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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, 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, 2002

or

|  |  |                                                                                                           
|- |  | ----------------------------------------------------------------------------------------------------------
|o |  | 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

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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
o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes
o No x

Indicate 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 June 28, 2002 was approximately $45 million. The aggregate
market value was based on the closing price on June 28, 2002 for the common
stock as quoted on the NASDAQ National Market System, multiplied by the number
of shares outstanding on June 28, 2002, excluding the common stock held by
executive officers, directors and stockholders whose ownership exceeds 5% of
the common stock outstanding at June 28, 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  23,859,802 shares as of March 25, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Definitive Proxy Statement for the 2003
Annual Meeting of Stockholders to be held on June 6, 2003, and to be filed with
the Commission pursuant to Regulation 14A within 120 days after Registrants
fiscal year ended December 31, 2002, are incorporated by reference into Part
III of this Report.

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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. CONTROLS AND PROCEDURES                                                                                  
|                  | Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                         
|Index to Exhibits
|SIGNATURES       
|CERTIFICATION    
|EXHIBIT 4.3      
|EXHIBIT 4.4      
|EXHIBIT 4.8      
|EXHIBIT 4.9      
|EXHIBIT 10.11    
|EXHIBIT 23.1     
|EXHIBIT 99.1     



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PART I




Item 1. BUSINESS

JMAR Technologies, Inc. (the Company or JMAR) is a leader in the
development of advanced lasers, laser produced plasma (LLP) sources, and
X-ray lithography (XRL) steppers for semiconductor fabrication. The
Companys Collimated Plasma Lithography (CPL) system is a cost effective
alternative to the complex optical methods proposed for next generation
lithography (NGL).

JMARs Mission is to create the high value Laser Produced Plasma Sources
and Lithography Systems that enable its semiconductor industry customers to
meet their critical lithography needs.

BACKGROUND

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

BUSINESS SEGMENT EVOLUTION

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

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

CURRENT BUSINESS SEGMENTS

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

Research Division (formerly JMAR Research)  This segments role is as an
innovator of laser and laser-produced plasma technologies for the Companys CPL
Source, EUV generators, and related products such as high-brightness lasers.
During 2002, this segment accounted for approximately 38% of the Companys
revenues.

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Systems Division (formerly JMAR/SAL NanoLithography)  This segment
encompasses the development of X-ray lithography steppers, and the product
engineering, production and integration of CPL light sources and complete CPL
stepper systems. During 2002, this segment accounted for approximately 41% of
the Companys revenues.

Microelectronics Division  In 2002, JMAR discontinued the standard
products business of JSI and the assets of its Sacramento operations were
transferred to JSI Microelectronics, Inc., a wholly-owned subsidiary of the
Company, operating as the Microelectronics Division. This segment provides process
integration and maintenance support for the Defense Microelectronics Activity
semiconductor fabrication facility in Sacramento, California, and ASIC design
and production capability for the military and commercial markets. During
2002, this segment accounted for approximately 21% of the Companys revenues.

BUSINESS SUMMARY

Advanced Semiconductor Lithography.Semiconductors are the engines that
drive the technology industry. While the economics of many industries are
driven by consumption or deterioration, the economics of the semiconductor
industry are driven by continuous innovation to satisfy demanding performance
and cost reduction 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, if not the most critical
step, in the production of semiconductors. It is a photographic process that
uses precision light sources to fabricate 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 is the originator of Collimated Plasma Lithography (CPL), a
compact high-intensity lithography source that addresses the need for next
generation lithography.

CPL illumination is provided by a laser produced plasma (LPP) X-ray
source. JMARs LPP X-ray point source 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 100 nanometer feature sizes (one hundred nanometers is about one-one
millionth of the thickness of a human hair).

As the semiconductor industry moves toward printing 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 wavelengths
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 CPL program has been to provide an acceptable
alternative to the synchrotron and an alternative to other proposed NGL
technologies, such as extreme ultraviolet (EUV), 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 Source consists of several
individual modules, each powered by the Companys

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patented Britelight laser. These modules produce a succession of
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 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 used most frequently for these high-speed chips is Gallium Arsenide
(GaAs). GaAs is used principally for military communications applications, but
it also finds applications in the telecommunications industry. Critical
circuits on many of these high-speed chips are currently made using very low
throughput electron beam (e-beam) systems. Although GaAs chip production has
not increased as rapidly as expected due to the telecom industry slowdown, the
Company believes that since CPL is capable of higher throughput than
conventional e-beam writers, it can play a key role in enabling the
cost-effective manufacture of these high performance chips when demand picks up.

Following planned increases in the throughput capability of its CPL
sources, JMAR believes they will play a significant role in silicon
semiconductor manufacturing in the future. These increases will require
significant additional R&D investment by the Company. See Market 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 $50 million in Company and government funds over
the past decade and an additional approximately $22 million investment in
government funds for stepper
development prior to JMAR owning the Systems Division. 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 2002, JMAR received a contract from the
Department of the Army supported 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 x-ray point
source CPL system to produce high-performance semiconductor integrated circuits
needed to support a wide range of critical military missions. During 2002, the
Company received $13 million in funds related to this contract. The Company
expects to receive another approximately $5.3 million in funding under this
contract in 2003.

In addition, in May 2002, the Systems Division was awarded a $10 million
contract for sub-100nm X-ray masks for NGL systems. The contract, awarded by
DARPA, is an effort that will produce X-ray masks used in the development and
production of high performance GaAs Monolithic Microwave Integrated Circuits
(MMICs). With the awarding of this contract, the Company granted to the IBM
Microelectronics Division a $3 million subcontract to design, produce and
deliver up to 50 masks during the first year of the contract. The Company
expects another approximately $3.3 million in funding under this contract in
2003.

In recent tests, the Companys CPL Source produced 100nm-dense lines, and
70nm isolated features on test wafers. Those tests also confirmed that JMARs
source was able to support printing sub-80nm contact 2D arrays on 200nm pitch
on the same exposure fields. The Companys beta CPL Source was delivered to
the Systems Division in February, 2003 for integration with the Companys
stepper system. The Systems Division is now set up with the integrated source
and stepper, a materials transport system, environmental chamber, and
applications lab. During 2003, the Company will use this CPL test facility to
fully characterize the integrated CPL System and to demonstrate CPL to potential customers and
partners. In early 2004, the System will be moved to a fabrication facility
where chips will be fabricated and where we believe the System will demonstrate
the performance, simplicity and cost effectiveness of CPL.

Although 130nm resolution is adequate for our CPL steppers targeted at the
compound semiconductor industry, the sub-100nm results are important to our
mainstream silicon applications. Concurrent with our effort to further
demonstrate the source resolution capability, our Research Division is

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working to increase Source X-ray power to increase wafer throughput. We plan to
upgrade the Source with those high-power modifications by the end of this year.

Since July, 2002, the Company has been working actively to establish strong alliances with the semiconductor industry to deliver CPL to the
mainstream silicon market. In December, 2002, SG Cowen Securities Corporation
was retained to advise the Company on identifying, contacting and negotiating
transactions with prospective alliance partners with a strategic interest in
Next Generation Lithography (NGL). We are convinced that alliances with
complementary partners will accelerate the introduction of CPL products into
semiconductor facilities.

JMARs high-power X-ray point source is also unique among NGL technologies
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
source includes a collimator developed by X-ray Optical Systems, Inc.,
under contract with the Research Division. 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 CPL Source 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. The
Company believes 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
and other proprietary technology developed by the University of Central Florida
to convert laser beams into Extreme Ultraviolet (EUV). JMAR has also developed
proprietary technology in this field that is the subject of a pending patent.
JMAR is positioned to combine the licensed technology and its own technology
with its patented high-power Britelight lasers to demonstrate the efficiency
of its EUV technology to the semiconductor industry.

JMAR
believes that development of an EUV source based on the UCFRF and its
own technology is complementary to the Companys current X-ray lithography
activities. Although EUV is generally considered to be the leading technology
for the 32nm lithography node, its high projected cost and difficult technical
challenges are pushing its projected introduction date out to 2009 and beyond.
JMAR is therefore looking for partners willing to invest in EUV source
development over the long term to support its EUV research.

Semiconductor Process Integration Services.The Microelectronics Division
provides technology development and high-value technology services to other
semiconductor producers in the aerospace and defense industries. This area of
the business is based largely on a contract originally awarded to the Company
by General Dynamics Advanced Information Systems (GDAIS) in 1998. Work under
this contract includes the development, construction and operation of a
semiconductor wafer fabrication facility at McClellan Air Force Base in
Sacramento for the Defense Microelectronics Activity
(DMEA). This facility was
completed in 1999 with facility qualification and process development, and new
process integration continuing throughout 2002.

Under these ongoing programs, the Microelectronics Division uses its
unique semiconductor industry experience and existing relationships to define
and/or acquire the technologies and semiconductor equipment needed to support
its customers missions. New long-term programs have been captured for the
placement, implementation and maintenance of these new state-of-the-art

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technologies. In a unique arrangement, the Microelectronics Division
maintains access to use these facilities to support certain commercial design
and wafer fabrication needs. The Microelectronics Division has expanded its
relationship in this area by entering into a Cooperative Research and
Development Agreement (CRADA) with the DMEA that designates the Microelectronics Division as the commercial interface for
the use of the DMEA capabilities by other aerospace contractors. The CRADA is
due for renewal in June, 2003. The Company expects it to be renewed on the
same terms.

In addition to a $1.6 million contract awarded in June, 2002, the
Microelectronics Division recently received $5 million in new contracts to
enhance the performance of the semiconductor fabrication process at the DMEA
installation. GDAIS, a prime contractor for DMEA, issued these contracts to the
Microelectronics Division in February, 2003. We believe the Microelectronics
Divisions business will continue to grow over time as we support the DMEAs
mission and will allow us to apply the unique foundry access the agency has
given us so we can enhance the foundrys semiconductor processes and leverage
their use for commercial product development.

MARKET

The
Companys technology base is directly applicable to the advanced
microelectronics lithography market. The total size of the lithography system market is
forecast to reach $6 billion by 2007. The semiconductor industry purchases
between 500 to 1,000 new lithography stepper systems per year at prices ranging
from approximately $6 million to $20 million, depending upon the circuit
feature sizes and other factors. Historically, as circuit feature sizes have
become smaller, the prices of the lithography systems have increased rapidly.
The estimated cost of next generation EUV lithography systems for the
production of high performance silicon semiconductor chips ranges to as high as
$70 million.

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 and ASML.
Additionally, Ultratech Systems and Suss MicroTec participate in niche market
segments.

The silicon semiconductor industry is transitioning its highest
performance fab lines to the initial production of circuitry having feature
sizes as small as 90 nanometers (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 including the extension of these technologies
using so called immersion techniques. The NGL technologies competing to succeed todays optical lithography processes for the
silicon market are XRL, EUV and electron
projection lithography (EPL). 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 65 nanometer
node and below.

The Systems Division of JMAR was established several years ago to focus on
the XRL stepper market. As of the end of 2002, 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 sold by the
Systems Division.

JMAR is
the originator of Collimated Plasma Lithography, an NGL alternative designed to deliver affordable, sub-100
nanometer chip-making capability in a compact format to the semiconductor
industry. The Company further believes that the power output of its
CPL Source will soon be
sufficient for commercially viable Gallium Arsenide chip production. Once its
X-ray output attains levels adequate

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for commercially viable silicon chip production rates, JMAR believes its
NanoPulsar series of CPL systems will provide the silicon semiconductor
industry with a lower cost, much more compact and flexible alternative to
synchrotron facilities for lithography process development and production. JMAR
also expects its CPL systems will provide a much lower cost alternative to the
EUV systems currently under development for NGL.

Each of the NGL approaches has technical issues which need to be addressed
before it is adopted for use by the silicon semiconductor industry. 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 70 nanometers and below. JMARs CPL Source
offers a solution to the synchrotron problem and the Company is actively
working with IBM on the development of XRL masks. Although the semiconductor
industry has recently begun to explore the possibility of extending DUV
technology to even lower feature sizes using immersion technologies, there
appears to be many technical challenges to be overcome with that approach.

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 2004. 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 $2.4 billion in 2002 to nearly
$4 billion by 2007.

GaAs devices operating at ultra-high bandwidths use a transistor gate
technology, commonly referred to as T-gate. Optical and EUV lithography
systems cannot produce these T-gates but electron beam systems and X-ray
lithography can. JMAR believes that its NanoPulsar CPL technology, powered by
the Companys unique series of laser plasma point sources, is
capable of throughputs 3-5 times greater than current e-beam systems
at critical dimension resolutions. With planned increase in the power
of the CPL Source and improvements in platform mechanics, JMAR believes
its CPL systems will be capable of reaching throughputs of 40 times
the throughput of current direct write electron beam systems. As the market grows and the requirement
for smaller feature sizes continues, JMAR believes its CPL System
will be ideally suited to
meet the need for a cost effective lithography process.

The Company is focused on the commercialization of its CPL Source as the
NGL source for the high volume production mainstream silicon chip market. In
the near term, however, JMAR is pursuing opportunities for its NanoPulsar
system for the GaAs chip market and for low-volume production process
development applications for the silicon chip market. In pursuing the
mainstream silicon market, the Company believes its commercial CPL Sources will
cost less and be of comparable, or smaller, size than projected optical DUV or
EUV Sources for the 65 nanometer generation of silicon production and beyond.

Although JMAR does not believe that synchrotrons will be widely adopted as
a light source by the semiconductor industry, there is an installed base of
synchrotrons at research facilities world-wide performing lithography and other
small-scale processing. In light of the fact that the Systems Division has
sold sixteen 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
CPL stepper systems for the next few years is limited to the sale of systems to
support the GaAs chip market and specialty silicon market. It is estimated
that these entry systems will be priced in the $8-10 million range. The
Company expects the market for CPL steppers for the GaAs market to expand in
later years as more GaAs manufacturers seek to develop and sell the higher
bandwidth chips. If CPL 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.

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MANUFACTURING

The
Companys Systems Division manufactures the Companys CPL
steppers and is the
integrator of the beta CPL Source in its facility in Vermont. Portions of the
CPL development effort have been subcontracted 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 CPL light source requires a component
called a collimator, which collects the X-ray output from our 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 CPL system currently being integrated with our stepper. We
have engaged XOS to develop a higher-efficiency collimator to be used with our
first commercial systems. This higher-efficiency collimator and future
improvements are needed to increase the power of our lithography equipment in
order to achieve our goal of entering the high volume silicon lithography
market by 2005. In addition, the Company purchases laser pump diode
arrays, a critical
component used in its CPL Source, from Spectra Physics. Although other
suppliers manufacture such diode arrays, the Company has found Spectra Physics to
best meet our current diode specifications. If we cannot obtain these high-efficiency
collimators and specialty diodes when needed then we will need to rely on other
alternatives to increase 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 $854,306, $602,980, $340,227, $467,328 and $717,792 for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively. Total
expenditures for RD&E, including funding provided by third party contracts from
the U.S. government and other companies were $12,455,160, $7,638,266,
$4,151,767, $4,561,538 and $4,367,240 for the years ended December 31, 2002, 2001, 2000,
1999 and 1998, respectively.

The Companys Research Division is performing R&D contract work to develop
a CPL lithography system based on its advanced solid state laser technology.
This work, which has important potential commercial applications, is primarily
funded by the Defense Advanced Research Projects Agency (DARPA) of the
Department of Defense. Government funding for this technology, however, is very
vulnerable to changes in the political environment. For this reason, the
Company is exploring strategic alliance discussions with commercial
semiconductor and semiconductor equipment 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 2002 include (i) the continued development of collimated
plasma lithography systems for the semiconductor industry and (ii) the
continued development of a high efficiency EUV generation system for advanced
semiconductor lithography. The main R&D emphasis in 2003 will be to further
demonstrate JMARs CPL source resolution capability and to increase its power
in order to increase wafer throughput.

COMPETITION

Advanced X-ray Source Development

The Company believes that it has established itself as the worlds leading
developer of laser produced plasma X-ray source systems by virtue of its
patented collimated laser plasma source technology.

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Collimated Plasma Lithography Sources and Steppers

The Company faces competition in the application of its laser produced
plasma technology to the field of semiconductor lithography. In GaAs and
specialty silicon wafer applications, JMAR CPL Stepper Systems will compete with
traditional electron beam direct write systems by offering far higher
throughput at a comparable or lower price.

In the mainstream silicon market, JMARs CPL Source faces different
competitive technologies at each lithography feature size node. At the 90 nanometer node, CPL faces the
incumbent technology  the 193 nanometer DUV source. This technology is starting to
appear in leading fabs. At the 65 nanometer node, CPL is expected to compete with 193
immersion and 157 nanometer DUV technology. Neither of these technologies is
proven and the Company believes that CPL has the opportunity to demonstrate a
superior value proposition: fine resolution and sufficient throughput
at a lower capital cost and cost of ownership. At the 45 nanometer
node, CPL is expected to compete with EUV or immersion 157 nanometer technology. At the 32 nanometer
node, the known competition is EUV and 157 immersion. In addition to these
mainstream competitors, other technologies represent potential competition if
current R&D proves successful. These technologies include multi-beam electron
beam lithography, proximity mask electron beam (PREVAIL), LEEPL, EPL, mask-less
lithography (MxL), step and flash imprint lithography and nano-imprint.

CPLs competitive attractiveness is not limited to its potential to emerge
as the lowest cost lithography source at the 65, 45, 32 and 25 nanometer nodes.
From a long term perspective, CPL offers the semiconductor industry the
opportunity to embrace a single technology now and refine it over the next 10
years as the industry moves to progressively smaller feature size. XRL is the
only NGL technology that (a) has already demonstrated the ability to achieve 25
nanometer resolution, (b) has masks that have been routinely produced and (c)
has the potential to evolve through all nodes, from 90 to 25 nanometers, without the need for a
technology change. We believe that JMARs compact CPL offers the semiconductor
industry the opportunity to recapture hundreds of millions of dollars already
spent on XRL research and secure a multi-node solution that saves hundreds of
millions of dollars in future R&D.

Semiconductor Process Integration Services

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

PATENTS AND PROPRIETARY TECHNOLOGY

During the past several years JMARs patent protection efforts have
resulted in the issuance of 14 U.S. patents and 4 foreign patents. JMAR
currently has filed 9 pending U.S. patent applications, 24 pending foreign
applications and several provisional patent applications. 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 Central 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.

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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 2002, 2001 and 2000, the United States Government
accounted for approximately 68%, 71% 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.

EMPLOYEES

Currently, the Company has approximately 120 full-time employees of which
approximately 40 employees are employed by the Companys JMAR Precision Systems
(JPSI)
subsidiary which is in the process of being sold. 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 and the Precision Equipment segment, the
Company will operate in three segments as follows: Research Division, Systems
Division and Microelectronics Division. Financial information relating to the
Companys segments, significant customers and export sales for the three years
ended December 31, 2002 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
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.

The Research Division leases 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 advanced light technology development activities, including CPL. That
lease expires on April 30, 2006.

The Microelectronics Division leases 2,567 square feet of office and
storage space in Sacramento, California. That lease expires in April, 2004.

The Systems Division leases a total of 17,950 square feet of office,
manufacturing, clean room and storage space in South Burlington, Vermont. That
lease expires on March 31, 2004.

The Company is in the process of selling JPSI and its operations are reflected as a discontinued
operation. The Company is a party to a lease of the facility used by JPSI.
This facility consists of a total of 25,005 square feet of manufacturing,
office and storage space in Chatsworth, California, a suburb of Los Angeles.
The facility lease expires in August, 2005. The

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Company intends to seek the assumption of this lease by a buyer of JPSIs
business. If that is not successful, the Company will attempt to sublease this
space.

The Company is a guarantor on a lease of 25,556 square feet of office and
storage space in Irvine, California south of Los Angeles which was used by the
standard chip business of JMAR Semiconductor, Inc., which was discontinued in
March 2002. This lease expires on August 31, 2005. The Company is currently
attempting to sublease this space.

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




Item 3. LEGAL PROCEEDINGS

Anorad Lawsuit.

In October, 2001, Anorad Corporation filed a lawsuit against Shankar Rao,
a former Anorad employee and currently Senior Vice President of JPSI, the
Company and JPSI alleging misappropriation of trade secrets by Mr. Rao. In
February, 2003, the Company, JPSI, Mr. Rao and Anorad entered into a settlement
agreement providing for complete dismissal of the lawsuit in consideration for
payment by the Company of $225,000 to cover Anorads costs in bringing the
action. The Company expects reimbursement of a portion of its defense costs
from its D&O insurance carrier.

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

Following the discontinuance of JSIs standard chip business in the first
quarter of 2002, JSI sought to negotiate debt reductions from the creditors
associated with the discontinued portion of its business. JSI was a party to a
Distributor Agreement with All American Semiconductor, Inc. (All American)
under which All American had purchased approximately $700,000 of JSI chips for
resale to customers. In accordance with generally accepted accounting
principles, that transaction was reflected as deferred revenue (a liability)
and not as revenue pending sale to the ultimate customer. Under the terms of
the Distributor Agreement, if All American properly terminated the Distributor
Agreement, it had the right to require JSI to repurchase those chips for the
$700,000 paid by All American. Soon after the announcement by JMAR that JSI
had discontinued its standard chip business, All American gave notice of
termination of the Distributor Agreement and returned the JSI chips it held, creating an obligation on JSIs part to repay approximately
$700,000 to All American. The $700,000 claim of All American is included in
the total of approximately $3.1 million of discontinued liabilities that are
included in JMARs Consolidated Balance Sheet.

In September, 2002, a Complaint was filed by All American against JSI and
JMAR in San Diego Superior Court. The Complaint alleges that JSI owes All
American approximately $700,000. The Complaint also alleges that All American
was induced to refrain from terminating the agreement until after the JSI
business had been discontinued. All American claims that such actions
constituted fraud and that it is entitled to treble (triple) damages. All
American has also alleged that JMAR is the alter ego of JSI and based on that
theory should be held responsible for the obligations of JSI. While
recognizing that the approximately $700,000 in indebtedness may be owed by JSI
to All American under the agreement, JSI asserts that the obligations are
merely of a contractual nature and strongly disputes that any of the actions
taken constitute fraud. JMAR also disputes that it is the alter ego of JSI
in light of the facts that JSI is a separately incorporated entity that has
been more than adequately capitalized over its years of operations and, that
JSI, and not JMAR, was the party to the Distributor Agreement and was the sole
direct contact with All American. JMAR believes that there is insufficient
evidence to support the alter ego theory and believes that it will ultimately
prevail on this issue. JMAR and JSI intend to vigorously contest any claims by
All American that it is owed more than $700,000.

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Assignment for the Benefit of
Creditors.

After unsuccessfully engaging in efforts to sell the standard chip portion
of JSI, in the fourth quarter of 2002, JSI transferred all of its assets to a
third party fiduciary in an assignment for the benefit of creditors. Under
this state law procedure, the assignee liquidates the JSI assets and the
proceeds from the sale of those assets are equitably distributed among the
creditors of JSI and the claims of creditors of JSI are limited to those
proceeds. Following the assignment of those assets, the fiduciary sold those
assets to JSI Microelectronics, Inc., a wholly-owned subsidiary of the Company,
at a price equal to a 10% premium over an independently appraised value of
those assets, with the purchase price consisting of cash, assumption
of certain trade debt owed to suppliers who are critical to the
ongoing operations and the credit bid of debt held by the Company.

Tyson Foods Lawsuit.

This lawsuit related to alleged performance issues by JPSI components that
were included in equipment sold by a JPSI customer to Tyson Foods.
This lawsuit was
voluntarily dismissed by Tyson without payment of any consideration by JPSI or
the Company.




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

At the Companys Annual Meeting of Shareholders held on December 6, 2002,
the following matters were voted on:



| | a) |  | The following directors were elected: James H. Banister, Jr.
(21,670,152 affirmative votes and 238,799 votes withheld); C. Neil
Beer (21,274,187 affirmative votes and 634,764 votes withheld); Vernon
H. Blackman (21,670,152 affirmative votes and 238,799 votes withheld);
Charles A. Dickinson (21,229,187 affirmative votes and 679,764 votes
withheld); John S. Martinez (21,603,222 affirmative votes and 305,729
votes withheld); Barry Ressler (21,122,009 affirmative votes and
786,942 votes withheld); and Ronald A. Walrod (21,670,152 affirmative
votes and 238,799 votes withheld).
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | A motion to approve an amendment to the Companys 1999 Stock Option
Plan to increase the number of shares reserved for purchase thereunder
by 1,000,000 shares was passed with 20,183,714 affirmative votes,
1,644,001 negative votes and 81,236 abstaining votes.                                                                                                                                                                                                                                                                                                                                
|
| | c) |  | A motion to ratify the appointment of Grant Thornton, LLP as the
Companys independent auditor for the fiscal year ending December 31,
2002 was passed with 21,721,266 affirmative votes, 129,202 negative
votes and 58,483 abstaining votes.                                                                                                                                                                                                                                                                                                                                                     

Executive Officers of the Company

RONALD A. WALRODwas elected President, Chief Executive Officer and director in
October 2002. From 1998 to 2000, Mr. Walrod served as President and CEO of
Kinetic Probe, a privately-held company engaged in the development of
semiconductor probe cards. While there, he established a new business model for
the start-up operation and secured funding from a range of sources to develop
and commercialize its product. From 1996 to 1998, Mr. Walrod served as
President and CEO of Nautronix, a leading supplier of dynamic positioning,
autopilot and automation systems for marine applications. While under his
direction, that company, a U.S. subsidiary of an Australian company,
effectively capitalized on emerging opportunities in the offshore oil and gas
industry and tripled its revenues in less than two years. From 1984 to 1993,
Mr. Walrod served as President and CEO of Applied Remote Technology, Inc.
(ART), a company he founded to develop autonomous undersea vehicle (AUV)
systems, advanced undersea sensors, and acoustic communications links, all of
which have both commercial and military applications. Under his leadership, ART
formed a series of teaming agreements, strategic alliances, and technology
transfer agreements that enabled it to gain rapid access to its targeted
markets. The effectiveness of ARTs AUV and sensor systems earned the company
recognition as a leading innovator in the field and led directly to ARTs
acquisition by General Dynamics. Mr. Walrod graduated with Honors from the
United States Coast Guard Academy and earned both Masters of Science and
Professional Engineer Degrees from the Massachusetts Institute of Technology in
1970, and received a Masters of Business

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Administration degree from the University of San Diego in 1983. He was awarded
a fellowship for graduate studies in Ocean Engineering from the National
Science Foundation and has twice received the Industrial Research and
DevelopmentIR 100 Award for Remotely Operated Vehicles developed under his
direction. Mr. Walrod holds a United States Patent for Comminution by
Cryogenic Electrohydraulics that was issued in 1998.

DANIEL J. FLEMING, Ph.D.,joined JMAR/SAL NanoLithography, Inc. (JSAL, now the
Systems Division) as
President in August 2001 when SAL, Inc. was merged into JSAL. Dr. Fleming was
elected Chief Operating Officer of JMAR in February 2003. 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
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.

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 there 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. Mr. Martinez served as
the Companys Interim Chief Executive Officer from August to October 2002.
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, one of the Companys
directors and the former Chairman and Chief Executive Officer.

JOHN P. RICARDIjoined the Company as Vice President of Business Development in
February 2003. Mr. Ricardi brings more than 25 years of experience in
developing sales for high technology products and systems to his new position
with JMAR. He most recently served as President and Chief Executive Officer of
NTec Systems Corporation, an emerging Canadian semiconductor equipment company
where, within one year, he raised sufficient capital to interest other Canadian
investors and began alliance discussions with key industry leaders. Prior to
that, he served as President and CEO of Advanced Laser and Fusion Technology,
Inc., where he was instrumental in the effort to convert the company from a
research and development operation to a commercial corporation. From 1997
through 1999, Mr. Ricardi served as Vice President of Corporate Development for
JMAR Technologies, Inc. and as Senior Vice President of Sales and Marketing of
JMARs Precision Systems operation in Chatsworth, California. Prior to JMAR,
he held senior sales and marketing positions with the Imaging Systems Division
of Datron

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Advanced Technologies, a California-based manufacturer of advanced
telecommunications products; Airpax Corporation (now a division of Siemens AG),
which manufactures a range of electronic products for commercial and military
applications; and Texas Instruments, Inc. Mr. Ricardi holds Bachelors and
Masters degrees in Electrical Engineering from Northeastern University in
Boston, Massachusetts.

LARRY R. JOHNSONjoined JMAR
Semiconductor, Inc. in July, 1996 as Process Engineering
Manager, was elected Vice President of Operations in January, 1999
and was elected President in October, 2002. Following the assignment for the benefit of creditors of the JSI
assets and subsequent purchase of assets by JSI Microelectronics,
Inc., Mr. Johnson was elected President of JSI Microelectronics. Mr. Johnson has worked in the
semiconductor chip and foundry industry for more than three decades at
companies including Hughes Aircraft, Rockwell International, Signetics
Corporation, National Semiconductor, Advanced Micro Devices (AMD) and Fairchild
Semiconductor. At Rockwell International he was Director of Operations
supervising 1,500 employees and profitably grew his business area from
revenues of $54 million to $180 million in a two-year period. While at AMD Mr.
Johnson formed their MOS Division, which now generates the majority of AMDs
revenues. Mr. Johnson received his B.S. degree from the University of Redlands
and an MBA from Pepperdine University.




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 2002 and
2001 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
|     |  |                |  |  |      |      |  |    
|2002 |  |                |  |  |      |      |  |     |      |  |  | 
|     |  | First Quarter  |  |  | 3.53 |      |  |     | 2.00 | 
|     |  | Second Quarter |  |  | 2.52 |      |  |     | 1.65 | 
|     |  | Third Quarter  |  |  | 2.20 |      |  |     | 1.27 | 
|     |  | Fourth Quarter |  |  | 1.65 |      |  |     | 0.92 | 
|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 | 

As of
March 17, 2003, there are approximately 12,000 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 2,946 shares of Common Stock in
December, 2002 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.

In
connection with the hiring of Mr. Walrod as the President and
Chief Executive Officer of the Company in October, 2002, the Company
issued an option exercisable into 500,000 shares of Common Stock at
an exercise price of $1.33 per share. The option expires October 11,
2012 with vesting of one-third of the options each year commencing
with the first anniversary of the grant. The shares were issued in a
transaction exempt under Section 4(2) of the Securities Act of
1933.

In
October 2002, the Companys Board of Directors approved the
issuance of 2,000 shares of Common Stock to a consultant of the
Company. The shares were issued in a transaction 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 the Companys independent public accountants, Grant Thornton LLP for 2002,
2001 and 2000 and Arthur Andersen LLP for 1999 and 1998. 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. The amounts for all
years have been adjusted from that previously reported to reflect the
operations of JMAR Precision Systems, Inc. and the standard chip business of
JMAR Semiconductor, Inc. as discontinued operations.

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

|                                                                |                                                      |   |            |      |      |   |            |      |      |   |            |      |   |   |             |      |   |   |             |      |  
|--------------------------------------------------------------- | ---------------------------------------------------- | - | ---------- | ---- | ---- | - | ---------- | ---- | ---- | - | ---------- | ---- | - | - | ----------- | ---- | - | - | ----------- | ---- | -
|                                                                |                                                      |   | 1998       |      | 1999 |   | 2000       |      | 2001 |   | 2002      
|                                                                |                                                      |   |            |      |      |   |            |      |      |   |           
|Revenues                                                        |                                                      | $ | 8,559,293  |      |      | $ | 14,452,054 |      |      | $ | 9,114,357  |      |   | $ | 12,903,811  |      |   | $ | 18,383,810  |     
|Gross profit                                                    |                                                      |   | 2,765,963  |      |      |   | 3,433,171  |      |      |   | 2,328,406  |      |   |   | 3,499,243   |      |   |   | 3,413,492   |     
|Operating expenses                                              |                                                      |   | 3,517,347  |      |      |   | 3,714,334  |      |      |   | 3,222,903  |      |   |   | 4,989,402   |      |   |   | 6,523,346   |     
|Loss from operations                                            |                                                      |   | (751,384   | )    |      |   | (281,163   | )    |      |   | (894,497   | )    |   |   | (1,490,159  | )    |   |   | (3,109,854  | )   
|Realized gain on sale of
marketable securities                  |                                                      |   |           |      |      |   |           |      |      |   | 2,184,476  |      |   |   | 1,189,273   |      |   |   | 1,349,721   |     
|Interest and other income                                       |                                                      |   | 243,654    |      |      |   | 87,519     |      |      |   | 273,626    |      |   |   | 252,282     |      |   |   | 67,404      |     
|Interest and other expense                                      |                                                      |   | (362,918   | )    |      |   | (192,905   | )    |      |   | (106,466   | )    |   |   | (107,950    | )    |   |   | (284,174    | )   
|Income (loss) from continuing
operations before income taxes    |                                                      |   | (870,648   | )    |      |   | (386,549   | )    |      |   | 1,457,139  |      |   |   | (156,554    | )    |   |   | (1,976,903  | )   
|Income tax expense                                              |                                                      |   | (32,204    | )    |      |   |           |      |      |   |           |      |   |   |            |      |   |   | (484,423    | )   
|Income (loss) from continuing
operations                        |                                                      |   | (902,852   | )    |      |   | (386,549   | )    |      |   | 1,457,139  |      |   |   | (156,554    | )    |   |   | (2,461,326  | )   
|Income (loss) from operations of
discontinued operations        |                                                      |   | 1,659,693  |      |      |   | (1,862,445 | )    |      |   | (2,681,904 | )    |   |   | (14,544,980 | )    |   |   | (5,839,367  | )   
|Loss on disposal of discontinued
operations                     |                                                      |   |           |      |      |   |           |      |      |   |           |      |   |   |            |      |   |   | (3,200,000  | )   
|Net income (loss)                                               |                                                      |   | 756,841    |      |      |   | (2,248,994 | )    |      |   | (1,224,765 | )    |   |   | (14,701,534 | )    |   |   | (11,500,693 | )   
|Basic income (loss) per share:                                  |                                                      |   |            |      |      |   |            |      |      |   |            |      |   |   |             |      |   |   |             |     
|                                                                | Income (loss) per share from
continuing
operations   |   |            | (.05 | )    |   |            | (.02 | )    |   |            | .06  |   |   |             | (.01 | ) |   |             | (.11 | )
|                                                                | Income (loss) per share from
discontinued operations |   |            | .09  |      |   |            | (.10 | )    |   |            | (.12 | ) |   |             | (.64 | ) |   |             | (.38 | )
|                                                                | Net income (loss) per share                          |   |            | .04  |      |   |            | (.12 | )    |   |            | (.06 | ) |   |             | (.65 | ) |   |             | (.49 | )
|Basic shares used in
computation of net income
(loss) per share |                                                      |   | 18,046,860 |      |      |   | 18,045,914 |      |      |   | 21,468,763 |      |   |   | 22,484,905  |      |   |   | 23,618,169  |     

Consolidated Balance Sheet Data  December 31,

|                          |  |      |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            |  
|------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | -
|                          |  | 1998 |            | 1999 |  | 2000 |            | 2001 |  | 2002
|                          |  |      |            |      |  |      |            |      |  |     
|Working
capital (deficit) |  | $    | 9,213,134  |      |  | $    | 7,468,743  |      |  | $    | 21,543,381 |  |  | $ | 7,843,465  |  |  | $ | (1,285,004 | )
|Total assets              |  |      | 22,874,833 |      |  |      | 20,673,768 |      |  |      | 34,191,574 |  |  |   | 26,618,625 |  |  |   | 15,121,660 |  
|Short-term debt           |  |      | 2,693,975  |      |  |      | 5,195,490  |      |  |      | 1,291,178  |  |  |   | 3,007,152  |  |  |   | 1,556,405  |  
|Long-term liabilities     |  |      | 475,362    |      |  |      | 642,913    |      |  |      | 339,908    |  |  |   | 1,419,632  |  |  |   | 1,203,917  |  
|Stockholders equity      |  |      | 13,253,179 |      |  |      | 10,909,461 |      |  |      | 28,444,669 |  |  |   | 14,299,655 |  |  |   | 3,677,994  |  

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

Overview

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

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

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

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

The standard semiconductor products business and the Precision Equipment
segment business have been accounted for in the accompanying consolidated
financial statements as discontinued operations and the statement of operations
for the years ending December 31, 2001 and 2000 have been restated to reflect
the discontinuation of these businesses.

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

Results of Consolidated Operations

Total revenues for the years ended December 31, 2002, 2001 and 2000 were
$18,383,810, $12,903,811 and $9,114,357, respectively, of which contract
revenues accounted for $17,543,334, $12,033,271 and $8,780,205, respectively.
The net loss for the years ended December 31, 2002, 2001

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and 2000 was $(11,500,693), $(14,701,534) and $(1,224,765), respectively. The
income (loss) from continuing operations for those same periods was
$(2,461,326), $(156,554) and $1,457,139 respectively, while the loss from
operations for those same periods was $(3,109,854), $(1,490,159) and
$(894,497), respectively.

Included in the net loss and loss from continuing operations before income
taxes for the years ended December 31, 2002, 2001 and 2000 is a gain on the
sale of marketable securities of $1,349,721, $1,189,273 and $2,184,476,
respectively. Included in the net loss and loss from continuing operations for
the year ended December 31, 2002 is $1,074,324 for severance charges recorded related to
the retirement in August, 2002 of the Companys Chairman and Chief Executive
Officer. Also included in the net loss and loss from continuing operations for
the year ended December 31, 2002 is an income tax expense of $484,423
resulting from an increase in the valuation allowance against the Companys
deferred tax assets. Included in the net loss and loss from operations for the
year ended December 31, 2001 are asset writedowns of $226,899. Also, included
in the net loss for the years ended December 31, 2002, 2001 and 2000 is a loss
from operations of discontinued operations of $(5,839,367), $(14,544,980) and
$(2,681,904), respectively, and a loss on disposal of discontinued operations
of $(3,200,000) for 2002.

The increase in revenues for the year ended December 31, 2002 compared to
the prior year was primarily attributable to other contract revenues from the
Systems Division of $3,779,133 along with an increase in CPL revenue of
$921,323. The Systems Division was acquired in August, 2001. In 2002, the
Systems Division received an approximately $10 million contract from Naval Air
Warfare Center AD (the Navair Contract) which accounted for approximately
$2,435,168 in revenues in 2002.

The increase in total revenues for the year ended December 31, 2001
compared to the prior year was attributable to a significant increase in X-ray
lithography contract revenues of $3,864,260 as well as other contract revenues
from the Systems Division of $724,884, acquired in August 2001 offset in part
by a decrease in semiconductor process technology services sales of
approximately $800,000.

Gross margins for the fiscal years ended December 31, 2002, 2001 and 2000
were 18.6%, 27.1% and 25.5%, respectively. The Companys margins are low
because the majority of its revenues are from contracts, which inherently
generate lower margins than product revenues. The decrease in the gross margin
in 2002 was primarily due to the contract with Navair for sub-100nm X-ray masks
for NGL systems (Navair Contract) having lower margins due to its high
subcontract component, and the Companys absorption of some of the costs
incurred due to limited funding on that contract. In addition, the Company
recorded a $245,000 reserve in 2002 for another contract at the Systems
Division related to estimated cost overruns on that contract. The majority of
the Companys revenues in 2003 will also be derived from contracts, so gross
margins will continue at similar levels.

Selling, general and administrative (SG&A) expenses for the fiscal years
ended December 31, 2002, 2001 and 2000 were $4,594,716, $4,159,523 and
$2,882,676, respectively. The increase in SG&A expenses in 2002 is primarily
due to an increase of approximately $1,090,693 related to the
Systems Division, which the Company acquired in August 2001 offset by lower
legal costs of approximately $325,000 in 2002, a reduction of
approximately $138,000 at the Research Division primarily related to higher allocation of resources to research and development
activities in 2002, and an overall reduction in SG&A
costs at the Microelectronics Division of approximately $129,000. The increase in SG&A expenses in 2001
compared to 2000 is primarily due to $562,327 related to
the Systems Division and higher legal costs.

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 $11,600,854, $7,035,286 and $3,811,540 for the fiscal years
ended December 31, 2002, 2001 and 2000, respectively. The increase in
Customer-Funded RD&E expenditures for 2002 is related to an increase of
approximately $933,880 in the collimated plasma lithography program contract
funding provided by the Defense Advanced Research Projects Agency, which is
directed toward development of JMARs CPL technology for the commercial
semiconductor market, and an increase in

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contract costs of $3,631,688 incurred by the Systems Division (approximately
$2,346,000 of which is related to the Navair contract) which was acquired in
August 2001. The increase in Customer-Funded RD&E expenditures for
2001 compared to 2000 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. 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 $854,306, $602,980 and $340,227 for the fiscal years ended December 31,
2002, 2001 and 2000, respectively. Hence, total RD&E expenditures for those
three years were $12,455,160, $7,638,266 and $4,151,767, respectively. Total
RD&E expenditures as a percentage of sales were 67.8%, 59.2% and 45.6% for the
years ended December 31, 2002, 2001 and 2000, respectively. These expenditures
are primarily related to the continued development of CPL systems for the semiconductor industry and the development of a
high efficiency EUV generation system for advanced semiconductor lithography.

The standard semiconductor products business and the Precision Equipment
segment business have been accounted for in the accompanying consolidated
financial statements as discontinued operations and the statement of operations
for the years ending December 31, 2001 and 2000 have been restated to reflect
the discontinuation of these businesses.

The loss from operations of discontinued operations of $5,839,367 for the
year ended December 31, 2002 includes $1,856,381 related to the standard
semiconductor products business and $3,982,986 related to the Precision
Equipment segment business. The loss on disposal of discontinued operations of
$3,200,000 for the year ended December 31, 2002 is net of the expected proceeds
from the sale of the Precision Equipment segment business. The Company is in
discussions with a number of potential buyers, however, it has not yet received
an offer from any of the potential purchasers of this business. If the sales
price of this business is different from the estimate that the Company has
made, the difference will be reflected in the Companys 2003 Statement of
Operations. Also, if the Company is unable to find a buyer on satisfactory
terms, the Company will have to take alternative actions regarding this
business, which may result in further charges. The results of operations of the Precision Equipment Segment business for
2003 through the sale date will be reported in discontinued operations in 2003.

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 attempt to sublease the facility and move JSI into a smaller facility.
Accordingly, in the fourth quarter of 2001, the Company accrued $547,000, its
estimated loss under the September 2000 lease. In 2002, the Company accrued an
additional $300,000 in estimated losses under this lease. These
amounts are included in the loss from operations of discontinued
operations. The lease provides
for rent and related expenses of approximately $34,000 per month through August
2005. The Company does not yet have a subtenant for that facility and, if it
is unsuccessful in obtaining a subtenant on acceptable terms, there could be
further losses related to that lease.

The gain on sale of marketable securities of $1,349,721, $1,189,273 and
$2,184,476 for 2002, 2001 and 2000, respectively, is related to the sale of
545,500 shares, 500,000 shares and 890,000 shares, respectively, of the
Companys investment in Bede plc in January 2002, April 2001 and December 2000,
respectively.

Interest and other income is lower for 2002 versus 2001 due to lower
average cash balances and lower interest rates.

Interest and other expense for the fiscal years ended December 31, 2002,
2001 and 2000 was $284,174, $107,950 and $106,466, respectively. Interest and
other expense is higher for 2002 versus 2001 due to interest on the $1.2
million notes issued to the former shareholders of SAL and higher average
borrowings in 2002 of the Companys working capital line with
Comerica Bank. Interest expense will be significantly
higher in 2003 due to financing transactions the Company entered into in March
2003 (see Consolidated Liquidity and Financial Condition below).

Following the discontinuance of JSIs standard chip business in the first
quarter of 2002, JSI sought to negotiate debt reductions from the creditors
associated with the discontinued portion of its

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business. JSI was a party to a Distributor Agreement with All American
Semiconductor, Inc. (All American) under which All American had purchased
approximately $700,000 of JSI chips for resale to its customers. In accordance
with generally accepted accounting principles, that transaction was reflected
as deferred revenue (a liability) and not as revenue pending sale to the
ultimate customer. Under the terms of the Distributor Agreement, if All
American properly terminated the Distributor Agreement, it had the right to
require JSI to repurchase those chips for the $700,000 paid by All American.
Soon after the announcement by JMAR that JSI had discontinued its standard chip
business, All American gave notice of termination of the Distributor Agreement
and returned the chips it held, creating an obligation on JSIs part to repay
approximately $700,000 to All American. The $700,000 claim of All American is
included in the total of approximately $3.1 million of net current discontinued
liabilities that are included on JMARs Consolidated Balance Sheet.

In September, 2002, a Complaint was filed by All American against JSI and
JMAR in San Diego Superior Court. The Complaint alleges that JSI owes All
American approximately $700,000. The Complaint also alleges that All American
was induced to refrain from terminating the agreement until after the JSI
business had been discontinued. All American claims that such actions
constituted fraud and that it is entitled to treble (triple) damages. All
American has also alleged that JMAR is the alter ego of JSI and based on that
theory should be held responsible for the obligations of JSI. While
recognizing that the approximately $700,000 in indebtedness may be owed by JSI
to All American under the agreement, JSI asserts that the obligations are
merely of a contractual nature and strongly disputes that any of the actions
taken constitute fraud. JMAR also disputes that it is the alter ego of JSI
in light of the facts that JSI is a separately incorporated entity that has
been more than adequately capitalized over its years of operations and that
JSI, and not JMAR, was a party to the Distributor Agreement and was the sole
contact with All American. JMAR believes there is insufficient evidence to
support the alter ego theory and believes that it will ultimately prevail on
this issue. JMAR and JSI intend to vigorously contest any claims by All
American that it is owed more than $700,000.

After unsuccessfully engaging in efforts to sell the standard chip portion
of JSI, in the fourth quarter of 2002, JSI transferred all of its assets to a
third party fiduciary in an assignment for the benefit of creditors. Under
this state law procedure, the assignee liquidates the assets and the proceeds
from the sale of those assets are equitably distributed among the creditors of
JSI and the claims of creditors of JSI are limited to those proceeds.
Following the assignment of those assets, the fiduciary sold those assets to
JSI Microelectronics, Inc., a wholly-owned subsidiary of the Company, at a
price equal to a 10% premium over an independently appraised value of those
assets, with the purchase price consisting of cash, assumption of
certain trade debt owed to suppliers who are critical to the
ongoing operations and the
credit bid of debt held by the Company.

Pursuant to an Employment Agreement dated September, 2001 with Dr.
Martinez, the Companys former Chairman and Chief Executive Officer, if the
Company delivered notice of its intention not to renew or discontinued his
status of Chairman or CEO, or both, other than for cause, then Dr. Martinezs
employment was to continue for three years at the highest total compensation
rate (including bonuses, director fees and similar payments) he had received in
any previous 12 month period. This amount is approximately $375,000 per annum.
In such event, the Company also agreed to maintain comparable medical insurance
benefits for such three year period.

In May, 2002, Dr. Martinez informed the Board of Directors of his desire
to retire. The Board and Dr. Martinez engaged in discussions regarding Dr.
Martinezs future role with the Company. In order to set a definite date for
the transition to a new CEO, in July, 2002, the Board of Directors exercised
the Companys rights under the Employment Agreement to discontinue Dr.
Martinezs status as CEO effective August 16, 2002. Following negotiations
between Dr. Martinez and the Board, an agreement was reached to restructure
this payment obligation to spread the payments over six years to reduce the
impact of the original agreement on the Companys cash flow. In consideration
for this modification, the Company will provide comparable medical insurance
benefits for six years, and modified 942,242 of the options and warrants held
by Dr. Martinez to (1) vest all unvested options and warrants (141,269
options), (2) provide that, in those options that have an expiration date
within the next six years, the early termination provision that would otherwise
have resulted in the termination of the options and warrants 60 days after
termination

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of his employment was waived, and (3) provide that all remaining options
and warrants will expire on the later of August 15, 2008 or 60 days after Dr.
Martinez ceases to be a director. The Company recorded a charge in 2002 in the
amount of $1,074,324 resulting from this event. The charge includes $561,517
for the discounted post-employment payments over six years and $512,807 for the
intrinsic value of Dr. Martinezs options and warrants resulting from the
modification of those options and warrants.

Results of Segment Operations

The results of segment operations (excluding corporate) for the years
ending December 31, 2002 and 2001 are as follows:

|                          |  |          |            |                         |  |      |            |      |  |   |            |   |  |   |          |  
|------------------------- |  | -------- | ---------- | ----------------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | -------- | -
|                          |  | Revenues |            | Operating Income (Loss)
|                          |  |          |            |                        
|                          |  | 2002     |            | 2001                    |  | 2002 |            | 2001
|                          |  |          |            |                         |  |      |            |     
|Research Division         |  | $        | 6,951,114  |                         |  | $    | 7,701,840  |      |  | $ | 228,963    |   |  | $ | 228,329  |  
|Systems Division          |  |          | 7,602,336  |                         |  |      | 2,151,154  |      |  |   | (1,498,007 | ) |  |   | (158,197 | )
|Microelectronics Division |  |          | 3,830,360  |                         |  |      | 3,050,817  |      |  |   | 268,018    |   |  |   | (133,003 | )
|                          |  |          |            |                         |  |      |            |      |  |   |            |   |  |   |          |  
|                          |  | $        | 18,383,810 |                         |  | $    | 12,903,811 |      |  | $ | (1,001,026 | ) |  | $ | (62,871  | )
|                          |  |          |            |                         |  |      |            |      |  |   |            |   |  |   |          |  

The
$750,726 decrease in revenues for the Research Division for the year
ended December 31, 2002 as compared to the year ended December 31, 2001 is due
to more work under the DARPA contract being performed by the Systems
Division in 2002. During 2002, the Company received $13 million
in CPL contract funding. As of December
31, 2002, the Company had approximately $2.7 million of this funding in backlog
and expects another approximately $5.3 million in CPL contract funding in
2003.

The
$5,451,182 increase in revenues for the Systems Division for the year
ended December 31, 2002 as compared to the year ended December 31, 2001 is due
to the 2002 receipt of $3 million in funding for the Navair
Contract, more work under the DARPA contract being performed by the
Systems Division in 2002, the
receipt of a $1.2 million contract with a major aerospace firm in November 2001
for semiconductor X-ray lithography system support, and the receipt of a $1.7
million order from the University of Wisconsin on October 31, 2001 to upgrade
an X-ray lithography stepper to produce sub-50 nanometer microcircuits. The
Systems Division was acquired in August, 2001. As of December 31, 2002, the
Company had approximately $2.5 million in backlog and expects another
approximately $3.3 million in funding under the Navair contract in 2003.

The
$779,543 increase in revenues for the Microelectronics Division for
the year ended December 31, 2002 as compared to the year ended December 31,
2001 is due to the receipt in 2002 of approximately $3.2 million in contracts
from General Dynamics Advanced Information Systems (General Dynamics) for the
development, construction and operation of a semiconductor wafer fabrication
facility at McClellan Air Force Base in Sacramento for the Defense
Microelectronics Activity. As of December 31, 2002, the Company had
approximately $600,000 in backlog from these contracts and received
approximately $5 million in additional contracts from General Dynamics in
February 2003.

The $1,339,810 increase in the operating loss of the Systems Division for
the year ended December 31, 2002 as compared to the year ended December 31,
2001 is due to 1) the Navair Contract having lower margins due to its high
subcontract component, and the Companys absorption of some of the costs
incurred due to the limited funding on the contract; 2) the recording of a
$245,000 reserve in 2002 for the contract with the University of Wisconsin
related to estimated cost overruns on that contract; and 3) costs associated
with the Companys CPL commercialization efforts.

The $401,021 increase in the operating income of the Microelectronics
Division is due to higher revenues and higher gross margins.

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Consolidated Liquidity and Financial Condition

Unrestricted cash and cash equivalents at December 31, 2002 was
$2,246,264. The decrease in unrestricted cash and cash equivalents from 2001 to 2002 of
$1,830,630 resulted primarily from cash used in continuing operations of
$475,515 primarily related to operating losses (exclusive of the gain on the
sale of the Bede stock), cash used in discontinued operations of $3,895,597 and
payments under the Companys working capital bank lines of $1,450,000, offset
in part by net proceeds from the issuance of common stock of
$1,779,920,
proceeds for the sale of marketable securities of $1,399,746 and a decrease in
restricted cash of $1,450,000. At December 31, 2002, the Company had a working capital deficit of $1,285,004.

JMARs operations will continue to require the use of working capital in
2003 for, among other requirements, 1) certain CPL commercialization costs not
covered by existing contracts; 2) cash requirements of JPSI until its sale; 3)
temporary funding delays related to government contracts; and 4) corporate
costs, primarily related to the cost of being a public company. Working
capital (deficit) as of December 31, 2002 and December 31, 2001 was
$(1,285,004) and $7,843,465, respectively. The decrease in working capital is
primarily due to 1) the Companys losses; 2) decrease in receivables; 3)
increase in net current liabilities of assets held for sale; and 4) accrued
severance costs. The working capital of the Company had generally been funded
through its working capital line (the Comerica Debt) 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 Comerica Debt to $3 million and required up to a $3 million compensating
balance. Pursuant to this debt, there were no financial covenants or ratios.

In March 2003, the Company entered into a $3 million Revolving Fixed Price
Convertible 3 Year Note (the Working Capital Line) with Laurus Master Fund
(Laurus). Advances under the Working Capital Line are at an advance rate up
to 85% of eligible accounts receivable of the Company. The Company can convert
any portion of the principal outstanding to common stock at $.92 per share (the
Conversion Price) if the market price of the Companys common stock averages
118% of the Conversion Price or higher for 22 consecutive trading days. Laurus
can convert any portion of the principal outstanding to common stock at the
Conversion Price any time the Companys common stock is in excess of the
Conversion Price. After the first $2 million of conversions into equity, the
Conversion Price will be adjusted upward. The interest rate on the Working
Capital Line is prime plus .75 percent, subject to a floor of
5 percent. Accrued interest is payable monthly. This
Working Capital line replaced the Comerica Debt.

In addition, in March 2003, the Company issued $1 million in 8 percent
Series A Convertible Preferred (the Series A
Preferred) to Laurus at a fixed conversion
price of $.88 per share. Accrued interest is payable monthly. The
Series A Preferred must be redeemed in two years, if
not previously converted. The conversion terms of the Series A Preferred are
the same as those pursuant to the Working Capital Line. The proceeds
received under the Series A Preferred are initially restricted,
however, the funds are released as the Preferred Stock is converted
to Common Stock.

The Company also issued $1 million in shares of 3 percent Series B
Convertible Preferred Stock (the Series B Preferred) to Laurus at a fixed
conversion price of $.88 per share. Accrued interest is payable
monthly. Principal is payable in cash or stock in
twelve equal monthly installments starting October 1, 2003. The conversion
terms of the Series B Preferred Stock are the same as those pursuant to the
Working Capital Line. Any conversions to equity will offset the
requirements to make principal repayments.

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

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

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Management believes that, including the above financing, the Company has
adequate resources to fund operations and working capital requirements at least
through December 31, 2003. 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 CPL systems for
the manufacture of high-performance semiconductors. However, there can be no
assurance that additional financings will be available when needed, on
favorable terms, or at all.

The
Companys stockholders equity was $3,677,994 as of December 31, 2002.
The continued listing requirement of the Nasdaq National Market
System requires the
maintenance of no less than $10 million of stockholders equity. The Company
intends to transfer to the Nasdaq Small-Cap Market in the second quarter of
2003, where the continued listing requirement is the maintenance of no less
than $2.5 million of stockholders equity. Continued losses without increases
in equity would cause the Company to fall below this NASDAQ requirement which
would require it to come into compliance or face delisting. The delisting of
the Companys stock could adversely affect its ability to raise funds in the
future. The Company believes that it has available to it several potential
sources of capital to meet NASDAQ listing standards, particularly the above
described financings. The Company is also pursuing opportunities for strategic
relationships with semiconductor industry partners, one of the goals of which
would involve receipt of additional funding, in order to accelerate the
commercialization of its emerging CPL products.

In October, 2001, the Companys Universal Blank Shelf Registration
Statement with respect to $25 million of Company securities was declared
effective by the Securities and Exchange Commission. The securities that may be
sold under this registration statement included common stock, preferred stock,
debt, warrants or rights. This Form S-3 Registration Statement will no longer
be available for the sale of securities after March 31, 2003 because the
Companys market capitalization does not exceed
$75 million. The Company is considering whether to amend this
Form S-3 to a Form S-1 Registration Statement to allow for
the future sale of securities from time to time on a registered
basis.

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), in a
merger of SAL with and into Subsidiary (Merger). Consideration for the
Merger consisted of an aggregate of 603,051 shares of the Companys Common
Stock, $1.2 million in cash and $1.2 million in notes (the 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. Interest on the Notes is
payable quarterly, with the entire principal amount due, if not converted, on
February 7, 2004. The resale by the holders of the conversion shares is registered, however, the
holders have agreed to restrictions on their sale of those JMAR shares to no
more than 25% of their JMAR holdings in any quarter and to refrain from selling
any shares for 60 days upon notice from JMAR of its intention to negotiate an
underwritten public offering.

Under the Merger Agreement, SALs former shareholders and creditors could
earn up to three contingent earnout payments upon the satisfaction of three
earnout conditions. For the first earnout, the SAL creditors were eligible to
receive $500,000 in Convertible Notes upon the satisfaction of a stepper
limited throughput test (without the CPL light source) by June 30, 2002. This
requirement was not met by the June 30, 2002 deadline, and, therefore, the
Company did not have to issue the $500,000 in Convertible Notes. For the
second earnout, the SAL shareholders can earn $500,000 in Convertible Notes
upon the satisfaction of a lithography demonstration milestone. This milestone
must be met 90 days after the CPL light source is integrated with the stepper
at the Systems Division in Vermont and satisfies certain source performance
criteria. The third earnout condition can result in payment of up to 354,736
JMAR shares and up to $1.2 million in Convertible Notes upon receipt by the
Company of a qualifying order for a CPL system from a commercial customer and
delivery to the customer. Under the Merger Agreement, the deadline for receipt
of this order is 180 days after the CPL source is integrated with the stepper
at the Systems Division in Vermont and satisfies certain source performance
criteria.

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In February 2003 the Company received approximately $5 million in
additional contracts from General Dynamics. In addition, JMAR expects to
receive another approximately $5.3 million in CPL contract funding from DARPA
by June 30, 2003 and another $3.3 million in funds from NAVAIR by June 30,
2003.

Commitments

Future minimum annual commitments under bank and other debt agreements,
non-cancellable operating leases and post-employment benefits as of December 31, 2002 are as follows (unaudited):

|                         |  |      |           |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 
|------------------------ |  | ---- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | ------- | ---------- |  | ----- | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | --------- | 
|                         |  | 2003 |           | 2004 |  | 2005 |           | 2006 |  | 2007 |         | Thereafter |  | Total
|                         |  |      |           |      |  |      |           |      |  |      |         |            |  |      
|Bank and other
debt      |  | $    | 1,556,405 |      |  | $    | 1,203,917 |      |  | $    |        |            |  | $     |        |  |  | $ |        |  |  | $ |        |  |  | $ | 2,760,322 | 
|Operating leases         |  |      | 1,020,630 |      |  |      | 940,228   |      |  |      | 641,029 |            |  |       | 39,970  |  |  |   |        |  |  |   |        |  |  |   | 2,641,857 | 
|Post-employment
benefits |  |      | 211,172   |      |  |      | 211,172   |      |  |      | 211,172 |            |  |       | 211,172 |  |  |   | 211,172 |  |  |   | 138,074 |  |  |   | 1,193,934 | 
|                         |  |      |           |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 
|                         |  | $    | 2,788,207 |      |  | $    | 2,355,317 |      |  | $    | 852,201 |            |  | $     | 251,142 |  |  | $ | 211,172 |  |  | $ | 138,074 |  |  | $ | 6,596,113 | 
|                         |  |      |           |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 

Pursuant to the acquisition of SAL, its former shareholders and creditors
can earn up to two earnout payments upon the satisfaction of certain earnout
conditions (see page 23).

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

Critical Accounting Policies and Estimates

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

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

Revenues

Product revenues are recognized when the product is shipped FOB shipping
point, all risks of ownership have passed to the customer and the Company has
performed all obligations in accordance

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with Staff Accounting Bulletin No 101, Revenue Recognition in Financial
Statements (SAB No. 101). Contract revenues are recognized based on the
percentage of completion method wherein income is recognized pro-rata over the
life of the contract based on the ratio of total incurred costs to anticipated
total costs of the contract. The program manager prepares a statement
of work, schedule and budget for each contract. At least monthly,
actual costs are compared to budget and technical progress is
compared to the planned schedule. The Company prepares an estimate of costs to complete for each contract
at least quarterly. Estimated losses based on this review are fully charged to
operations when identified. Actual costs could differ from these estimated
costs.

Allowances for Doubtful Accounts

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

Inventory Reserves

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

Goodwill and Intangible Assets

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

Deferred Taxes

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

Litigation Accrual

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

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Warranty Reserve

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

Stock-Based Compensation Plans

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

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 the lack of
funds to continue development and commercialization of our CPL products in
accordance with our proposed schedule of product introductions, due to delays
in funding of government contracts and delays in securing, or inability to
secure other financing, whether from the public or private debt or equity
markets or from commercial lenders or otherwise. Other risks include
concentration of sales to certain markets and customers, such as the
semiconductor industry, delays in shipments or cancellations of orders, failure
of expected orders to materialize, fluctuations in margins, timing of future
orders, lack of availability of critical components, customer reorganizations,
failure of advanced technology and new intellectual property to perform as
predicted, the failure of pending patents to be issued, delays in development,
introduction and acceptance of new products, changing business and economic
conditions in various geographic regions, technical obsolescence of existing
products, technical problems in the development or modification of current
products or manufacturing processes, the impact of competitive products and
pricing, including the risk that current lithography technologies can continue
to economically produce smaller feature sizes or that the EUV LLC is successful
in developing an acceptable next generation lithography process that becomes
the process of choice for the semiconductor industry or that the semiconductor
industry fails to adopt CPL as the lithography alternative, the degree of
success of technology transfer (e.g., advanced lithography sources, etc.) to
commercial products, availability of working capital to support growth,
continued government funding of advanced lithography, successful integration of
acquisitions, declining credit markets, the adverse effect of selling JPSI on
its operating results, less than expected sales proceeds realized for the sale
of JPSI, other competitive factors and temporary cessation of operations at one
or more of its division facilities due to natural events such as floods,
earthquakes and fires.

JMARs future operating results are 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 and
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.

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Achieving market acceptance for our new and proposed Collimated Plasma
Lithography (CPL) products requires a significant effort to convince
semiconductor manufacturers to adopt the Companys CPL technology over other
alternative next generation lithography technologies. This will require
substantial technical, marketing and sales efforts and the expenditure of
significant funds to create customer awareness of and demand for our products.
We cannot assure you that our CPL product lines will achieve significant market
acceptance or result in significantly increased levels of revenues.

The development of sophisticated laser systems and microelectronics
manufacturing products is a lengthy and capital intensive process and is
subject to unforeseen risks, delays, problems and costs. We were unsuccessful
in establishing the semiconductor products portion of JSIs business and have
been unsuccessful in profitably operating the JPSI business. We cannot assure
you that we will be able to successfully develop our CPL products or any
additional products, or that unanticipated technical or other problems will not
occur which would result in delays in our development program.

Our CPL source development program, intended to produce CPL sources for
semiconductor lithography and for semiconductor inspection and related
processes, has been a technologically challenging effort that has taken several
years to achieve its current results. We have integrated our CPL source into a
JSAL stepper and anticipate conducting wafer exposures using this integrated
system in 2003. Additional efforts are ongoing to increase the x-ray power
output of our CPL sources to meet commercially viable requirements for the
Gallium Arsenide chip manufacturing industry, with a goal of receiving an order
for a commercial system by the end of 2003. Although we believe we will
resolve these challenges, the failure to do so within the time demanded by
potential customers could have a material adverse impact on the success of our
efforts to manufacture and sell our CPL equipment. The failure to sell
significant amounts of our newly developed CPL equipment within our announced
timeframes could have a material adverse impact on our stock price.

Our Research Division and Systems Division are dependent on third party
suppliers for components used in the development and manufacture of our
products. If certain key components are delayed or unavailable, we might have
to reengineer our products, resulting in delays and increased costs, or we may
have to pay other suppliers more to obtain those components, which could
adversely affect our business.

In the case of our CPL 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 CPL light source requires a component called a collimator,
which collects the X-ray output from our CPL source and directs the X-rays to
the wafer. We have received collimators in the past from a single supplier and
are using one of their current collimators on the CPL system currently
integrated with a JSAL stepper. We have engaged that supplier to develop a
higher-efficiency collimator in 2003 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 the X-ray power of our systems, which
would involve additional re-engineering and related delays and additional costs
which could adversely affect our business.

The markets for our products are highly competitive and are characterized
by rapid technological change and evolving industry standards. Development by
others of new or improved products, processes or technologies may make our
products obsolete or less competitive. Our ability to compete is dependent on
our ability to continually enhance and improve our products and to successfully
develop and market new products. Many of our competitors have greater
financial, managerial and technical resources than we have. We cannot assure
you that we will successfully differentiate ourselves from our competitors,
that the market will consider our products to be superior to our competitors
products or that we will be able to adapt to evolving markets and technologies,
develop new products or achieve and maintain technological advantages.

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Our success is substantially dependent on the efforts of certain key
personnel. In particular, our CPL business area relies on the skill of several
key laser and laser plasma scientists and engineers. The loss of such key
personnel would adversely affect our business and prospects. In such event, we
cannot assure you that we would be able to employ qualified persons on terms
favorable to us. In seeking and retaining qualified personnel, we are required
to compete with companies having greater financial and other resources than we
have. Since our future success is dependent upon our ability to retain or
attract qualified personnel, our failure to do so could have an adverse impact
on our business.

Our CPL program conducted by our Research and Systems divisions has been
funded primarily by government contracts from the Defense Advanced Research
Projects Agency and our Microelectronics Divisions business has received other
government funding in the past and may receive similar funding in the future.
These businesses are subject to various government regulations in connection
with their government R&D contract work. In addition, these portions of our
business are subject to audit by the U.S. Government of the costs incurred
under U.S. Government contracts and to safety audits by various U.S. Government
agencies. Our failure to comply with these government regulations could
jeopardize existing and future funding.

We rely, to a significant extent, on patents, trade secrets and
confidentiality agreements to protect our proprietary technology. We cannot
assure you as to the breadth or degree of protection which existing or future
patents, if any, may afford us, or that patents will not be circumvented or
invalidated, or that our products do not and will not infringe on patents or
violate proprietary rights of others. In the event a patent infringement claim
is asserted against us, or we are required to enforce our rights under an
issued patent, the cost of such actions may be very high, whether or not we are
successful. While we are unable to predict what such costs, if any, will be if
we are obligated to pursue patent litigation, our ability to fund our
operations and to pursue our business goals may be substantially impaired.

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.

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.

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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-26.




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

Not applicable.




PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is set forth in the Proxy Statement
under the caption Election of Directors and incorporated herein by reference
except that the information regarding our executive officers is included in
Part I under the heading Executive Officers of the Company.




Item 11. EXECUTIVE COMPENSATION

The information required by Item 11 is set forth in the Proxy Statement
under the caption Executive Compensation and is incorporated herein by this
reference.




Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is set forth in the Proxy Statement
under the caption Security Ownership of Certain Beneficial Owners and
Management and is incorporated herein by this reference.




Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is set forth in the Proxy Statement
under the caption Certain Relationships and Related Transactions and is
incorporated herein by this reference.

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PART IV




Item 14. CONTROLS AND PROCEDURES

Based on their evaluation, as of a date within 90 days of the filing date
of this Form 10-K, our Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures (as defined in Rule
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.




Item 15. 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, 2002 and 2001                                                |  |  | F-3 | 
|Consolidated Statements of Operations for the Years
Ended December 31, 2002, 2001 and 2000                  |  |  | F-4 | 
|Consolidated
Statements of Comprehensive Income (Loss) for the Years Ended
December 31, 2002, 2001 and 2000 |  |  | F-5 | 
|Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2002, 2001 and 2000        |  |  | F-6 | 
|Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000                  |  |  | F-7 | 
|Notes to Consolidated Financial Statements                                                                  |  |  | F-8 | 



| | 2. |  | Financial Statement Schedules. The following financial
statement schedule of JMAR Technologies, Inc., for the years ended
December 31, 2002, 2001 and 2000 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

The Company filed a Report on Form 8-K on October 15, 2002 related to the
election of Ronald A. Walrod as President and Chief Executive Officer and as a
director of the Company. In addition, the Company reported that Vernon H.
Blackman was elected Chairman of the Board of Directors.




Index to Exhibits

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

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|          |  |                                                                                                                                                                                                                                                                                           
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit   |  |                                                                                                                                                                                                                                                                                           
|No.       |  | Description                                                                                                                                                                                                                                                                               
|          |  |                                                                                                                                                                                                                                                                                           
|2.1(11)   |  | 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 (10)  |  | 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.
|          |  |                                                                                                                                                                                                                                                                                           
|4.3       |  | Form of Stock Option
Agreement between the Company and the employees listed on attached
schedule. (+)                                                                                                                                                                                     
|          |  |                                                                                                                                                                                                                                                                                           
|4.4       |  | Stock Option
Agreement, dated October 14, 2002, between the Company and
Ronald A. Walrod. (+)                                                                                                                                                                                             
|          |  |                                                                                                                                                                                                                                                                                           
|4.5(16)   |  | Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series A 8% Convertible
Preferred Stock, $.01 Par Value Per Share.                                                                                                   
|          |  |                                                                                                                                                                                                                                                                                           
|4.6(16)   |  | Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series B 3% Convertible
Preferred Stock, $.01 Par Value Per Share.                                                                                                   
|          |  |                                                                                                                                                                                                                                                                                           
|4.7(16)   |  | Common Stock Purchase Warrant issued on March 14, 2003 to Laurus Master Fund, Ltd.
in connection with the issuance of Series A Preferred Stock, Series B
Preferred Stock and Convertible Note.                                                                                            
|          |  |                                                                                                                                                                                                                                                                                           
|4.8       |  | Common Stock Purchase Warrant issued on March 21, 2003 to Laurus Master Fund, Ltd. in
connection with $3 million receivables financing facility.                                                                                                                                          
|          |  |                                                                                                                                                                                                                                                                                           
|4.9       |  | Convertible Note
dated March 21, 2003 executed by the Company in favor of Laurus
Master Fund, Ltd.                                                                                                                                                                                        
|          |  |                                                                                                                                                                                                                                                                                           
|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 (14) |  | The Companys 1999 Stock Option Plan, as amended. (+)                                                                                                                                                                                                                                     
|          |  |                                                                                                                                                                                                                                                                                           
|10.6 (7)  |  | Management Incentive Plan Agreement for JMAR Precision Systems, Inc., as amended. (+)                                                                                                                                                                                                     
|          |  |                                                                                                                                                                                                                                                                                           
|10.7 (12) |  | Employment Agreement between the Company and Daniel J. Fleming, dated August 7, 2001.
(+)                                                                                                                                                                                                 

31



---



##### Table of Contents



|           |  |                                                                                                                                                                                                                                                                  
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit    |  |                                                                                                                                                                                                                                                                  
|No.        |  | Description                                                                                                                                                                                                                                                      
|           |  |                                                                                                                                                                                                                                                                  
|10.8 (12)  |  | Amendment dated September 7, 2001 to Amended and Restated Employment
Agreement between the Company and John S. Martinez. (+)                                                                                                                                     
|           |  |                                                                                                                                                                                                                                                                  
|10.9 (14)  |  | Agreement dated September 16, 2002 between the Company and John S.
Martinez.                                                                                                                                                                                     
|           |  |                                                                                                                                                                                                                                                                  
|10.10 (13) |  | Employment Agreement between the Company and Ronald A. Walrod,
dated October 14, 2002. (+)                                                                                                                                                                       
|           |  |                                                                                                                                                                                                                                                                  
|10.11      |  | Purchase and Security Agreement dated March 21, 2003 between the
Company, JMAR Research, Inc., JMAR/SAL NanoLithography, Inc., JSI
Microelectronics, Inc. and JMAR Precision Systems, Inc., and Laurus Master
Fund, Ltd.                                         
|           |  |                                                                                                                                                                                                                                                                  
|21.1       |  | Subsidiaries of the Company include JMAR Research, Inc. (a California
corporation), JMAR Precision Systems, Inc. (a California corporation), JSI
Microelectronics, Inc. (a California corporation) and JMAR/SAL
NanoLithography, Inc. (a California Corporation).
|           |  |                                                                                                                                                                                                                                                                  
|23.1       |  | Consent of Independent Public Accountants.                                                                                                                                                                                                                       
|           |  |                                                                                                                                                                                                                                                                  
|99.1       |  | Certificate pursuant
to section 906 of the SarbanesOxley Act of 2002.                                                                                                                                                                                           



---

|(+)  |  | These contracts are management compensation contracts required to be
separately identified pursuant to Item 15 (a) 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 Form
10-Q for the quarter ended June 30, 2000.                                                                                                                                                                                                   
|    
|(11) |  | Incorporated by reference to the exhibit filed with the Companys Form
8-K dated August 22, 2001.                                                                                                                                                                                                                  
|    
|(12) |  | Incorporated by reference to the exhibit filed with the Companys Form
10-K for the year ended December 31, 2001.                                                                                                                                                                                                  
|    
|(13) |  | Incorporated by reference to the exhibit filed with the Companys Form
8-K dated October 15, 2002.                                                                                                                                                                                                                 
|    
|(14) |  | Incorporated by reference to the exhibit filed with the Companys Form
10-Q for the quarter ended September 30, 2002.                                                                                                                                                                                              
|    
|(15) |  | Incorporated by reference to the exhibit filed with the Companys Proxy
Statement for the 2002 Annual Meeting of Shareholders.                                                                                                                                                                                     
|    
|(16) |  | Incorporated by reference to the exhibit filed with the Companys Form
8-K dated March 14, 2003.                                                                                                                                                                                                                   

32



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                           |  |  |     | 
|---------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Report of Independent Public Accountants                                                                   |  |  | F-2 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                               |  |  | F-3 | 
|Consolidated Statements of Operations for the
Years Ended December 31, 2002, 2001 and 2000                 |  |  | F-4 | 
|Consolidated
Statement of Comprehensive Income (Loss) for the
Years Ended December 31, 2002, 2001 and 2000 |  |  | F-5 | 
|Consolidated Statements of Stockholders Equity for the Years Ended December 31,
2002, 2001 and 2000       |  |  | F-6 | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2002,
2001 and 2000                 |  |  | F-7 | 
|Notes to Consolidated Financial Statements                                                                 |  |  | F-8 | 





---



##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
JMAR Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of JMAR
Technologies, Inc. (a Delaware corporation) as of December 31,
2002 and 2001, and the related consolidated statements of operations,
comprehensive income (loss), stockholders equity and cash flows for each of
the three years in the period ended December 31, 2002. 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 of America. 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 consolidated financial position of JMAR
Technologies, Inc. as of December 31, 2002 and 2001, and the
consolidated results of its operations and its consolidated cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.

We have
also audited Schedule II of JMAR Technologies, Inc. for each of the three years in the period
ended December 31, 2002. In our opinion, this schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

Irvine, California
March 27, 2003

F-2



---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2001

|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |            |            |  | 
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------------- | ----------- | ---------- | ---------- | ---------- | ----------- | ---------- | ---------- |  | 
|                                                                      |                                                                                                                                                                            | December 31,                              
|                                                                      |                                                                                                                                                                            |                                           
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            | 2002       |            | 2001       
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |            
|ASSETS                                                                |                                                                                                                                                                            |                                            |                            |             |            |            |            |            
|Current Assets:                                                       |                                                                                                                                                                            |                                            |                            |             |            |            |            |            
|                                                                      | Cash and cash equivalents                                                                                                                                                  |                                            | $                          | 2,246,264   |            |            | $          | 4,076,894   |           
|                                                                      | Restricted cash                                                                                                                                                            |                                            |                            | 1,550,000   |            |            |            | 3,000,000   |           
|                                                                      | Accounts receivable, net                                                                                                                                                   |                                            |                            | 2,894,393   |            |            |            | 4,201,634   |           
|                                                                      | Inventories                                                                                                                                                                |                                            |                            | 389,467     |            |            |            | 294,482     |           
|                                                                      | Marketable securities available for sale                                                                                                                                   |                                            |                            |            |            |            |            | 1,474,889   |           
|                                                                      | Net current assets of assets held for sale                                                                                                                                 |                                            |                            | 1,349,758   |            |            |            | 5,248,883   |           
|                                                                      | Prepaid expenses and other                                                                                                                                                 |                                            |                            | 524,863     |            |            |            | 446,021     |           
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|                                                                      |                                                                                                                                                                            |                                            | Total current assets       |             |            | 8,954,745  |            |             |            | 18,742,803 | 
|Property and equipment, net                                           |                                                                                                                                                                            |                                            | 1,248,198                  |             |            |            | 1,252,738  |            
|Intangible assets, net                                                |                                                                                                                                                                            |                                            | 930,056                    |             |            |            | 1,118,020  |            
|Other assets                                                          |                                                                                                                                                                            |                                            | 197,754                    |             |            |            | 667,436    |            
|Net non-current assets of assets held for sale                        |                                                                                                                                                                            |                                            |                           |             |            |            | 1,059,630  |            
|Goodwill, net                                                         |                                                                                                                                                                            |                                            | 3,790,907                  |             |            |            | 3,777,998  |            
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|TOTAL ASSETS                                                          |                                                                                                                                                                            | $                                          | 15,121,660                 |             |            | $          | 26,618,625 |            
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|LIABILITIES AND STOCKHOLDERS EQUITY                                  |                                                                                                                                                                            |                                            |                            |             |            |            |            |            
|Current Liabilities:                                                  |                                                                                                                                                                            |                                            |                            |             |            |            |            |            
|                                                                      | Accounts payable                                                                                                                                                           |                                            | $                          | 1,864,405   |            |            | $          | 1,781,277   |           
|                                                                      | Accrued liabilities                                                                                                                                                        |                                            |                            | 1,558,307   |            |            |            | 1,019,383   |           
|                                                                      | Accrued payroll and related costs                                                                                                                                          |                                            |                            | 1,302,874   |            |            |            | 846,056     |           
|                                                                      | Customer deposits                                                                                                                                                          |                                            |                            | 832,607     |            |            |            | 1,480,386   |           
|                                                                      | Line of credit and notes payable                                                                                                                                           |                                            |                            | 1,556,405   |            |            |            | 3,007,152   |           
|                                                                      | Net current liabilities of assets held for sale, including notes payable                                                                                                   |                                            |                            | 3,125,151   |            |            |            | 2,765,084   |           
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|                                                                      |                                                                                                                                                                            |                                            | Total current liabilities  |             |            | 10,239,749 |            |             |            | 10,899,338 | 
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|Notes payable and other long-term liabilities, net of current portion |                                                                                                                                                                            |                                            | 1,203,917                  |             |            |            | 1,244,632  |            
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|Notes payable of assets held for sale, net of current portion         |                                                                                                                                                                            |                                            |                           |             |            |            | 175,000    |            
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|Commitments and contingencies                                         |                                                                                                                                                                            |                                            |                           |             |            |            |           |            
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|Stockholders equity:                                                 |                                                                                                                                                                            |                                            |                            |             |            |            |            |            
|                                                                      | Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and
outstanding as of December 31, 2002 and 2001                                                 |                                            |                            |            |            |            |            |            |           
|                                                                      | Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 23,852,024 shares as of December 31, 2002 and
22,840,392 shares as of December 31, 2001 |                                            |                            | 238,520     |            |            |            | 228,404     |           
|                                                                      | Additional paid-in capital                                                                                                                                                 |                                            |                            | 56,636,991  |            |            |            | 54,343,211  |           
|                                                                      | Accumulated other comprehensive income                                                                                                                                     |                                            |                            |            |            |            |            | 1,424,864   |           
|                                                                      | Accumulated deficit                                                                                                                                                        |                                            |                            | (53,197,517 | )          |            |            | (41,696,824 | )         
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|                                                                      |                                                                                                                                                                            |                                            | Total stockholders equity |             |            | 3,677,994  |            |             |            | 14,299,655 | 
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           
|                                                                      |                                                                                                                                                                            | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                            | $           | 15,121,660 |            |            | $           | 26,618,625 |           
|                                                                      |                                                                                                                                                                            |                                            |                            |             |            |            |            |             |           



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

F-3





---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001 and 2000

|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |            |           | 
|------------------------------------------------------------------------ | -------------------------------------------------- | ------------------------ | ----------- | ----------------------- | ---------- | ---- | ----------- | ----------- | ---------- | - | ---------- | ---------- | --------- | 
|                                                                         |                                                    |                          |             | Year ended December 31,
|                                                                         |                                                    |                          |             |                        
|                                                                         |                                                    |                          |             | 2002                    |            | 2001 |             | 2000       
|                                                                         |                                                    |                          |             |                         |            |      |             |            
|Contract sales                                                           |                                                    | $                        | 17,543,334  |                         |            | $    | 12,033,271  |             |            | $ | 8,780,205  |           
|Product sales                                                            |                                                    |                          | 840,476     |                         |            |      | 870,540     |             |            |   | 334,152    |           
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         |                                                    | Total revenues           |             |                         | 18,383,810 |      |             |             | 12,903,811 |   |            |            | 9,114,357 | 
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Contract costs of sales                                                  |                                                    |                          | 14,548,712  |                         |            |      | 9,092,586   |             |            |   | 6,593,953  |           
|Product costs of sales                                                   |                                                    |                          | 421,606     |                         |            |      | 311,982     |             |            |   | 191,998    |           
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         |                                                    | Total costs of sales     |             |                         | 14,970,318 |      |             |             | 9,404,568  |   |            |            | 6,785,951 | 
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         |                                                    | Gross profit             |             |                         | 3,413,492  |      |             |             | 3,499,243  |   |            |            | 2,328,406 | 
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Operating expenses:                                                      |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         | Selling, general and administrative                |                          |             | 4,594,716               |            |      |             | 4,159,523   |            |   |            | 2,882,676  |          
|                                                                         | Research and development                           |                          |             | 854,306                 |            |      |             | 602,980     |            |   |            | 340,227    |          
|                                                                         | Asset writedowns and special items                 |                          |             | 1,074,324               |            |      |             | 226,899     |            |   |            |           |          
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         |                                                    | Total operating expenses |             |                         | 6,523,346  |      |             |             | 4,989,402  |   |            |            | 3,222,903 | 
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Loss from operations                                                     |                                                    |                          | (3,109,854  | )                       |            |      | (1,490,159  | )           |            |   | (894,497   | )         
|Realized gain on sale of marketable securities                           |                                                    |                          | 1,349,721   |                         |            |      | 1,189,273   |             |            |   | 2,184,476  |           
|Interest and other income                                                |                                                    |                          | 67,404      |                         |            |      | 252,282     |             |            |   | 273,626    |           
|Interest and other expense                                               |                                                    |                          | (284,174    | )                       |            |      | (107,950    | )           |            |   | (106,466   | )         
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Income (loss) from continuing operations before
income taxes             |                                                    |                          | (1,976,903  | )                       |            |      | (156,554    | )           |            |   | 1,457,139  |           
|Income tax expense                                                       |                                                    |                          | (484,423    | )                       |            |      |            |             |            |   |           |           
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Income
(loss) from continuing operations                                 |                                                    |                          | (2,461,326  | )                       |            |      | (156,554    | )           |            |   | 1,457,139  |           
|Discontinued operations:                                                 |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         | Loss from operations of discontinued operations    |                          |             | (5,839,367              | )          |      |             | (14,544,980 | )          |   |            | (2,681,904 | )        
|                                                                         | Loss on disposal of discontinued operations        |                          |             | (3,200,000              | )          |      |             |            |            |   |            |           |          
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Net loss                                                                 |                                                    | $                        | (11,500,693 | )                       |            | $    | (14,701,534 | )           |            | $ | (1,224,765 | )         
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Basic
and diluted income (loss) per share:                               |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         | Income
(loss) per share from continuing operations |                          | $           | (.11                    | )          |      | $           | (.01        | )          |   | $          | .06        |          
|                                                                         | Loss per share from discontinued operations        |                          |             | (.38                    | )          |      |             | (.64        | )          |   |            | (.12       | )        
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Basic
and diluted net loss per share                                     |                                                    | $                        | (.49        | )                       |            | $    | (.65        | )           |            | $ | (.06       | )         
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|Shares
used in computation of basic and diluted income (loss) per share: |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         | Basic                                              |                          |             | 23,618,169              |            |      |             | 22,484,905  |            |   |            | 21,468,763 |          
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           
|                                                                         | Diluted                                            |                          |             | 23,618,169              |            |      |             | 22,484,905  |            |   |            | 25,331,177 |          
|                                                                         |                                                    |                          |             |                         |            |      |             |             |            |   |            |           



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

F-4



---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2002, 2001 and 2000

|                                   |  |                                                            |             |      |         |      |             |      |        |   |            |   |           | 
|---------------------------------- |  | ---------------------------------------------------------- | ----------- | ---- | ------- | ---- | ----------- | ---- | ------ | - | ---------- | - | --------- | 
|                                   |  |                                                            |             | 2002 |         | 2001 |             | 2000
|                                   |  |                                                            |             |      |         |      |             |     
|Net
loss                           |  | $                                                          | (11,500,693 | )    |         | $    | (14,701,534 | )    |        | $ | (1,224,765 | )
|                                   |  |                                                            |             |      |         |      |             |      |        |   |            |  
|Other
comprehensive income (loss): |  |                                                            |             |      |         |      |             |      |        |   |            |  
|                                   |  | Holding
gains (losses)                                     |             |      | (75,143 | )    |             |      | 24,797 |   |            |   | 4,773,816 | 
|                                   |  | Reclassification
adjustment for gains included in net loss | (1,349,721  | )    |         |      | (1,189,273  | )    |        |   | (2,184,476 | )
|                                   |  |                                                            |             |      |         |      |             |      |        |   |            |  
|                                   |  | Other
comprehensive income (loss)                          | (1,424,864  | )    |         |      | (1,164,476  | )    |        |   | 2,589,340  |  
|                                   |  |                                                            |             |      |         |      |             |      |        |   |            |  
|Comprehensive
income (loss)        |  | $                                                          | (12,925,557 | )    |         | $    | (15,866,010 | )    |        | $ | 1,364,575  |  
|                                   |  |                                                            |             |      |         |      |             |      |        |   |            |  



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

F-5



---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2002, 2001 and 2000



|                                                                  |  |              |            |                 |  |        |         |        |  |  |   |  |  |   |   | 
|----------------------------------------------------------------- |  | ------------ | ---------- | --------------- |  | ------ | ------- | ------ |  |  | - |  |  | - | - | 
|                                                                  |  | Common Stock |            | Preferred Stock
|                                                                  |  |              |            |                
|                                                                  |  | Shares       |            | Amount          |  | Shares |         | Amount
|                                                                  |  |              |            |                 |  |        |         |       
|Balance, December 31, 1999                                        |  |              | 18,074,836 |                 |  | $      | 180,748 |        |  |  |  |  |  | $ |  | 
|Stock issued upon exercise of
warrants and options                |  |              | 4,151,824  |                 |  |        | 41,519  |        |  |  |  |  |  |   |  | 
|Issuance of stock for services                                    |  |              | 1,628      |                 |  |        | 16      |        |  |  |  |  |  |   |  | 
|Issuance of stock related to
acquisition of Continuum
Engineering |  |              | 5,062      |                 |  |        | 51      |        |  |  |  |  |  |   |  | 
|Repurchase of stock                                               |  |              | (8,700     | )               |  |        | (87     | )      |  |  |  |  |  |   |  | 
|Unrealized gain on marketable
securities                          |  |              |           |                 |  |        |        |        |  |  |  |  |  |   |  | 
|Net loss                                                          |  |              |           |                 |  |        |        |        |  |  |  |  |  |   |  | 
|                                                                  |  |              |            |                 |  |        |         |        |  |  |   |  |  |   |   | 
|Balance, December 31, 2000                                        |  |              | 22,224,650 |                 |  |        | 222,247 |        |  |  |  |  |  |   |  | 
|Stock issued upon exercise of
warrants and options                |  |              | 26,013     |                 |  |        | 260     |        |  |  |  |  |  |   |  | 
|Issuance of stock for services                                    |  |              | 1,571      |                 |  |        | 16      |        |  |  |  |  |  |   |  | 
|Issuance of stock related to
acquisition of Continuum
Engineering |  |              | 807        |                 |  |        | 8       |        |  |  |  |  |  |   |  | 
|Repurchase of stock                                               |  |              | (18,700    | )               |  |        | (187    | )      |  |  |  |  |  |   |  | 
|Change in unrealized gain on
marketable securities                |  |              |           |                 |  |        |        |        |  |  |  |  |  |   |  | 
|Issuance of stock related to
legal settlement                     |  |              | 3,000      |                 |  |        | 30      |        |  |  |  |  |  |   |  | 
|Issuance of stock related to
acquisition of SAL                   |  |              | 603,051    |                 |  |        | 6,030   |        |  |  |  |  |  |   |  | 
|Net loss                                                          |  |              |           |                 |  |        |        |        |  |  |  |  |  |   |  | 
|                                                                  |  |              |            |                 |  |        |         |        |  |  |   |  |  |   |   | 
|Balance, December 31, 2001                                        |  |              | 22,840,392 |                 |  |        | 228,404 |        |  |  |  |  |  |   |  | 
|Issuance of stock for services                                    |  |              | 11,632     |                 |  |        | 116     |        |  |  |  |  |  |   |  | 
|Charge on unrealized gain on
marketable securities                |  |              |           |                 |  |        |        |        |  |  |  |  |  |   |  | 
|Issuance of common stock and
warrants                             |  |              | 1,000,000  |                 |  |        | 10,000  |        |  |  |  |  |  |   |  | 
|Modification to existing option
and warrant terms                 |  |              |           |                 |  |        |        |        |  |  |  |  |  |   |  | 
|Net loss                                                          |  |              |           |                 |  |        |        |        |  |  |  |  |  |   |  | 
|                                                                  |  |              |            |                 |  |        |         |        |  |  |   |  |  |   |   | 
|Balance,
December 31, 2002                                        |  |              | 23,852,024 |                 |  | $      | 238,520 |        |  |  |  |  |  | $ |  | 
|                                                                  |  |              |            |                 |  |        |         |        |  |  |   |  |  |   |   | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                  |  |            |            |               |  |                   |            |        |  |   |             |   |  |   |             |  
|----------------------------------------------------------------- |  | ---------- | ---------- | ------------- |  | ----------------- | ---------- | ------ |  | - | ----------- | - |  | - | ----------- | -
|                                                                  |  |            |            |               |  | Accumulated Other |            |        |  |   |             |   |  |  
|                                                                  |  | Additional |            | Comprehensive |  | Accumulated       |            | Total 
|                                                                  |  | Paid-in    |            | Income        |  | Deficit           |            | Equity
|                                                                  |  |            |            |               |  |                   |            |       
|Balance, December 31, 1999                                        |  | $          | 36,499,238 |               |  | $                 |           |        |  | $ | (25,770,525 | ) |  | $ | 10,909,461  |  
|Stock issued upon exercise of
warrants and options                |  |            | 16,142,801 |               |  |                   |           |        |  |   |            |   |  |   | 16,184,320  |  
|Issuance of stock for services                                    |  |            | 5,984      |               |  |                   |           |        |  |   |            |   |  |   | 6,000       |  
|Issuance of stock related to
acquisition of Continuum
Engineering |  |            | 5,818      |               |  |                   |           |        |  |   |            |   |  |   | 5,869       |  
|Repurchase of stock                                               |  |            | (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                                        |  |            | 52,628,372 |               |  |                   | 2,589,340  |        |  |   | (26,995,290 | ) |  |   | 28,444,669  |  
|Stock issued upon exercise of
warrants and options                |  |            | 44,652     |               |  |                   |           |        |  |   |            |   |  |   | 44,912      |  
|Issuance of stock for services                                    |  |            | 4,884      |               |  |                   |           |        |  |   |            |   |  |   | 4,900       |  
|Issuance of stock related to
acquisition of Continuum
Engineering |  |            | 3,808      |               |  |                   |           |        |  |   |            |   |  |   | 3,816       |  
|Repurchase of stock                                               |  |            | (55,456    | )             |  |                   |           |        |  |   |            |   |  |   | (55,643     | )
|Change in unrealized gain on
marketable securities                |  |            |           |               |  |                   | (1,164,476 | )      |  |   |            |   |  |   | (1,164,476  | )
|Issuance of stock related to
legal settlement                     |  |            | 10,316     |               |  |                   |           |        |  |   |            |   |  |   | 10,346      |  
|Issuance of stock related to
acquisition of SAL                   |  |            | 1,706,635  |               |  |                   |           |        |  |   |            |   |  |   | 1,712,665   |  
|Net loss                                                          |  |            |           |               |  |                   |           |        |  |   | (14,701,534 | ) |  |   | (14,701,534 | )
|                                                                  |  |            |            |               |  |                   |            |        |  |   |             |   |  |   |             |  
|Balance, December 31, 2001                                        |  |            | 54,343,211 |               |  |                   | 1,424,864  |        |  |   | (41,696,824 | ) |  |   | 14,299,655  |  
|Issuance of stock for services                                    |  |            | 11,053     |               |  |                   |           |        |  |   |            |   |  |   | 11,169      |  
|Change
in unrealized gain on
marketable securities                |  |            |           |               |  |                   | (1,424,864 | )      |  |   |            |   |  |   | (1,424,864  | )
|Issuance of common stock and
warrants                             |  |            | 1,769,920  |               |  |                   |           |        |  |   |            |   |  |   | 1,779,920   |  
|Modification to existing option
and warrant terms                 |  |            | 512,807    |               |  |                   |           |        |  |   |            |   |  |   | 512,807     |  
|Net loss                                                          |  |            |           |               |  |                   |           |        |  |   | (11,500,693 | ) |  |   | (11,500,693 | )
|                                                                  |  |            |            |               |  |                   |            |        |  |   |             |   |  |   |             |  
|Balance,
December 31, 2002                                        |  | $          | 56,636,991 |               |  | $                 |           |        |  | $ | (53,197,517 | ) |  | $ | 3,677,994   |  
|                                                                  |  |            |            |               |  |                   |            |        |  |   |             |   |  |   |             |  



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

F-6





---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000

|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |            |           |            |  
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------------------------------- | ---------- | ----------------------- | ----------- | ---------- | ---------- | -------- | ---------- | ---------- | ---------- | --------- | ---------- | -
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            | Year Ended December 31,
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                        
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            | 2002                    |             | 2001       |            | 2000    
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |         
|Cash flows from operating activities:                         |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |           
|                                                              | Income (loss) from continuing operations                                                                                             |                                                                                                               | $                                                   | (2,461,326                                                                | )          |                         | $           | (156,554   | )          |          | $          | 1,457,139  |           
|                                                              | Adjustments to reconcile income (loss) from continuing operations to net cash
provided by (used in) continuing operating activities: |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|                                                              |                                                                                                                                      | Depreciation and amortization                                                                                 |                                                     |                                                                           | 777,317    |                         |             |            | 478,042    |          |            |            | 402,156    |          
|                                                              |                                                                                                                                      | Services received in exchange for
common stock or warrants                                                    |                                                     |                                                                           | 11,169     |                         |             |            | 15,246     |          |            |            | 6,000      |          
|                                                              |                                                                                                                                      | Gain on sale of marketable securities                                                                         |                                                     |                                                                           | (1,349,721 | )                       |             |            | (1,189,273 | )        |            |            | (2,184,476 | )        
|                                                              |                                                                                                                                      | Modification of options and warrants                                                                          |                                                     |                                                                           | 512,807    |                         |             |            |           |          |            |            |           |          
|                                                              |                                                                                                                                      | Asset writedowns                                                                                              |                                                     |                                                                           |           |                         |             |            | 226,899    |          |            |            |           |          
|                                                              |                                                                                                                                      | Change in assets and liabilities, net of
effects from acquisitions, asset writedowns and non-recurring items: |                                                     |                                                                           |            |                         |             |            |            |          |            |            |            |          
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Accounts receivable, net                                                  |            |                         | 1,307,241   |            |            |          | (425,747   | )          |            |           | (194,891   | )
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Inventories                                                               |            |                         | (94,983     | )          |            |          | (9,908     | )          |            |           | 71,800     |  
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Prepaid expenses and other                                                |            |                         | (93,534     | )          |            |          | (44,970    | )          |            |           | (264,937   | )
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Other assets                                                              |            |                         | 484,423     |            |            |          | (86,450    | )          |            |           | (88,993    | )
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Customer deposits                                                         |            |                         | (647,779    | )          |            |          | 1,480,386  |            |            |           |           |  
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Accounts payable and accrued liabilities                                  |            |                         | 1,078,871   |            |            |          | 344,091    |            |            |           | (256,562   | )
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Net cash provided by (used in) continuing operations operating
activities |            |                         | (475,515    | )          |            |          | 631,762    |            |            |           | (1,052,764 | )
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|Loss from discontinued operations                             |                                                                                                                                      |                                                                                                               | (9,039,367                                          | )                                                                         |            |                         | (14,544,980 | )          |            |          | (2,681,904 | )         
|Changes in net assets and liabilities of assets held for sale |                                                                                                                                      |                                                                                                               | 5,143,770                                           |                                                                           |            |                         | 10,474,627  |            |            |          | (3,186,671 | )         
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Net cash used in discontinued operations                                  |            |                         | (3,895,597  | )          |            |          | (4,070,353 | )          |            |           | (5,868,575 | )
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     | Net cash used in operating activities                                     |            |                         | (4,371,112  | )          |            |          | (3,438,591 | )          |            |           | (6,921,339 | )
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|Cash flows from investing activities:                         |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |           
|                                                              | Proceeds from sale of marketable securities                                                                                          |                                                                                                               |                                                     | 1,399,746                                                                 |            |                         |             | 1,207,923  |            |          |            | 2,224,337  |           
|                                                              | Investment in marketable securities                                                                                                  |                                                                                                               |                                                     |                                                                          |            |                         |             |           |            |          |            | (107,939   | )         
|                                                              | Capital expenditures                                                                                                                 |                                                                                                               |                                                     | (393,564                                                                  | )          |                         |             | (394,255   | )          |          |            | (626,528   | )         
|                                                              | Intangible assets, other assets and goodwill                                                                                         |                                                                                                               |                                                     | (204,157                                                                  | )          |                         |             | (128,872   | )          |          |            | (116,213   | )         
|                                                              | Payments received on notes receivable                                                                                                |                                                                                                               |                                                     |                                                                          |            |                         |             | 7,738      |            |          |            |           |           
|                                                              | Payment for purchase of JSAL, net of cash acquired                                                                                   |                                                                                                               |                                                     |                                                                          |            |                         |             | (1,112,309 | )          |          |            |           |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|                                                              |                                                                                                                                      |                                                                                                               | Net cash provided by (used in) investing activities |                                                                           |            | 802,025                 |             |            |            | (419,775 | )          |            |            | 1,373,657 |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|Cash flows from financing activities:                         |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |           
|                                                              | Net proceeds from the issuance of common stock                                                                                       |                                                                                                               |                                                     | 1,779,920                                                                 |            |                         |             |           |            |          |            |           |           
|                                                              | Net borrowings (payments) under line of credit                                                                                       |                                                                                                               |                                                     | (1,450,000                                                                | )          |                         |             | 1,900,000  |            |          |            | (3,890,000 | )         
|                                                              | (Increase) decrease in restricted cash                                                                                               |                                                                                                               |                                                     | 1,450,000                                                                 |            |                         |             | (3,000,000 | )          |          |            |           |           
|                                                              | Payments of notes payable and other long-term liabilities                                                                            |                                                                                                               |                                                     | (41,463                                                                   | )          |                         |             | (1,386     | )          |          |            | (6,447     | )         
|                                                              | Increase in notes payable and other long-term liabilities                                                                            |                                                                                                               |                                                     |                                                                          |            |                         |             | 35,000     |            |          |            | 32,861     |           
|                                                              | Repurchases of stock                                                                                                                 |                                                                                                               |                                                     |                                                                          |            |                         |             | (55,643    | )          |          |            | (25,556    | )         
|                                                              | Net proceeds from the exercise of options and warrants                                                                               |                                                                                                               |                                                     |                                                                          |            |                         |             | 44,912     |            |          |            | 16,184,320 |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|                                                              |                                                                                                                                      | Net cash provided by (used in) financing activities                                                           |                                                     |                                                                           | 1,738,457  |                         |             |            | (1,077,117 | )        |            |            | 12,295,178 |          
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|Net increase (decrease) in cash and cash equivalents          |                                                                                                                                      |                                                                                                               | (1,830,630                                          | )                                                                         |            |                         | (4,935,483  | )          |            |          | 6,747,496  |           
|Cash and cash equivalents, beginning of period                |                                                                                                                                      |                                                                                                               | 4,076,894                                           |                                                                           |            |                         | 9,012,377   |            |            |          | 2,264,881  |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|Cash and cash equivalents, end of period                      |                                                                                                                                      | $                                                                                                             | 2,246,264                                           |                                                                           |            | $                       | 4,076,894   |            |            | $        | 9,012,377  |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           
|Cash paid for interest                                        |                                                                                                                                      | $                                                                                                             | 183,466                                             |                                                                           |            | $                       | 106,176     |            |            | $        | 123,943    |           
|                                                              |                                                                                                                                      |                                                                                                               |                                                     |                                                                           |            |                         |             |            |            |          |            |            |           

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 5,062 ($5,869) and 807
($3,816) earn-out shares were issued in 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 January
2002, April 2001 and December 2000, the Company sold 545,500, 500,000 and
890,000 shares, respectively, of Bede for net proceeds of approximately $1.4
million, $1.2 million and $2.2 million, respectively.



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

F-7



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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001

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.

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

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

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

The standard semiconductor products business and the Precision Equipment
segment business have been accounted for in the accompanying consolidated
financial statements as discontinued operations and the statement of operations
for the years ending December 31, 2001 and 2000 have been restated to reflect
the discontinuation of these businesses (See Note 9).

The
Company  has incurred significant losses for the years ended
December 31, 2002 and 2001. As of December 31, 2002, the
Company has stockholders equity of approximately
$3.7 million and a deficit working capital of approximately
$1.3 million. Management has taken steps to reduce its future
cash flow requirements through the discontinuance of its standard
semiconductor products and Precision Equipment segment businesses
mentioned above. Additionally, management has completed additional
debt and equity financings subsequent to December 31, 2002 (see
Note 17). Management believes that the Company has adequate
resources to fund its operations and working capital requirements
through December 31, 2003. However, additional financing may be
required to complete or accelerate the development of its CPL
systems. There can be no assurance that additional financings will be
available when needed, on favorable terms, or at all.

2.     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, 2002 and 2001 includes
$1,550,000 and $3,000,000 as compensating balance for the Companys line of
credit (see Note 8).

F-8



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##### Table of Contents



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

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.

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 accounts for software development costs in accordance with
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed. Under SFAS No. 86, costs incurred internally in
creating a computer software product are charged to expense

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

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. The Company
annually compares the unamortized cost to the net realizable value and
writes-off the amount by which the unamortized capitalized costs exceed the net
realizable value. 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.

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 the estimated useful
life of the products. Software development costs are currently being amortized
using the straight line basis over three years. Accumulated amortization of
capitalized software development costs is included in net non-current assets of
discontinued operations and was $723,880 as of December 31, 2001. During the
year ended December 31, 2001, the Company wrote down $4,650,000 of capitalized
software costs to fair value related to the Companys semiconductor standard
products based on an impairment analysis pursuant to SFAS No 86. Subsequent to
December 31, 2001, the Company decided to discontinue this line of business
(see Note 9).

h.     Goodwill and Other Intangible Assets

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. In
addition, the Company was 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 using the purchase method. The Company adopted SFAS No. 142
beginning January 1, 2002, and upon adoption the Company did not recognize any
impairment of goodwill or other intangible assets.

In accordance with SFAS 142, the Company has established reporting units
and applies a two-step fair value approach to evaluating goodwill impairment,
using at least an annual assessment. The Company compares the fair value of the
business unit with the carrying amount of the assets associated with the
business unit. The fair value of each business unit is determined using a
risk adjusted discount rate to compute a net present value of estimated future
cash flows and a consideration of market capitalization of the Company. The second step measures the amount of the impairment, if any.

i.     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
$604,771 and $225,559 at December 31, 2002 and 2001, respectively.

j.     Long-Lived Assets

The Company periodically evaluates the carrying value of its long-lived
assets and applies the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Under SFAS No. 144, 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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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The net assets and liabilities of a disposal group classified as held for
sale is presented separately in the asset and liability sections of the
consolidated balance sheet. The major classes of assets and liabilities
classified as held for sale are separately disclosed in the notes to financial
statements. In accordance with SFAS No. 144, the Company classifies assets
held for sale when management commits to a plan of disposal, the disposal group
is available for immediate sale and an active plan to locate a buyer has been
initiated.

k.     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
while unrealized gains (losses) are presented in the Consolidated
Statements of Comprehensive Income (Loss). 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.

l.     Revenues

Product revenues are recognized when the product is shipped FOB shipping
point, all risks of ownership have passed to the customer and the Company has
performed all obligations in accordance with Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB No. 101). Contract
revenues are recognized based on the percentage of completion method wherein
income is recognized pro-rata over the life of the contract based on the ratio
of total incurred costs to anticipated total costs of the contract. 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 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. 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.

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

m.     Earnings Per Share

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

n.     Stock Options

The Company accounts for employee stock options in accordance with APB No.
25 using the intrinsic value method. The Company has adopted the disclosure
only requirements of SFAS No. 123, Accounting for Stock-Based Compensation
(see Note 12). Options issued to non-employees (other than directors) are
accounted for based on the fair value of the equity instrument issued. The
fair value is determined based on the Black-Scholes method. The resulting
value is amortized over the service period.

o.     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 the 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. The unrealized gain (loss) for the years ended
December 31, 2002, 2001 and 2000 represents the Companys
investment in Bede plc.

p.     Reclassifications

Certain reclassifications have been made to the prior year financial
statements to conform with the 2002 presentation.

q.     New Accounting Standards

In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). This statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to (a)
all entities and (b) legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal operation of long-lived assets, except for certain obligations of
lessees. This statement amends FASB Statement No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, and is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
will implement SFAS No. 143 effective January 1, 2003. The impact of such
adoption is not anticipated to have a material effect on the Companys
financial statements.

In 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

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

Transactions, for the disposal of a segment of a business (as previously
defined in that Opinion). The Company adopted SFAS No. 144 on January 1, 2002.
Under the adoption of SFAS No. 144 the Company was unable to
accrue for estimated future losses for the period January 1, 2003
to the date of disposal. These losses will be recognized in the
period incurred.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. The provisions
of this Statement generally shall be effective for financial statements issued
on or after May 15, 2002. SFAS 145 amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of SFAS 145
did not have a significant impact on the Companys financial statements.

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

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of SFAS No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of SFAS
No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company will implement SFAS No. 148
effective January 1, 2003 regarding disclosure requirements for condensed
financial statements for interim periods.

The FASB has issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,  an interpretation of FASB Nos. 5, 57 and 107 and
rescission of FASB Interpretation No. 34. This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. Implementation of these provisions of the
Interpretation is not expected to have a material impact on the Companys
consolidated financial statements. The disclosure requirements of the
Interpretation are effective for financial statements of interim or annual
periods ended after December 15, 2002, and have been adopted in the
accompanying consolidated financial statements for December 31, 2002, with no
additional disclosure required.

The FASB has issued Interpretation No. 46, Consolidation of Variable
Interest Entities  an interpretation of Accounting Research Bulletin (ARB)
No. 51. This Interpretation defines a variable interest entity and provides
that if a business enterprise has a controlling financial interest in a
variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be included in consolidated
financial statements with those of the business enterprise. Furthermore, the
Board indicates that the voting interest approach of ARB No. 51 is not
effective in identifying controlling financial interests in entities that are
not controllable through voting interest or in which the equity investors do
not bear the residual economic risk. This Interpretation applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.

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

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

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), in a
merger of SAL with and into Subsidiary (Merger). SAL (subsequently renamed
JMAR/SAL NanoLithography, Inc. or JSAL) is a provider of XRL stepper systems
and the leading developer of CPL 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 per share, which exceeded the market value of the
Companys common stock at the date of the Merger. 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.
Interest on the Notes is payable quarterly, with the payment due, if not
converted, on February 7, 2004. 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.

The Company has accounted for the Acquisition as a purchase and,
accordingly, results of operations of JSAL have been included in the
consolidated financial statements since August 7, 2001. The allocation of the
purchase price of $4,297,414 (including transaction costs) is as follows:

|                                       |  |   |           |  
|-------------------------------------- |  | - | --------- | -
|Goodwill                               |  | $ | 3,790,907 |  
|Identifiable intangibles               |  |   | 785,000   |  
|Fair value of tangible assets acquired |  |   | 671,593   |  
|Liabilities assumed                    |  |   | (950,086  | )
|                                       |  |   |           |  
|                                       |  | $ | 4,297,414 |  
|                                       |  |   |           |  

Under the Merger Agreement, SALs former shareholders and creditors could
earn up to three contingent earnout payments upon the satisfaction of three
earnout conditions. For the first earnout, the SAL creditors were eligible to
receive $500,000 in Convertible Notes upon the satisfaction of a stepper
limited throughput test (without the CPL light source) by June 30, 2002. This
requirement was not met by the June 30, 2002 deadline, and, therefore, the
Company did not have to issue the $500,000 in Convertible Notes. For the
second earnout, the SAL shareholders can earn $500,000 in Convertible Notes
upon the satisfaction of a lithography demonstration milestone. This milestone
must be met 90 days after the CPL light source is integrated with the stepper
at the Systems Division in Vermont and satisfies certain source performance
criteria. The third earnout condition can result in payment of up to 354,736
JMAR shares and up to $1.2 million in Convertible Notes upon receipt by the
Company of a qualifying order for a CPL system from a commercial customer and
delivery to the customer. Under the Merger Agreement, the deadline for receipt
of this order is 180 days after the CPL source is integrated with the stepper
at the Systems Division in Vermont and satisfies certain source performance
criteria. The earnout consideration will increase goodwill when and if it is
paid.

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

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

expense, from the debt settlements of SAL directly attributable to the
Acquisition. The identifiable intangibles acquired in the Acquisition are being
amortized over three years using the straight-line method. Identifiable assets
include patents and unpatented technology. Patents were valued based on a
discounted cash flow model and unpatented technology 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.

|                                |  |                         |            |             |  |   |           |  
|------------------------------- |  | ----------------------- | ---------- | ----------- |  | - | --------- | -
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | 2001                    |            | 2000       
|                                |  |                         |            |            
|                                |  | (Unaudited)             |            | (Unaudited)
|Total revenues                  |  | $                       | 13,622,000 |             |  | $ | 9,958,000 |  
|                                |  |                         |            |             |  |   |           |  
|Loss from continuing operations |  | $                       | (1,490,000 | )           |  | $ | (894,000  | )
|                                |  |                         |            |             |  |   |           |  
|Loss per share                  |  | $                       | (.06       | )           |  | $ | (.04      | )
|                                |  |                         |            |             |  |   |           |  

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 2000 and 2001, the Company issued 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.

4.     Inventories

At December 31, 2002 and 2001, inventories consisted of the following:

|                                             |  |      |         |      |  |   |         | 
|-------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                             |  | 2002 |         | 2001
|                                             |  |      |         |     
|Raw materials, components and sub-assemblies |  | $    | 222,077 |      |  | $ | 150,319 | 
|Work-in-process                              |  |      | 125,315 |      |  |   | 69,713  | 
|Finished goods                               |  |      | 42,075  |      |  |   | 74,450  | 
|                                             |  |      |         |      |  |   |         | 
|                                             |  | $    | 389,467 |      |  | $ | 294,482 | 
|                                             |  |      |         |      |  |   |         | 

5.     Accounts Receivable

At December 31, 2002 and 2001, accounts receivable consisted of the
following:

|                           |  |      |           |      |  |   |           | 
|-------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                           |  | 2002 |           | 2001
|                           |  |      |           |     
|Trade                      |  | $    | 1,384,112 |      |  | $ | 810,081   | 
|Trade  unbilled           |  |      | 920       |      |  |   | 275,339   | 
|U.S. Government  billed   |  |      | 1,056,321 |      |  |   | 27,478    | 
|U.S. Government  unbilled |  |      | 453,040   |      |  |   | 3,088,736 | 
|                           |  |      |           |      |  |   |           | 
|                           |  | $    | 2,894,393 |      |  | $ | 4,201,634 | 
|                           |  |      |           |      |  |   |           | 

All unbilled receivables at December 31, 2002 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.

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

6.     Property and Equipment

At December 31, 2002 and 2001, property and equipment consisted of the
following:

|                              |  |      |            |      |  |   |            |  
|----------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                              |  | 2002 |            | 2001
|                              |  |      |            |     
|Equipment and machinery       |  | $    | 2,983,443  |      |  | $ | 2,678,026  |  
|Furniture and fixtures        |  |      | 420,188    |      |  |   | 373,087    |  
|Leasehold improvements        |  |      | 280,283    |      |  |   | 275,988    |  
|                              |  |      |            |      |  |   |            |  
|                              |  |      | 3,683,914  |      |  |   | 3,327,101  |  
|Less-Accumulated depreciation |  |      | (2,435,716 | )    |  |   | (2,074,363 | )
|                              |  |      |            |      |  |   |            |  
|                              |  | $    | 1,248,198  |      |  | $ | 1,252,738  |  
|                              |  |      |            |      |  |   |            |  

7.     Commitments and Contingencies

a.     Leases

The Company leases its office facilities under various operating leases
expiring through April 30, 2006. Minimum future rental payments for
non-cancelable leases as of December 31, 2002, are as follows:

|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|Year Ending December 31, |  |   |           | 
|                         |  |   |           | 
|2003                     |  | $ | 1,020,630 | 
|2004                     |  |   | 940,228   | 
|2005                     |  |   | 641,029   | 
|2006                     |  |   | 39,970    | 
|                         |  |   |           | 
|                         |  | $ | 2,641,857 | 
|                         |  |   |           | 

Related
rent expense was $1,185,303, $981,794 and $563,800 for the years
ended December 31, 2002, 2001 and 2000, respectively.

b.     Litigation

Following the discontinuance of JSIs standard semiconductor products
business in the first quarter of 2002, JSI sought to negotiate debt reductions
from the creditors associated with the discontinued portion of its business.
JSI was a party to a Distributor Agreement with All American Semiconductor,
Inc. (All American) under which All American had purchased approximately
$700,000 of JSI chips for resale to customers. The Company reflected the
proceeds as deferred revenue (a liability) and not as revenue pending sale to
the ultimate customer. Under the terms of the Distributor Agreement, if All
American properly terminated the Distributor Agreement, it had the right to
require JSI to repurchase those chips for the $700,000 paid by All American.
Soon after the announcement by JMAR that JSI had discontinued its standard chip
business, All American gave notice of termination of the Distributor Agreement
and returned the chips it held, creating an obligation on JSIs part to repay
approximately $700,000 to All American. The $700,000 claim of All American is
included in the total of approximately $3.1 million of net current liabilities
of assets held for sale that are included on JMARs Consolidated Balance Sheet.

In September, 2002, a Complaint was filed by All American against JSI and
JMAR in San Diego Superior Court. The Complaint alleges that JSI owes All
American approximately $700,000. The Complaint also alleges that All American
was induced to refrain from terminating the agreement until after the JSI
business had been discontinued. All American claims that such actions
constituted fraud and that it is entitled to treble (triple) damages. All
American has also alleged that JMAR is the alter ego of JSI and based on that
theory should be held responsible for the obligations of JSI. While
recognizing that the approximately $700,000 in indebtedness may be owed by JSI
to All American under the agreement, JSI asserts that the obligations are
merely of a contractual nature and strongly disputes that any of the actions

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

taken constitute fraud. JMAR also disputes that it is the alter ego of JSI
in light of the facts that JSI is a separately incorporated entity that has
been more than adequately capitalized over its years of operations
and, that JSI, and not JMAR, was the party to the Distributor Agreement
and was the sole direct contact with All American. JMAR believes that there is
insufficient evidence to support the alter ego theory and believes that it will
ultimately prevail on this issue. JMAR and JSI intend to vigorously contest
any claims by All American that it is owed more than $700,000.

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

c.     Post-Employment Benefits

Pursuant to an Employment Agreement dated September, 2001 with Dr.
Martinez, the Companys former Chairman and Chief Executive Officer, if the
Company delivered notice of its intention not to renew or discontinued his
status of Chairman or CEO, or both, other than for cause, then Dr. Martinezs
employment was to continue for three years at the highest total compensation
rate (including bonuses, director fees and similar payments) he had received in
any previous 12 month period. This amount is approximately $375,000 per annum.
In such event, the Company also agreed to maintain comparable medical insurance
benefits for such three year period.

In May, 2002, Dr. Martinez informed the Board of Directors of his desire
to retire. The Board and Dr. Martinez engaged in discussions regarding Dr.
Martinezs future role with the Company. In order to set a definite date for
the transition to a new CEO, in July, 2002, the Board of Directors exercised
the Companys rights under the Employment Agreement to discontinue Dr.
Martinezs status as CEO effective August 16, 2002. Following negotiations
between Dr. Martinez and the Board, an agreement was reached to restructure
this payment obligation to spread the payments over six years to reduce the
impact of the original agreement on the Companys cash flow. In consideration
for this modification, the Company will provide comparable medical insurance
benefits for six years, and modified 942,242 of the outstanding options and
warrants held by Dr. Martinez to (1) vest all unvested options and warrants
(141,269 options), (2) provide that, for those options that have an expiration
date within the next six years, the early termination provision that would
otherwise have resulted in the termination of the options and warrants 60 days
after termination of his employment was waived, and (3) provide that all
remaining options and warrants will expire on the later of August 15, 2008 or
60 days after Dr. Martinez ceases to be a director. The Company recorded a
charge in 2002 in the amount of $1,074,324 resulting from this event. The
charge includes $561,517 for the discounted post-employment payments over six
years, using a discount rate of 30 percent, and $512,807 for the intrinsic
value of Dr. Martinezs options and warrants resulting from the modification of
those options and warrants.

8.     Line of Credit and Notes Payable

Line of credit and notes payable as of December 31, 2002 and 2001, were
as follows:

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##### Table of Contents



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

|                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                |  |   | 2002       |   |  |   | 2001       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |   |  |   |            |  
|Working capital line of credit (the
Line) in the amount of $3,000,000 with
Comerica Bank  California (the Bank)
At December 31, 2002 and 2001, the line
is secured by a $1.5 million and $3
million compensating cash balance,
respectively. Advances bear interest at
prime rate (4.25% at December 31, 2002). Interest on the line is payable monthly.
Advances are secured by all assets of the
Company |  | $ | 1,500,000  |   |  | $ | 3,000,000  |  
|Convertible notes payable issued to
former shareholders and creditors of SAL,
Inc. bearing interest at 8% interest due
quarterly, principal due February 7, 2004                                                                                                                                                                                                                                                |  |   | 1,200,000  |   |  |   | 1,200,000  |  
|Other notes payable                                                                                                                                                                                                                                                                                                                                                                                             |  |   | 60,322     |   |  |   | 51,784     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |   |  |   |            |  
|                                                                                                                                                                                                                                                                                                                                                                                                                |  |   | 2,760,322  |   |  |   | 4,251,784  |  
|Less: Current portion                                                                                                                                                                                                                                                                                                                                                                                           |  |   | (1,556,405 | ) |  |   | (3,007,152 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |   |  |   |            |  
|                                                                                                                                                                                                                                                                                                                                                                                                                |  | $ | 1,203,917  |   |  | $ | 1,244,632  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                |  |   |            |   |  |   |            |  

In November 2001, the Bank reduced the available amount of the Line from
$5 million to $3 million and now requires up to a $3 million compensating
balance. Pursuant to this line of credit, there are no financial covenants or
ratios. On March 21, 2003, the Company replaced this line of credit with a
credit facility with Laurus Master Fund, Ltd. (See Note 17). In addition, the
Company has a $250,000 line of credit with Howard Bank, of which $50,000 was
outstanding at December 31,2002 and none at December 31, 2001, secured by all
assets of JSAL. This line of credit is secured by a $50,000
compensating cash balance at December 31, 2002.

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 4.69% and 6.64% for 2002 and 2001, respectively. The
maximum amount outstanding was $3,000,000 for 2002 and 2001, and the average
amount outstanding was $1,393,151 and $1,072,916 during 2002 and 2001,
respectively.

Interest paid for the years ended December 31, 2002, 2001 and 2000 was
$183,466, $106,176 and $123,943, respectively.

Future principal payments on notes payable as of December 31, 2002 are as
follows:

|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|Year Ending December 31, |  |   |           | 
|                         |  |   |           | 
|2003                     |  | $ | 56,405    | 
|2004                     |  |   | 1,203,917 | 
|                         |  |   |           | 
|                         |  | $ | 1,260,322 | 
|                         |  |   |           | 

F-18





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##### Table of Contents



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

9.     Discontinued Operations/Assets Held for Sale

The
loss from operations of discontinued operations of $5,839,367 for the
year ended December 31, 2002 includes $1,856,381 related to the standard
semiconductor products business and $3,982,986 related to the Precision
Equipment segment business. The loss on disposal of discontinued operations of
$3,200,000 for the year ended December 31, 2002 is net of the expected proceeds
from the sale of the Precision Equipment segment business. The Company is
talking to a number of potential buyers, however, it has not yet received an
offer from any of the potential purchasers of this business. If the sales price
of this business is different from the estimate that the Company has made, the
difference will be reflected in the Companys 2003 Statement of Operations.
Also, if the Company is unable to find a buyer on satisfactory terms, the
Company will have to take alternative actions regarding this business, which
may result in further charges. In accordance with SFAS No. 144, the results of
operations of the Precision Equipment Segment business for 2003 through the
sale date will be reported in discontinued operations.

In September 2000, JSI moved into a significantly larger facility in
anticipation of realizing its growth plans. Prior to December 31, 2001, the
Company decided to sublease the facility and move JSI into a smaller facility.
Accordingly, in the fourth quarter of 2001, the Company accrued $547,000, its
estimated loss under the September 2000 lease. In the quarter ended September
30, 2002, the Company accrued an additional $300,000 of estimated losses under
this lease. The lease provides for rent and related expenses of approximately
$34,000 per month through August 2005. The Company does not yet have a
subtenant for that facility and, if it is unsuccessful in obtaining a subtenant
on acceptable terms, there could be further losses related to that lease.

At December 31, 2002 and December 31, 2001, net assets and liabilities of
assets held for sale consisted of the following:

|                         |  |                                                                 |                             |         |              |   |           |         |           |         | 
|------------------------ |  | --------------------------------------------------------------- | --------------------------- | ------- | ------------ | - | --------- | ------- | --------- | ------- | 
|                         |  |                                                                 |                             |         | December 31,
|                         |  |                                                                 |                             |         |             
|                         |  |                                                                 |                             |         | 2002         |   | 2001     
|                         |  |                                                                 |                             |         |              |   |          
|Current Assets:          |  |                                                                 |                             |         |              |   |           |        
|                         |  | Cash                                                            |                             | $       | 101,238      |   |           | $       | 38,235    |        
|                         |  | Accounts receivable                                             |                             |         | 454,557      |   |           |         | 906,830   |        
|                         |  | Inventories,
net of reserves of $2,115,143 at December 31, 2001 |                             |         | 727,983      |   |           |         | 4,215,942 |        
|                         |  | Prepaid expenses and other                                      |                             |         | 65,980       |   |           |         | 87,876    |        
|                         |  |                                                                 |                             |         |              |   |           |         |           |        
|                         |  | $                                                               | 1,349,758                   |         |              | $ | 5,248,883 |        
|                         |  |                                                                 |                             |         |              |   |           |         |           |        
|Non-Current Assets:      |  |                                                                 |                             |         |              |   |           |        
|                         |  |                                                                 | Property and equipment, net | $       |             |   |           | $       | 518,160   |        
|                         |  |                                                                 | Intangible assets, net      |         |              |  |           |         |           | 361,737 | 
|                         |  |                                                                 | Goodwill, net               |         |              |  |           |         |           | 179,733 | 
|                         |  |                                                                 |                             |         |              |   |           |         |           |        
|                         |  | $                                                               |                            |         |              | $ | 1,059,630 |        
|                         |  |                                                                 |                             |         |              |   |           |         |           |        
|Current Liabilities:     |  |                                                                 |                             |         |              |   |           |        
|                         |  | Payable to distributor                                          | $                           | 692,314 |              |   | $         | 692,314 |          
|                         |  | Facility lease accrual                                          | 548,374                     |         |              |   | 547,137   |        
|                         |  | Accounts payable                                                | 1,154,463                   |         |              |   | 1,244,936 |        
|                         |  | Employee related contractual
commitments                        | 555,000                     |         |              |   |          |        
|                         |  | Note payable                                                    | 175,000                     |         |              |   | 280,697   |        
|                         |  |                                                                 |                             |         |              |   |           |         |           |        
|                         |  | $                                                               | 3,125,151                   |         |              | $ | 2,765,084 |        
|                         |  |                                                                 |                             |         |              |   |           |         |           |        
|Non-Current Liabilities: |  |                                                                 |                             |         |              |   |           |        
|                         |  | Note payable                                                    | $                           |        |              |   | $         | 175,000 |          
|                         |  |                                                                 |                             |         |              |   |           |         |           |        

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##### Table of Contents



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

10.     Income Taxes

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2002 and 2001 are presented below:

|                     |                                   |                                 |   |            |             |      |   |            |             |  
|-------------------- | --------------------------------- | ------------------------------- | - | ---------- | ----------- | ---- | - | ---------- | ----------- | -
|                     |                                   |                                 |   | 2002       |             | 2001
|                     |                                   |                                 |   |            |             |     
|Deferred tax assets: |                                   |                                 |   |            |             |      |   |           
|                     | Net operating loss carryforwards  |                                 | $ | 15,022,000 |             |      | $ | 13,264,000 |            
|                     | Asset writedowns                  |                                 |   | 2,523,000  |             |      |   | 2,705,000  |            
|                     | Losses on discontinued operations |                                 |   | 1,312,000  |             |      |   |           |            
|                     | Other                             |                                 |   | 1,688,000  |             |      |   | 636,000    |            
|                     |                                   |                                 |   |            |             |      |   |            |            
|                     |                                   | Total gross deferred tax assets |   |            | 20,545,000  |      |   |            | 16,605,000  |  
|                     |                                   | Less valuation reserve          |   |            | (20,545,000 | )    |   |            | (16,085,000 | )
|                     |                                   |                                 |   |            |             |      |   |            |            
|                     |                                   | Net deferred tax asset          |   | $          |            |      |   | $          | 520,000     |  
|                     |                                   |                                 |   |            |             |      |   |            |            

The
valuation reserve as of December 31, 2002 and 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 as of December 31, 2001. In 2002, because of the
Companys continued history of operating losses, management increased its
valuation allowance by $484,423 which has been recorded as income tax expense
in the accompanying Consolidated Statement of Operations.

The effective income tax rate for the years ended December 31, 2002, 2001
and 2000 varied from the statutory federal income tax rate as follows:

|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   
|---------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                                 |  | 2002 |     | 2001 |  | 2000
|                                                                 |  |      |     |      |  |     
|Statutory federal income tax rate                                |  |      | (34 | )%   |  |      | (34 | )% |  |  | (34 | )%
|State income tax                                                 |  |      | (6  | )    |  |      | (6  | )  |  |  | (6  | ) 
|Permanent differences                                            |  |      |    |      |  |      |    |    |  |  | 1   |   
|Valuation
allowance                                              |  |      | 25  |      |  |      |    |    |  |  |    |   
|Benefit recorded due to net operating loss
carryforward position |  |      | 40  |      |  |      | 40  |    |  |  | 39  |   
|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   
|                                                                 |  |      | 25  | %    |  |      |    |    |  |  |    |   
|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   

At December 31, 2002, the Company had Federal net operating loss
carryforwards expiring as follows:

|        |  |   |           | 
|------- |  | - | --------- | 
|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   | 
|2019    |  |   | 2,297,000 | 
|2020    |  |   | 3,436,000 | 
|2021    |  |   | 6,177,000 | 

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##### Table of Contents



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

|        |  |   |            | 
|------- |  | - | ---------- | 
|Expires |  |   |            | 
|        |  |   |            | 
|2022    |  |   | 6,099,000  | 
|        |  |   |            | 
|Total   |  | $ | 44,182,000 | 
|        |  |   |            | 

The
Company has approximately $16,243,000 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
$844,000 apply to approximately $4,868,000 of Company and acquired company loss
carryforwards. Approximately $39,314,000 of the net operating loss
carryforwards are not subject to annual limitations.

11.     Stockholders Equity

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 less offering costs of approximately $220,000. 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 issued warrants to
purchase 20,000 shares of the Companys common stock at an exercise price of
$2.40 per share. Out of the gross proceeds of $2 million, the warrants to
purchase 170,000 shares of the Companys common stock have been valued based on
the Black-Scholes method at approximately $305,000 in the accompanying
consolidated financial statements as paid-in-capital with a corresponding
reduction in the amount assigned to the common stock issued.

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

During 2002, 2001 and 2000, the Company issued 1,628, 1,571 and 11,632
shares of common stock for services and other obligations. These issuances were
valued based upon the fair market value of the Companys common stock at the
date of issue.

12.     Stock-Based Compensation Plans

The Company has six stock option or warrant plans, the 1991 Stock Option
Plan (the 1991 Plan), the 1999 Stock Option Plan (the 1999 Plan), the
Management Anti-Dilution Plan (the Anti-Dilution Plan), an incentive plan
which provides for the issuance of warrants to Research Division employees (the
Research Division Plan), and an incentive plan which provides for the
issuance of warrants to JPSI employees (the JPSI Plan) and a second plan for
the issuance of Warrants to JPSI employees (the 2002 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 using the fair value method under SFAS No. 123, the Companys net
loss and loss per share would have been the following pro forma amounts
(unaudited):

|                  |                 |             |           |   |             |      |      |   |             |      |   |   |            |      |   |  | 
|----------------- | --------------- | ----------- | --------- | - | ----------- | ---- | ---- | - | ----------- | ---- | - | - | ---------- | ---- | - |  | 
|                  |                 |             |           |   | 2002        |      | 2001 |   |             | 2000 |  
|                  |                 |             |           |   |             |      |      |   |            
|Net loss:         |                 | As Reported |           | $ | (11,500,693 | )    |      | $ | (14,701,534 | )    |   | $ | (1,224,765 | )   
|                  |                 | Pro Forma   |           |   | (13,441,692 | )    |      |   | (16,415,610 | )    |   |   | (3,159,638 | )   
|Basic and diluted |                 | As Reported |           |   | (.49        | )    |      |   | (.65        | )    |   |   | (.06       | )   
|                  | loss per share: |             | Pro Forma |   |             | (.57 | )    |   |             | (.73 | ) |   |            | (.15 | )

F-21



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##### Table of Contents



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

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 2000, 2001 and 2002: risk-free
interest rate of approximately 4 percent in 2002 and 6 percent in 2001 and 2000; expected dividend yields of 0 percent
and expected lives of 6 years. For grants in 2002, 2001 and 2000, the
expected volatility used was 142 percent, 191 percent and 112 percent,
respectively.

The Company was authorized to grant options or warrants to its employees
(including directors) and consultants for up to 1,480,000 shares under the 1991
Plan, 1,900,000 shares under the 1999 Plan, 806,637 shares under the
Anti-Dilution Plan, 350,000 shares under the JRI Plan, 450,000 shares under the
JPSI Plan, and 100,000 shares under the 2002 JPSI Plan (collectively,
the Plans). As of December 31,
2002, the Company has granted 1,280,603 options under the 1991
Plan, 623,672 options under the 1999 Plan, 424,246 warrants under the
Anti-Dilution Plan, 278,000 warrants under the Research Division
Plan, 171,000
warrants under the JPSI Plan and 70,000 warrants under the 2002 JPSI Plan. In
addition, 585,000 non-qualified options have been granted to four 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.
Options usually have a term of ten years and vest one-third per year after date
of grant. As of December 31, 2002, 1,856,725 shares are
available for grant pursuant to the Plans.

A summary of the status of the total number of stock options or warrants
pursuant to all five of the above plans as of December 31, 2000, 2001 and 2002
and changes during the years then ended is presented in the tables below:

|                                                           |  |        |           |          |  |        |      |          |  |         |           |          |  |   |      |         |  |  |           |   |  |   |      | 
|---------------------------------------------------------- |  | ------ | --------- | -------- |  | ------ | ---- | -------- |  | ------- | --------- | -------- |  | - | ---- | ------- |  |  | --------- | - |  | - | ---- | 
|                                                           |  | 2002   |           | 2001     |  | 2000  
|                                                           |  |        |           |          |  |       
|                                                           |  |        |           | Wtd Avg  |  |        |      |          |  | Wtd Avg |           |          |  |   |      | Wtd Avg
|                                                           |  | Shares |           | Ex Price |  | Shares |      | Ex Price |  | Shares  |           | Ex Price
|                                                           |  |        |           |          |  |        |      |          |  |         |           |         
|Outstanding at beg. of year                                |  |        | 2,436,802 |          |  | $      | 3.53 |          |  |         | 2,185,933 |          |  | $ | 3.85 |         |  |  | 2,008,351 |   |  | $ | 2.61 | 
|Granted                                                    |  |        | 898,800   |          |  |        | 1.48 |          |  |         | 496,686   |          |  |   | 3.48 |         |  |  | 604,461   |   |  |   | 7.12 | 
|Exercised                                                  |  |        |          |          |  |        |     |          |  |         | (32,983   | )        |  |   | 3.11 |         |  |  | (325,603  | ) |  |   | 2.67 | 
|Forfeited                                                  |  |        | (120,768  | )        |  |        | 4.04 |          |  |         | (212,834  | )        |  |   | 6.74 |         |  |  | (101,276  | ) |  |   | 2.51 | 
|                                                           |  |        |           |          |  |        |      |          |  |         |           |          |  |   |      |         |  |  |           |   |  |   |      | 
|Outstanding
at end of year                                 |  |        | 3,214,834 |          |  |        | 2.93 |          |  |         | 2,436,802 |          |  |   | 3.53 |         |  |  | 2,185,933 |   |  |   | 3.85 | 
|                                                           |  |        |           |          |  |        |      |          |  |         |           |          |  |   |      |         |  |  |           |   |  |   |      | 
|Exercisable
at end of year                                 |  |        | 1,977,859 |          |  |        |      |          |  |         | 1,586,912 |          |  |   |      |         |  |  | 1,249,173 |   |  |   |      | 
|                                                           |  |        |           |          |  |        |      |          |  |         |           |          |  |   |      |         |  |  |           |   |  |   |      | 
|Weighted average fair value
of options or warrants granted |  |        | 1.38      |          |  |        |      |          |  |         | 3.42      |          |  |   |      |         |  |  | 6.07      |   |  |   |      | 

A summary of the options outstanding as of December 31, 2002, 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-      |  | Number      |      | Weighted-     
|Range of        |  | Outstanding         |           | Remaining           |  | Average        |  | Exercisable |      | Average       
|Exercise Prices |  | at 12/31/02         |           | Contractual Life    |  | Exercise Price |  | at 12/31/02 |      | Exercise Price
|                |  |                     |           |                     |  |                |  |             |      |               
|$.53 to $1.79   |  |                     | 1,026,406 |                     |  | 8.7 years      |  | $           | 1.42 |                |  | $ | 180,406   |  |  | $ | 1.30
|2.00 to 2.99    |  |                     | 679,568   |                     |  | 5.3            |  |             | 2.44 |                |  |   | 593,035   |  |  |   | 2.48
|3.00            |  |                     | 626,796   |                     |  | 3.0            |  |             | 3.00 |                |  |   | 626,796   |  |  |   | 3.00
|3.13 to 4.56    |  |                     | 578,603   |                     |  | 7.2            |  |             | 3.69 |                |  |   | 346,827   |  |  |   | 3.79
|5.19 to 11.06   |  |                     | 303,461   |                     |  | 5.2            |  |             | 7.50 |                |  |   | 230,795   |  |  |   | 7.55
|                |  |                     |           |                     |  |                |  |             |      |                |  |   |           |  |  |   |     
|$.53 to $ 11.06 |  |                     | 3,214,834 |                     |  |                |  |             |      |                |  |   | 1,977,859 |  |  |   |     
|                |  |                     |           |                     |  |                |  |             |      |                |  |   |           |  |  |   |     

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

F-22





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##### Table of Contents



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

outstanding during the year. Diluted loss per common share for the years ended
December 31, 2002, 2001 and 2000,
was computed by dividing net loss by the sum of the weighted average number of
shares of common stock (23,618,169, 22,484,905 and 21,468,763 for 2002, 2001
and 2000, respectively) plus dilutive employee stock options and warrants (none
for 2002, 2001 and 2000) and other dilutive warrants and options (none for
2002, 2001 and 2000). For the years ended December 31, 2002, 2001 and 2000,
the denominator in the diluted net loss per share computation was the same as
the denominator for basic loss per share due to antidilutive effects of the
Companys warrants, stock options and shares underlying convertible debt. As
of December 31, 2002 and 2001, the Company had outstanding warrants, stock
options and shares underlying convertible debt of 278,940, all of which are antidilutive and were excluded from the
computation of diluted loss per share. For 2000, the diluted income from
continuing operations was computed by dividing the income from continuing
operations by the sum of the weighted average number of shares of common stock
(21,468,763) plus dilutive employee stock options and warrants (3,469,578) and other
dilutive warrants and options (392,836).

14.     Segment Information

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

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

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

Research Division (formerly JMAR Research)  This segments role is as an
innovator of laser and laser-produced plasma technologies for the Companys CPL
Source, EUV generators, and related products such as high-brightness lasers.
During 2002, this segment accounted for approximately 38% of the Companys
revenues.

Systems Division (formerly JMAR/SAL NanoLithography)  This segment
encompasses the development of X-ray lithography steppers, and the product
engineering, production and integration of CPL light sources and complete CPL
stepper systems. During 2002, this segment accounted for approximately 41% of
the Companys revenues.

Microelectronics Division  In 2002, JMAR discontinued the standard
products business and the assets of its Sacramento operations were transferred
to JSI Microelectronics, Inc., a wholly-owned subsidiary of the Company, now
the Microelectronics Division. This segment provides process integration and
maintenance support for the Defense Microelectronics Activity semiconductor
fabrication facility in Sacramento, California, and ASIC design and production
capability for the military and commercial markets. During 2002, this segment
accounted for approximately 21% of the Companys revenues.

F-23



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##### Table of Contents



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

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 2002, 2001 and 2000 has been restated to
reflect the new business segments (excluding discontinued operations) as
follows:

|      |                                    |  |  |  |  |          |   |           |   |                  |   |            |   |  |       |           |   |  |   |            |   |  |   |            |   | 
|----- | ---------------------------------- |  |  |  |  | -------- | - | --------- | - | ---------------- | - | ---------- | - |  | ----- | --------- | - |  | - | ---------- | - |  | - | ---------- | - | 
|      |                                    |  |  |  |  | Research |   | Systems   |   | Microelectronics |   |            |   |  |       |          
|      |                                    |  |  |  |  | Division |   | Division  |   | Division         |   | Corporate  |   |  | Total |          
|      |                                    |  |  |  |  |          |   |           |   |                  |   |            |   |  |       |          
|2002: |                                    |  |  |  |  |          |   |           |   |                  |   |            |   |  |       |           |   |  |   |            |   |  |   |           
|      | Revenues                           |  |  |  |  |          | $ | 6,951,114 |   |                  | $ | 7,602,336  |   |  | $     | 3,830,360 |   |  | $ |           |   |  | $ | 18,383,810 |  
|      | Asset writedowns and
special items |  |  |  |  |          |   |          |   |                  |   |           |   |  |       |          |   |  |   | (1,074,324 | ) |  |   | (1,074,324 | )
|      | Operating income (loss)            |  |  |  |  |          |   | 228,963   |   |                  |   | (1,498,007 | ) |  |       | 268,018   |   |  |   | (2,108,828 | ) |  |   | (3,109,854 | )
|      | Total assets                       |  |  |  |  |          |   | 2,775,418 |   |                  |   | 5,897,912  |   |  |       | 1,694,927 |   |  |   | 3,403,645  |   |  |   | 13,771,902 |  
|      | Capital expenditures               |  |  |  |  |          |   | 311,890   |   |                  |   | 52,144     |   |  |       | 28,021    |   |  |   | 1,509      |   |  |   | 393,564    |  
|      | Depreciation and
amortization      |  |  |  |  |          |   | 369,940   |   |                  |   | 307,614    |   |  |       | 14,837    |   |  |   | 84,926     |   |  |   | 777,317    |  
|2001: |                                    |  |  |  |  |          |   |           |   |                  |   |            |   |  |       |           |   |  |   |            |   |  |   |           
|      | Revenues                           |  |  |  |  |          |   | 7,701,840 |   |                  |   | 2,151,154  |   |  |       | 3,050,817 |   |  |   |           |   |  |   | 12,903,811 |  
|      | Asset writedowns and
special items |  |  |  |  |          |   | (226,899  | ) |                  |   |           |   |  |       |          |   |  |   |           |   |  |   | (226,899   | )
|      | Operating income (loss)            |  |  |  |  |          |   | 228,329   |   |                  |   | (158,197   | ) |  |       | (133,003  | ) |  |   | (1,427,288 | ) |  |   | (1,490,159 | )
|      | Total assets                       |  |  |  |  |          |   | 4,725,225 |   |                  |   | 6,879,809  |   |  |       | 1,321,850 |   |  |   | 7,383,228  |   |  |   | 20,310,112 |  
|      | Capital expenditures               |  |  |  |  |          |   | 248,805   |   |                  |   | 5,210      |   |  |       | 3,521     |   |  |   | 136,719    |   |  |   | 394,255    |  
|      | Depreciation and
amortization      |  |  |  |  |          |   | 254,347   |   |                  |   | 135,957    |   |  |       | 12,352    |   |  |   | 75,386     |   |  |   | 478,042    |  
|2000: |                                    |  |  |  |  |          |   |           |   |                  |   |            |   |  |       |           |   |  |   |            |   |  |   |           
|      | Revenues                           |  |  |  |  |          |   | 5,263,850 |   |                  |   |           |   |  |       | 3,850,507 |   |  |   |           |   |  |   | 9,114,357  |   | 
|      | Operating income (loss)            |  |  |  |  |          |   | 223,109   |   |                  |   |           |   |  |       | 175,521   |   |  |   | (1,293,127 | ) |  |   | (894,497   | )
|      | Total assets                       |  |  |  |  |          |   | 3,927,125 |   |                  |   |           |   |  |       | 3,830,966 |   |  |   | 10,204,595 |   |  |   | 17,962,686 |  
|      | Capital expenditures               |  |  |  |  |          |   | 395,746   |   |                  |   |           |   |  |       | 60,581    |   |  |   | 170,201    |   |  |   | 626,528    |  
|      | Depreciation and
amortization      |  |  |  |  |          |   | 310,927   |   |                  |   |           |   |  |       | 11,882    |   |  |   | 79,347     |   |  |   | 402,156    |  

In the table above, corporate assets are principally cash and other
assets.

Significant Customers

Sales
to the United States Government aggregated $12,484,601, $9,128,110
and $5,263,850 in 2002, 2001 and 2000, respectively. Accounts receivable from
the United States Government at December 31, 2002 and 2001 was
$1,509,361 and
$3,116,214, respectively.

Export Sales

For the years ended December 31, 2002, 2001 and 2000, all revenues were
generated from the United States and 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, 2002 and 2001.

F-24



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

|                  |  |          |            |              |  |              |           |          |  |                             |            |              |  |             |             |   |  |   |      |   |  |   |      |   |  |  |            |  | 
|----------------- |  | -------- | ---------- | ------------ |  | ------------ | --------- | -------- |  | --------------------------- | ---------- | ------------ |  | ----------- | ----------- | - |  | - | ---- | - |  | - | ---- | - |  |  | ---------- |  | 
|                  |  |          |            |              |  |              |           |          |  | Net
Income (Loss) Per Share |            |              |  |            
|                  |  |          |            |              |  |              |           |          |  |                             |            | Weighted    
|                  |  |          |            |              |  | Loss From    |           |          |  |                             |            |              |  | Average    
|Year Ended        |  |          |            |              |  | Discontinued |           |          |  | Continuing                  |            | Discontinued |  | Shares     
|December 31, 2002 |  | Revenues |            | Gross Profit |  | Operations   |           | Net Loss |  | Operations                  |            | Operations   |  | Outstanding
|                  |  |          |            |              |  |              |           |          |  |                             |            |              |  |            
|December 31       |  | $        | 3,729,599  |              |  | $            | 101,795   |          |  | $                           | (5,711,238 | )            |  | $           | (6,914,251  | ) |  | $ | (.05 | ) |  | $ | (.24 | ) |  |  | 23,849,904 | 
|September 30      |  |          | 6,459,934  |              |  |              | 1,222,461 |          |  |                             | (1,152,871 | )            |  |             | (2,836,656  | ) |  |   | (.07 | ) |  |   | (.05 | ) |  |  | 23,844,685 | 
|June 30           |  |          | 4,585,622  |              |  |              | 1,042,145 |          |  |                             | (331,330   | )            |  |             | (1,002,165  | ) |  |   | (.03 | ) |  |   | (.01 | ) |  |  | 23,841,609 | 
|March 31          |  |          | 3,608,655  |              |  |              | 1,047,091 |          |  |                             | (1,843,928 | )            |  |             | (747,621    | ) |  |   | .05  |   |  |   | (.08 | ) |  |  | 22,879,711 | 
|                  |  |          |            |              |  |              |           |          |  |                             |            |              |  |             |             |   |  |   |      |   |  |   |      |   |  |  |            | 
|                  |  | $        | 18,383,810 |              |  | $            | 3,413,492 |          |  | $                           | (9,039,367 | )            |  | $           | (11,500,693 | ) |  |   | (.11 | ) |  |   | (.38 | ) |  |  | 23,618,169 | 
|                  |  |          |            |              |  |              |           |          |  |                             |            |              |  |             |             |   |  |   |      |   |  |   |      |   |  |  |            | 

|                  |  |          |            |              |  |              |           |          |  |                             |             |              |  |             |             |   |  |   |      |   |  |   |      |   |  |  |            |  | 
|----------------- |  | -------- | ---------- | ------------ |  | ------------ | --------- | -------- |  | --------------------------- | ----------- | ------------ |  | ----------- | ----------- | - |  | - | ---- | - |  | - | ---- | - |  |  | ---------- |  | 
|                  |  |          |            |              |  |              |           |          |  | Net Income
(Loss)
Per Share |             |              |  |            
|                  |  |          |            |              |  |              |           |          |  |                             |             | Weighted    
|                  |  |          |            |              |  | Loss From    |           |          |  |                             |             |              |  | Average    
|Year Ended        |  |          |            |              |  | Discontinued |           |          |  | Continuing                  |             | Discontinued |  | Shares     
|December
31, 2001 |  | Revenues |            | Gross Profit |  | Operations   |           | Net Loss |  | Operations                  |             | Operations   |  | Outstanding
|                  |  |          |            |              |  |              |           |          |  |                             |             |              |  |            
|December 31       |  | $        | 4,236,722  |              |  | $            | 933,087   |          |  | $                           | (10,302,009 | )            |  | $           | (10,674,081 | ) |  | $ | (.02 | ) |  | $ | (.45 | ) |  |  | 22,856,672 | 
|September 30      |  |          | 4,397,576  |              |  |              | 1,187,946 |          |  |                             | (2,180,968  | )            |  |             | (2,555,466  | ) |  |   | (.01 | ) |  |   | (.10 | ) |  |  | 22,607,571 | 
|June 30           |  |          | 1,999,979  |              |  |              | 646,747   |          |  |                             | (1,106,279  | )            |  |             | (477,546    | ) |  |   | .03  |   |  |   | (.05 | ) |  |  | 22,238,799 | 
|March 31          |  |          | 2,269,534  |              |  |              | 731,463   |          |  |                             | (955,724    | )            |  |             | (994,441    | ) |  |   |     |   |  |   | (.04 | ) |  |  | 22,229,645 | 
|                  |  |          |            |              |  |              |           |          |  |                             |             |              |  |             |             |   |  |   |      |   |  |   |      |   |  |  |            | 
|                  |  | $        | 12,903,811 |              |  | $            | 3,499,243 |          |  | $                           | (14,544,980 | )            |  | $           | (14,701,534 | ) |  |   | (.01 | ) |  |   | (.64 | ) |  |  | 22,484,905 | 
|                  |  |          |            |              |  |              |           |          |  |                             |             |              |  |             |             |   |  |   |      |   |  |   |      |   |  |  |            | 

16.     Intangible Assets

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

|                      |  |                |           |              |  |                |         |  |  |   |         | 
|--------------------- |  | -------------- | --------- | ------------ |  | -------------- | ------- |  |  | - | ------- | 
|                      |  | Gross Carrying |           | Accumulated  |  | Net Intangible
|                      |  | Amount         |           | Amortization |  | Assets        
|                      |  |                |           |              |  |               
|Patents               |  | $              | 1,084,827 |              |  | $              | 392,271 |  |  | $ | 692,556 | 
|Unpatented Technology |  |                | 450,000   |              |  |                | 212,500 |  |  |   | 237,500 | 
|                      |  |                |           |              |  |                |         |  |  |   |         | 
|                      |  |                |           |              |  |                |         |  |  | $ | 930,056 | 
|                      |  |                |           |              |  |                |         |  |  |   |         | 

Aggregate amortization expense of the intangible assets with determinable
lives was $379,205, $163,187 and
$31,286 for the years ended December 31, 2002,
2001 and 2000, respectively. The unamortized balance of intangible assets is
estimated to be amortized as follows:

| |                    |   |                        |         | 
| | ------------------ | - | ---------------------- | ------- | 
| | For the Year Ended |   | Estimated Amortization
| | December 31,       |   | Expense               
| |                    |   |                       
| | 2003               |   | $                      | 313,242 | 
| | 2004               |   |                        | 204,213 | 
| | 2005               |   |                        | 51,575  | 
| | 2006               |   |                        | 51,575  | 
| | 2007               |   |                        | 51,575  | 
| | 2008               |   |                        | 51,575  | 
| | Beyond             |   |                        | 206,301 | 
| |                    |   |                        |        
| |                    | $ | 930,056                |        
| |                    |   |                        |        

The following table summarizes the net loss and net loss per share for the
years ended December 31, 2002, 2001 and 2000 adjusted to exclude goodwill
amortization expense:

F-25





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##### Table of Contents



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

|                                      |                                               |  |                         |             |      |  |      |             |   |  |   |            |  
|------------------------------------- | --------------------------------------------- |  | ----------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ---------- | -
|                                      |                                               |  | Year Ended December 31,
|                                      |                                               |  |                        
|                                      |                                               |  | 2002                    |             | 2001 |  | 2000
|                                      |                                               |  |                         |             |      |  |     
|Net loss:                             |                                               |  |                         |             |      |  |      |             |   |  |   |           
|                                      | Reported net loss                             |  | $                       | (11,500,693 | )    |  | $    | (14,701,534 | ) |  | $ | (1,224,765 | )
|                                      | Goodwill amortization                         |  |                         |            |      |  |      | 67,501      |   |  |   | 103,924    |  
|                                      |                                               |  |                         |             |      |  |      |             |   |  |   |            |  
|                                      | Adjusted net loss                             |  | $                       | (11,500,693 | )    |  | $    | (14,634,033 | ) |  | $ | (1,120,841 | )
|                                      |                                               |  |                         |             |      |  |      |             |   |  |   |            |  
|Basic and diluted net loss per share: |                                               |  |                         |             |      |  |      |             |   |  |   |           
|                                      | Reported basic and diluted
net loss per share |  | $                       | (.49        | )    |  | $    | (.65        | ) |  | $ | (.06       | )
|                                      | Goodwill amortization                         |  |                         |            |      |  |      |            |   |  |   | .01        |  
|                                      |                                               |  |                         |             |      |  |      |             |   |  |   |            |  
|                                      | Adjusted basic and diluted
net loss per share |  | $                       | (.49        | )    |  | $    | (.65        | ) |  | $ | (.05       | )
|                                      |                                               |  |                         |             |      |  |      |             |   |  |   |            |  

17.     Subsequent Events

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

Also, in March 2003, under its Universal Blank Shelf Registration
Statement, the Company entered into a $3 million Revolving Fixed Price
Convertible 3 Year Note (the Working Capital Line) with Laurus Master Fund
(Laurus) replacing its previous bank credit agreement, which required a
compensating balance of $1.5 million at December 31, 2002. Advances under the
Working Capital Line are up to 85% of eligible accounts receivable of the
Company. The Company can convert any portion of the principal outstanding to
common stock at $.92 per share (the Conversion Price) if the market price of
the Companys common stock averages 118% of the Conversion Price or higher for
22 consecutive trading days. Laurus can convert any portion of the principal
outstanding to common stock at the Conversion Price anytime the Companys
common stock is in excess of the Conversion Price. After the first $2 million
of conversions into equity, the Conversion Price will be adjusted upward. The
interest rate on the Working Capital Line is prime plus .75 percent, subject to
a floor of 5 percent.

In
addition, in March, 2003, the Company sold, for cash, $1 million in shares of 3
percent Series B Convertible Preferred Stock (Series B Preferred) to Laurus
at a fixed conversion price of $.88 per share. The Series B Preferred is
redeemable in cash or stock in equal installments starting October 1, 2003.
The conversion terms of the Series B Preferred are the same as those pursuant
to the Working Capital Line.

The
Company also sold, for cash, $1 million in shares of 8 percent Series A
Convertible Preferred Stock (Series A Preferred) to
Laurus at a fixed conversion price
of $.88 per share. The Series A Preferred is redeemable in two years, if not
previously converted. The conversion terms of the Series A Preferred are the
same as those pursuant to the Working Capital Line. The proceeds
received under the Series A Preferred are initially restricted,
however, the funds are released as the Preferred Stock is converted
to Common Stock.

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

As
a result of the convertible securities issued, the Company estimates
it will
recognize a beneficial conversion feature of approximately $600,000. The beneficial
conversion feature will be recognized during the first quarter of fiscal year
2003.

F-26



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##### Table of Contents






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 28, 2003 |  |  |  | By: /s/ Ronald A. Walrod
|                     |  |  |  |                         
|                     |  |  |  | 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/ Vernon H. BlackmanVernon H. Blackman         |  | Chairman of the Board                                |  | March 28, 2003
|                                                
|/s/ Ronald A. WalrodRonald A. Walrod             |  | Chief Executive Officer and
Director                 |  | March 28, 2003
|                                                
|/s/ Dennis E. ValentineDennis E. Valentine       |  | Chief Financial Officer
and Chief Accounting Officer |  | March 28, 2003
|                                                
|/s/ James H. Banister, Jr.James H. Banister, Jr. |  | Director                                             |  | March 28, 2003
|                                                
|/s/ C. Neil BeerC. Neil Beer                     |  | Director                                             |  | March 25, 2003
|                                                
|/s/ Charles A. DickinsonCharles A. Dickinson     |  | Director                                             |  | March 25, 2003
|                                                
|/s/ John S. MartinezJohn S. Martinez             |  | Director                                             |  | March 28, 2003
|                                                
|/s/ Barry ResslerBarry Ressler                   |  | Director                                             |  | March 26, 2003





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##### Table of Contents






CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Ronald A. Walrod, certify that:



|1)   I have reviewed this annual report on Form 10-K of JMAR
Technologies, Inc.;                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                              
|2)    Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
|                                                                                                                                                                                                                                                                                                                              
|3)   Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;                    
|                                                                                                                                                                                                                                                                                                                              
|4)   The registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                 



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date), and



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



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



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrants
internal controls; and



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



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

March 28, 2003





---



##### Table of Contents



CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Dennis E. Valentine, certify that:



|1)   I have reviewed this annual report on Form 10-K of JMAR Technologies,
Inc.;                                                                                                                                                                                                                                             
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                             
|2)   Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
|                                                                                                                                                                                                                                                                                                                             
|3)   Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;                   
|                                                                                                                                                                                                                                                                                                                             
|4)   The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;



| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date), and



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;



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



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and



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



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

March 28, 2003





---



##### Table of Contents



Schedule II

JMAR TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                      |                                                   |                   |            |           |            |  |           |           |  |  |  |            |            |             |  |  |            |  |   |          |   |  |   |           | 
|------------------------------------- | ------------------------------------------------- | ----------------- | ---------- | --------- | ---------- |  | --------- | --------- |  |  |  | ---------- | ---------- | ----------- |  |  | ---------- |  | - | -------- | - |  | - | --------- | 
|                                      |                                                   |                   |            |           |            |  | 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, 2002: |                                                   |                   |            |           |            |  |           |           |  |  |  |            |            |             |  |  |            |  |   |          |   |  |   |          
|                                      | Warranty reserve                                  |                   | $          | 115,233   |            |  | $         | 41,299    |  |  |  | $          | (156,532   | )           |  |  |            |  | $ |         |   |  | $ |          | 
|                                      | Reserve for inventory excess and obsolescence
(A) |                   |            | 2,115,143 |            |  |           | 300,000   |  |  |  |            | (2,415,143 | )           |  |  |            |  |   |         |   |  |   |          | 
|                                      | Allowance for doubtful accounts                   |                   |            | 27,812    |            |  |           |          |  |  |  |            | (27,812    | )           |  |  |            |  |   |         |   |  |   |          | 
|                                      |                                                   |                   |            |           |            |  |           |           |  |  |  |            |            |             |  |  |            |  |   |          |   |  |   |           | 
|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    | 
|                                      |                                                   |                   |            |           |            |  |           |           |  |  |  |            |            |             |  |  |            |  |   |          |   |  |   |           | 



|(A) |  | This reserve relates to inventory
of JPSI, which is classified as discontinued
operations in 2002.
|--- |  | --------------------------------------------------------------------------------------------------