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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K405 x
    
    ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 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. 
  Delaware
    
    68-0131180(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)5800 Armada Drive, Carlsbad, CA
    
    92008(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone number, including area code: (760) 602-3292 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registered
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes   x   No   o 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.   x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes   o   No   x




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The aggregate market value of common stock held by non-affiliates of the
Registrant as of June 30, 2003 was $30.0 million. The aggregate
market value was based on the closing price on June 30, 2003 for the common
stock as quoted on the NASDAQ SmallCap, multiplied by the number of shares
outstanding on June 30, 2003, excluding the common stock held by executive
officers, directors and stockholders whose ownership exceeds 5% of the common
stock outstanding at June 30, 2003. 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  30,063,179 shares as of March 24, 2004. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants Definitive Proxy Statement for the 2004
Annual Meeting of Stockholders to be held on June 25, 2004, and to be filed
with the Commission pursuant to Regulation 14A within 120 days after
Registrants fiscal year ended December 31, 2003, are incorporated by reference
into Part III of this Report. 2




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TABLE OF CONTENTS  PART IItem 2. PROPERTIESItem 3. LEGAL PROCEEDINGSItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIItem 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERSItem 6. SELECTED CONSOLIDATED FINANCIAL DATAItem 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A. CONTROLS AND PROCEDURESPART IIIItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTItem 11. EXECUTIVE COMPENSATIONItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 14. PRINCIPAL AUDITOR FEES AND SERVICESPART IVItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KREPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSIGNATURESIndex to ExhibitsEXHIBIT 14.1EXHIBIT 14.2EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1    Table of Contents  
 PART I Item 1. Business General JMAR Technologies, Inc. develops, manufactures, and supports advanced
laser, automated alignment and positioning, and sensor systems for applications
in the semiconductor, biotech, homeland security and nanotechnology markets.
JMAR originated the collimated plasma lithography (CPL) light source for
advanced semiconductor chip manufacturing. JMARs proprietary solid state laser
development skills and its expertise in X-ray light generation by means of
laser produced plasma, have enabled the Company to produce short wavelength (1
nanometer or nm) light for use with lithography steppers to pattern fine
features on both compound semiconductor and silicon wafers. JMAR is also the
leading producer of X-ray steppers for nanolithography. The U.S. Department of
Defense is the principal source of funds for the Companys CPL light source,
X-ray stepper systems, and X-ray mask research and development programs. JMAR
also provides X-ray steppers and services to the University of Wisconsins
Center for Nanotechnology, to BAE Systems in New Hampshire, and to others. JMAR plans to sell integrated CPL nanolithography systems to manufacturers
of compound semiconductors used in high performance military electronics,
radars, and high speed communications and to manufacturers of advanced LED and
chalcogenide random access memory (C-RAM) integrated circuits (ICs). JMAR
believes that its CPL light source technology is also well suited to pattern
contact holes on silicon semiconductor wafers at the 90 nm through 25 nm
features. With investment and support from strategic partners and other
sources, the Companys ultimate goal is to achieve significant growth in
revenue and earnings through the production and sale of CPL light sources for
the multi-billion dollar silicon-based semiconductor manufacturing industry.
The Company believes that CPL may prove a cost effective adjunct to more costly
Next Generation Lithography technologies, such as extreme ultraviolet (EUV)
lithography, at the 32 nm node and beyond. In addition to the development of nanolithography tools, JMAR provides
semiconductor fabrication process integration and maintenance support to the
Department of Defenses Defense Microelectronics Activity in Sacramento,
California. The Company also applies its automation systems expertise to design
and produce advanced sensor systems. In alliance with FemtoTrace Inc. (a
company formed with
technology licensed from NASAs Jet Propulsion Laboratory(JPL)), JMAR is designing and manufacturing portable
sensor systems capable of detecting, in real time, minute quantities of PCBs
and PFTs for end use by utilities in the U.S. and Europe. These unique systems
are believed to be significantly more sensitive than any other real-time
detectors of pollutants. These systems may also have applications in detecting
explosives, narcotics, and other organic molecules and, hence, show significant
potential for homeland security applications. JMAR is combining its extensive base of patents and intellectual property,
an entrepreneurial management team, and $8 million in new funding to diversify
and expand its business base through business alliances and new product
development. Business Segments JMAR conducts its operations in the following three business segments: Research Division (formerly JMAR Research)  Located in San Diego,
California, this segment carries out contract research and development
involving JMARs patented high brightness (Britelight) lasers and
laser-produced plasma (LPP) technology. The results of this R&D are applied to
the Companys CPL light source, EUV generators, and related laser products.
Until recently, the principal focus of the Research Divisions R&D efforts has
been in advanced semiconductor lithography applications. In 2003, the Company
embarked on an effort to identify additional applications for its laser and LPP
technologies. Substantially all of the Research Divisions R&D is funded by
contracts from the 3




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Defense Advanced Research Projects Agency (DARPA) of the U.S. Department of
Defense. During 2003, this segment accounted for approximately 36% of the
Companys revenues. The technologies developed at the Research Division are transitioned to
JMARs Systems Division for product engineering and future production. Systems Division (formerly JMAR/SAL NanoLithography)  This segment
develops and manufactures X-ray lithography steppers. Located in Vermont, this
Division also serves as JMARs product design and manufacturing arm, carrying
out the engineering, production, and integration of JMARs CPL light sources
and CPL stepper systems. The Systems Division also applies its engineering and
manufacturing expertise to the development of new products using a combination
of JMAR and third party technology, as in the case of its design and
manufacture of alpha and beta READ sensors for FemtoTrace, Inc. for
environmental and homeland security applications. During 2003, this segment
accounted for approximately 38% of the Companys revenues. Microelectronics Division (formerly JMAR Semiconductor)  This segment
provides process integration and maintenance support for the Defense
Microelectronics Activitys semiconductor fabrication facility in Sacramento,
California. It also designs and produces application specific integrated
circuits (ASICs) for military and commercial markets. During 2003, this segment
accounted for approximately 26% of the Companys revenues. Products and Services JMARs products and services evolve from one or more of its four core
competencies: high brightness solid state lasers, laser produced plasma
generators for soft X-ray and EUV light; automated precision positioning and
alignment systems, and microelectronic fabrication operations. These
competencies are the basis for JMARs contract research and development,
standard and custom products, and support services revenues. BritelightLasers The Companys patented diode pumped solid state (DPSS) Britelight lasers
feature high brightness, high beam quality and sub-nanosecond rise time. High
brightness DPSS Nd:YAG lasers may be operated at their fundamental wavelength
of 1064 nm or at harmonic multiples (532 nm, 355 nm, 266 nm) of the
fundamental, depending on the application. High brightness DPSS lasers are well suited to a wide variety of
applications including plasma production, micromachining and welding,
analytical instruments for biotechnology and chemistry, laser identification
detection and ranging (LIDAR) systems, and missile defense. JMAR is evaluating
the viability of several product offerings for these applications. Laser Produced Plasma Light Sources JMARs Britelight laser is uniquely effective as an energy source for
generation of short wavelength light. By focusing short laser pulses onto a
copper target, the resultant plasma becomes a point source of 1 nm X-ray light.
A tin target produces 13.5 nm (i.e., EUV) light, and a carbon target produces
soft X-rays at a 3 nm wavelength.
Each of these wavelengths of light has unique applications in science and
industry. JMARs 1 nm source is useful for X-ray lithography. JMARs research
toward an efficient 13.5 nm source applies to EUV lithography. JMAR is reviewing the feasibility
of using 2-4 nm light for certain biological imaging applications. 4




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CPL X-ray Light Source The semiconductor industry currently uses deep ultraviolet (DUV)
lithography in its chip manufacturing process. X-ray lithography has three
important attributes that differentiate it from DUV lithography: shorter
wavelength (~1 nm vs. ~193 nm), larger depth of field (~2,000 nm vs. ~150 nm),
and the ability to penetrate thick resist without high absorption. These
attributes make X-ray lithography particularly well suited for printing fine
features on wafers lacking smooth topology (e.g., GaAs wafers, MEMS, LEDs), and
for printing very deep, high aspect features (e.g., contact holes, inter-metal
vias, and C-RAM). Historically, large, expensive synchrotrons have produced light for X-ray
lithography development. JMAR has developed the prototype of a reasonably
sized, affordable alternative to the synchrotron. JMARs CPL X-ray source
consists of multiple Britelight laser modules. These modules produce a
succession of powerful, short light pulses with power density of many hundreds
of trillions of watts per square centimeter. When focused onto a copper target,
a plasma is created that emits 1 nm wavelength X-ray light. An X-ray collimator
is positioned in close proximity to the point source to improve X-ray
collection efficiency. JMAR has teamed with X-ray Optical Systems, Inc. (XOS)
to produce the worlds first full-field illumination collimators, achieving
lithography exposure gain of 12 (i.e., the exposure of the wafer is 12 times
faster than without the collimator), while the illuminated field is free from
the distortions associated with an uncollimated point source. JMAR believes
that its CPL source will achieve throughput performance that meets compound
semiconductor and niche mainstream semiconductor industry needs by adding
multiple laser modules to increase point source X-ray power and by taking
advantage of gain from the X-ray collimator. The Companys program to produce CPL sources for semiconductor lithography
has evolved over the past decade from scientific research and development, to
laboratory proof of concept, to the current beta stage. In 2003, JMAR
successfully integrated its CPL source with its X-ray stepper and printed high
quality patterns on wafers. The integrated CPL lithography system produced 100
nm dense lines and 70 nm isolated features on test wafers during 2003 tests.
The tests also confirmed that JMARs source prints sub-80 nm contact 2D arrays
on a 200 nm pitch on the same exposure fields. JMARs initial operating experience with the beta CPL source taught us
that fundamental engineering refinement is necessary to achieve the levels of
power stability and operational reliability needed for sustained lithography
operations. JMAR is working to increase source X-ray power to increase wafer
throughput and improve system reliability as it upgrades the beta CPL source
during 2004. EUV Light Source Research and Development Much of JMARs know-how used to produce X-ray light at 1 nm can be applied
to generate EUV light at 13.5 nm. JMAR has worked with the University of
Central Florida (UCF) to develop LPP based EUV light source technology and, in
2001, 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 UCF 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 believes it 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. Although EUV is generally considered by the semiconductor industry to be
the leading technology for the 32 nm 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. 5




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NanoPulsar Steppers JMAR is unique in its ability to design, build and service proximity X-ray
steppers for 75-200 mm wafer lithography. Since the mid-1980s, the
predecessor of JMARs Systems Division has sold sixteen X-ray steppers to
research facilities for use with synchrotron sources for lithography and
small-scale process work. The Company offers service and upgrades for that installed base and
continues to market its NanoPulsar steppers for use with synchrotron sources. Integrated CPL Nanolithography Systems In addition to marketing its light sources to other stepper manufacturers
and marketing its X-ray steppers to synchrotrons, JMAR has been seeking
customers for its integrated nanolithography system that combines its CPL light
source and its stepper. Gallium Arsenide (GaAs) and other compound semiconductor 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. With planned increase in
the power of JMARs CPL source and improvements in platform mechanics, JMAR
believes its integrated nanolithography system will be capable of reaching
throughputs of 5-10 times the throughput of current direct write electron beam
systems. Microelectronics Production Semiconductor Process Integration Services JMAR provides technology development and high-value technology services to
a government semiconductor producer. This business is based 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). Under this ongoing program, JMAR uses its in-depth semiconductor industry
experience and relationships to define and acquire the technologies and
semiconductor equipment needed to support its customers mission. In a unique
arrangement, JMAR maintains access to use DMEA facilities to support ASIC
commercial design and wafer fabrication. In 2003, JMAR expanded its
relationship with the DMEA by entering into a five-year cooperative research
and development agreement (CRADA). This CRADA establishes a joint DMEA/JMAR
research laboratory environment to strengthen and enhance DMEAs ability to use
new processes, equipment, and designs to improve low volume foundry efficiency.
By virtue of this CRADA, JMAR intends to use the versatile facilities and
capabilities available at the Defense Microelectronic Activitys ARMS foundry
to develop and produce commercial products for the government and commercial
sectors. During 2003, the Microelectronics Division received $5 million in new
contracts from GDAIS, a DMEA prime contractor, to enhance the performance of
the semiconductor fabrication process at the DMEA installation. The Company
received another approximately $3.5 million in contracts early in 2004 to
further this effort. ASIC Production The product life cycle for commercial parts is typically 3 to 5 years,
whereas military weapons systems have a life cycle of 20 to 30 years. When a
weapons system using commercial parts needs replacement parts no longer
manufactured by the original supplier and not available from an after market
source, the military has two choices: either replace the entire circuit board
(a very expensive proposition) or replicate the part. JMAR acts as a fabless
manufacturer of ASIC semiconductors for part replication. Actual fabrication is
carried out either within the DMEA foundry or by a commercial foundry. 6




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READ Sensor Systems Under an agreement with FemtoTrace, Inc. (a company formed with technology licensed from JPL),
JMARs Systems Division is engaged in the manufacture of alpha and beta sensor
systems that will be used in certain environmental applications and have great
potential to meet urgent homeland security needs. This sensor system uses a
mass spectrometer-based technology named reversal electron attachment detection
(READ) developed by FemtoTrace. JMARs business alliance with FemtoTrace
enables JMAR to design and produce a versatile, highly sensitive, real-time
organic chemical detection system. JMAR believes that this sensor system has
broad applications in commercial and defense markets including detection of
environmental pollutants, explosives, narcotics, and antibiotics and that JMAR
will play a continuing role in the production of these systems. Markets 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 possible more compact,
higher density, faster-operating semiconductors. Lithography is one of the most critical steps in the production of
semiconductors. It is a photographic process that uses precision light sources
to pattern intricate electronic circuit features 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. Lithography systems employing
shorter wavelength illumination sources will be required to make the smaller
circuit feature sizes needed to meet future microelectronics industry needs. As recently as 1998, the industry believed that an alternative to optical
UV lithography was needed for feature sizes below 100 nm. X-ray lithography
(XRL) was viewed as an NGL solution. Extensive process development work at
several leading research centers demonstrated the ability of X-ray lithography
to produce features as small as 25 nm using X-ray sources known as
synchrotrons. Most of the semiconductor industry considered these synchrotron
sources to be overly cumbersome and too expensive for other than scientific
feasibility and proof-of-principle demonstrations. The pressure to develop NGL
technologies was relieved by the extension of optical methods to finer features
through reticle enhancement techniques, and the mainstream silicon industry
discontinued its efforts to solve the two remaining XRL technical challenges:
(a) finding an alternative to the large and costly synchrotron source and (b)
developing X-ray mask infrastructure. 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. 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 patterned using electron beam (e-beam)
systems. CPL offers dramatically increased GaAs wafer throughput, as compared
to direct write e-beam lithography. The GaAs market is not expanding at the fast pace predicted three years
ago because of the unanticipated decline in the telecom industry, and so the
expected increased demand for the increased throughput offered by the Companys CPL system
has been delayed. JMAR is currently upgrading its CPL source to achieve higher
X-ray power with high reliability to be better prepared for the GaAs markets
recovery. 7




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Currently, mainstream silicon semiconductor integrated circuit production
uses optical lithography with the associated UV or DUV light sources and
complex optics to focus the circuit pattern image on the wafer surface.
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.
Ultratech Systems and Suss MicroTec participate in niche market segments. The
semiconductor industry generally purchases 300 to 500 new lithography stepper
systems per year, at prices ranging from approximately $3 million to $27
million per stepper system. Historically, as circuit feature sizes are reduced,
the prices of these complex lithography systems increase. Compound Semiconductor Chip Fabrication The demand for ultra-high speed communications devices declined when the
telecom market slowed in 2000. The market for these devices is expected to
resume growth in 2004 to nearly $4 billion by 2007. As the market grows and the
requirement for smaller feature sizes continues, JMAR believes its CPL system
will be well suited to meet the need of the compound semiconductor chip
industry for a cost effective lithography process. The CPL source, combined
with the NanoPulsar stepper is well suited to compound semiconductor production
requiring wafers up to 200 mm, throughputs of 5 to 10 wafer levels per hour,
and nominal 130 nm features. Silicon Wafer Fabrication Today, optical DUV lithography has been extended to achieve sub-100 nm
features and is projected to take the mainstream silicon industry to the 45 nm
node. This has been achieved through a series of incremental technology
improvements to the steppers, masks, mask design and reticle enhancement
techniques, resists, and metrology. Although the optical approach keeps getting
more and more expensive, the industry has favored this low risk incremental
approach, delaying the introduction of post-optical lithography. The industry currently views EUV lithography as the NGL solution below 45
nm and projects its introduction at the 32 nm node in about 2009. We believe
CPL is also a contender at the 32 nm node, especially for topologically
demanding, moderate throughput applications. 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. Each of the proposed NGL approaches has technical issues which need to be
addressed before adoption for use. The historic roadblocks to XRL adoption
include the high cost and impracticability of modifying factory designs to
accommodate synchrotron X-ray sources, and the perceived difficulty of
manufacturing lithography masks with feature sizes below 70 nanometers.
However, JMARs CPL source offers a solution to the synchrotron problem and the
Company is actively working with mask suppliers on the development of XRL
masks. Prototype XRL masks have been built to yield 65 nm and 30 nm features. The mainstream silicon industry will likely continue to incrementally
extend optical technology as long as possible. Although the industry is coming
to believe that 193 immersion will meet industry needs to the 45 nm node and
that EUV will be introduced at the 32 nm node in 2009, technical challenges
remain. The Company believes that its CPL source technology is also a potential
candidate to meet the semiconductor industrys need to produce better contact
holes in semiconductor chips, but considerable challenges must be overcome. If
193 immersion lithography is successful down to the 45 nm node, the need for
the Companys CPL system as a mix-and-match solution to the contact hole
problem will be greatly diminished. Furthermore, the silicon contact hole
market at the 65 nm feature will require production systems by 2008. For JMAR
to enter the silicon contact hole market in 2008, an end-user (foundry or chip
manufacturer) must commit to JMARs XRL solution in 2005, thereby providing the
lead time needed to develop appropriate stepper, mask and resist technology
for this niche market. Finally, 8




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in
order to meet the needs from the contact hole market, JMAR must improve CPL source reliability, increase its power output to 150
watts from the 20 watts produced today, and reduce projected manufacturing
costs to create a viable commercial source. Once CPL is
successful in the contact hole segment of the silicon market,
the Company plans to position its sources more broadly to the mainstream
silicon market as the most cost effective approach to lithography at
the 32 nm node and below. Production systems for this market will not
be required until 2010, with development systems being provided in
the earlier years. Advanced Realtime Sensor Systems The market for networked, real-time, remote, chemical sensors is difficult
to assess. It includes segments for homeland security, environmental
protection, and military operations. JMAR is working to define and quantify
these segments as it works with FemtoTrace to field READ sensor systems. Microelectronics Production The market for technology services for customers like GDAIS and DMEA is
somewhat limited. JMAR believes that this part of its revenue base will not
expand significantly beyond its current level. JMAR also applies its experience
gained for its DMEA fabrication support to a segment of the ASIC chip
production market: The production of military replacement components. This
market is believed to be approximately $4 million per year and is experiencing
moderate growth. Competition Advanced X-ray Sources The Company believes that it has established itself as the worlds leading
developer of laser produced plasma X-ray sources by virtue of its patented
collimated laser plasma source technology. Within its operational and projected
regime (i.e., 0.7 to 2.0 nanometers wave length, 20 watts to 150 watts average
power), CPL has no direct competitors using either the LPP or the pinch plasma
approach. To date, the principal focus of JMARs X-ray source development has
been to create an alternative lithography source. In the market for lithography
light sources using non-X-ray technology, there are several competitors and
competing technologies (see Advanced Semiconductor Lithography  Silicon Wafer
Fabrication below). Advanced Semiconductor Lithography The Company faces considerable competition in the application of its laser
produced plasma technology to the field of semiconductor lithography. In GaAs
and other compound semiconductor applications, JMAR believes its CPL stepper
systems will compete with traditional direct write electron beam systems by
offering far higher throughput at a comparable or lower price. In silicon
applications, CPL must compete with incumbent optical technologies and
other next generation lithography technologies being
developed. Its
competitive attractiveness ultimately comes down to whether it can
demonstrate superior cost
effectiveness. Compound Semiconductor Wafer Fabrication The extreme surface topography of GaAs wafers makes only lithography
technologies with a large (several microns) depth of field useful. At
dimensions below 150 nm this restricts the competition to suppliers of electron
beam based lithography tools. The main suppliers of e-beam tools are LEICA,
HITACHI, TOSHIBA, JEOL, and AMAT/ETEC. Electron beam lithography is limited by
low throughput. CPL offers a 5 to 10 times increase in throughput. Silicon Wafer Fabrication In the mainstream silicon market, JMARs CPL source faces different
competitive technologies at each lithography feature size node. At the 90 nm
node, CPL faces the incumbent technology  the 193- 9




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nanometer DUV source manufactured by Cymer, Gigaphoton and Lambda Physik. This
technology is starting to appear in leading fabs. A new technology called 193
immersion has recently been developed to extend DUV optical lithography to
smaller feature sizes. The mainstream silicon industry believes that 193
immersion will meet industry needs to the 45 nm node and that EUV will be
introduced at the 32 nm node in 2009. Alternative technologies, such as
multi-beam electron beam lithography, LEEPL, EPL, maskless lithography (MxL),
step and flash imprint lithography and nano-imprint represent potential
competition for CPL to the extent that R&D associated with these technologies
proves successful. Cymer, Lambda Physik and Gigaphoton will remain competitors,
regardless of source technology selected in the future. JMAR believes that 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 sizes, while recapturing
hundreds of millions of dollars already spent on XRL research and saving
hundreds of millions of dollars in future R&D. The momentum enjoyed by 193
immersion is a significant impediment to this vision. However, given the
industrys recent strong support for 193 immersion, CPLs principal competitive
attractiveness in the silicon market is its potential to emerge as the lowest
cost lithography technology at the 32 and 25 nanometer nodes. EUV LPP Source Research and Development Eight companies or consortia are actively working to develop either
Discharge Produced Plasma (DPP), Laser Produced Plasma (LPP), or both. DPP
sources are being developed by Cymer and Plex in the U.S., Xtreme (a Lambda
Physik and Jenoptik joint venture) in Germany, Philips Extreme (a Philips and
Fraunhofer Institute joint venture) in the Netherlands, and Gigaphoton (a
Komatsu and Ushio joint venture) in Japan. LPP sources are being developed by
Cymer, Xtreme, Gigaphoton, Powerlase in the U.K., Exulite (a Thales, CEA and
Alcatel consortium) in France, and JMAR. Thus far, DPP sources have produced up to 30 watts of power (at
intermediate focus) versus a 115 watt requirement. However, only 30 minutes of
run time has been achieved versus a continuous 90% uptime requirement. LPP has
obtained similar run time results but at 10 watts. In January 2004, Cymer added LPP to its DPP EUV source development program
started in 1999. Cymer recently announced it had received a $20 million
contract from Intel to develop a 50 watt beta source (DPP or LPP) by mid 2006
in preparation for the production of high volume manufacturing sources by 2009. Microelectronics Production Microelectronics Division has few competitors in the market for
microelectronics fabrication services to aerospace and government entities.
Although it currently is dependent upon a single customer for its funding
services, the success of the Microelectronics Division in this market is due to
the breadth of its semiconductor process technology expertise and its long held
relationships with top suppliers of relevant technology and support. The
programs that the Microelectronics Division performs involve high-level
engineering, labor-intensive activities requiring in-depth knowledge, and
complete understanding of the processes and technologies to be installed. Major
government contractors generally do not pursue this type of work because it
requires the application of specialized, highly skilled labor, not leveraged by
subsequent high volume production. Customers and End Users For fiscal years 2003, 2002 and 2001, the United States Government
accounted for approximately 69%, 68% and 71%, 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. 10




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Advanced Semiconductor Lithography JMARs advanced lithography development program has benefited from the
investment of in excess of $57 million in Department of Defense (DoD) funds
over the past decade on its lithography light source and an additional
approximately $22 million investment in DoD funds for stepper development prior
to JMARs acquisition of its Systems Division. These contracts were primarily
managed by the U.S. Army Research Laboratory, sponsored by DARPA and funded by
the DoD. In 2002, JMAR received a contract from the Department of the Army
supported by 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. Through 2003, a
total of $16.6 million has been received under this contract, including $3.6
million received in 2003. The Company expects to receive another approximately
$7 million in funding under this contract in 2004. In addition, in May 2002, the Systems Division was awarded a $10 million
contract (Navair Contract) to procure sub-100 nm X-ray masks for NGL systems.
The contract, awarded by DARPA, is an effort that produces X-ray masks used in
the development and production of high performance GaAs monolithic microwave
integrated circuits (MMICs). The Company received $3.4 million in funding in
2003 related to this contract, of which approximately $810,000 was in backlog
at December 31, 2003, and expects another approximately $2.4 million in funding
in 2004. In connection with the award of the Navair Contract, the Company
entered into a subcontract with IBM to manufacture and deliver X-ray masks to
JMAR. In October 2003, the Company was notified by IBM that effective December
31, 2003 it was discontinuing its Vermont X-ray lithography mask-making
operations and terminating this subcontract. The Company believes it has sufficient
masks for its planned lithography exposure tests until another mask supplier
subcontract can be signed. The Company has had discussions with other mask
suppliers and believes that it will enter into a subcontract with one or more
of these suppliers in 2004 to continue to provide masks. The failure to redirect the
Navair Contract funding to an alternative mask supplier or other
project of interest to Navair, could result in a
shortfall in recognizing the full $2.4 million expected under the Navair
Contract in 2004. JMAR has produced 16 of the worlds 20 X-ray steppers with another
currently in production. Steppers are currently in operation at BAE Systems,
the University of Wisconsin (CNtech), and IESS in Italy. The latter two
installations use an electron synchrotron orbital ring (SOR) source. The
installation at BAES is a standalone point source machine using a dense plasma
focus source supplied by Scientific Research Laboratories. Backlog at December
31, 2003 related to contracts received from BAE Systems and CNtech was
approximately $185,000. Microelectronics Production JMAR receives contracts for its microelectronics support from GDAIS, a
prime contractor for the DMEA. At December 31, 2003, the backlog related to
this activity was approximately $1.1 million. Advanced Realtime Sensor Systems The FemtoTrace/JMAR alliance will deliver the first READ sensor systems to
New York Citys Consolidated Edison in 2004. In 2003, the Company received a $1
million contract from FemtoTrace to design, develop and manufacture the first
of these sensor systems. During 2003, the Company recognized $50,000 in revenue
related to the contract. For reasons unrelated to JMARs work under the
contract, the end customer delayed this work during 2003. However, the end
customer has authorized re-commencement and JMAR is now working pursuant to its
contract with FemtoTrace. JMAR is also working with FemtoTrace to market the
READ system to other utilities, as well as to government agencies. 11




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Manufacturing JMAR has facilities and staff to manufacture X-ray steppers, CPL sources,
READ sensor systems, and other products at its South Burlington, Vermont
facility. At this facility JMAR works to improve the CPL stepper and source and
conducts lithography characterization and testing. JMAR believes that it will
be able to expand such facilities in Vermont as needed should any of these
product lines become successful. Portions of the CPL development effort have
been subcontracted to third party suppliers. Although these may initially be
sole suppliers for the prototype unit, 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 X-rays radiating from the point source and directs
them to the mask and wafer. We have received collimators in the past from XOS
and are using one of their collimators on the CPL system currently 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 other 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 in 2008. In addition, the Company purchases laser pump diode arrays, a critical
component used in its CPL source, from one supplier. Although other suppliers
manufacture such diode arrays, the Company has found this supplier to best meet
our current diode specifications. If we cannot obtain these high-efficiency
collimators and specialty diodes when needed, 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. Sales and Marketing JMARs sales and marketing effort has been focused on DoD contract
research and development and microelectronics production support opportunities.
JMAR uses in-house staff for sales and marketing, and is supplemented by a team
of manufacturers representatives for ASIC sales support. Participation in industry conferences is an important element of JMARs
marketing strategy. JMAR was invited to organize a presentation of worldwide
X-ray lithography status at the International SEMATECH Lithography Forum, held
January 27-29, 2004 in Los Angeles. Responding to this invitation, we
collaborated with several Japanese companies, including Canon, NTT-AT,
Mitsubishi, Sumitomo and Philtech; U.S. based companies Rohm and Hass
Electronic Materials (formerly Shipley), TOK/OHKA America and BAE Systems; U.S.
Universities MIT (Nanostructures Laboratory), University of Wisconsin (Center
for Nanotechnology), LSU (CAMD); and U.S. based Grenon Consulting. Research and Development The majority of JMARs R&D effort is carried out under contract to the
DoD. This work focuses on solving technology problems of importance to the
United States because of defense needs or critical industrial base
considerations. JMAR also carries out independent research and development
(IR&D) in areas of interest to the DoD. IR&D is included in the rate structure
associated with government contracts. Finally, JMAR funds technology and
product development work intended to grow the company through new products and
an expanded customer base. JMAR continues to perform R&D work to advance the performance of the CPL
lithography system under DoD contracts. Since this work has commercial, as well
as military, potential, JMAR has expended IR&D and company funds in its CPL
pursuit. Company-funded expenditures for research, development and engineering
(RD&E) were $529,039, $854,306, $602,980, $340,227 and $467,328 for the years
ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively. Total
expenditures for RD&E, including funding provided by third party 12




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contracts from the U.S. government and other companies were $10,135,784,
$12,383,221, $7,638,266, $4,151,767 and $4,561,538 for the years ended December
31, 2003, 2002, 2001, 2000 and 1999, respectively. In February 2004, the Company received $8 million in financing from the
Laurus Master Fund. JMAR intends to use these funds to initiate and advance new
product research and development efforts and to acquire or license products,
technologies or businesses. Industries of particular interest to JMAR include
nanotechnology, homeland security, and biotechnology. Intellectual Property Rights During the past several years JMARs patent protection efforts have
resulted in the issuance of 18 U.S. patents and 3 foreign patents. JMAR
currently has filed 14 pending U.S. patent applications, 19 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 EUV microlithography systems and X-ray
lithography stepper technology, each of which represents an opportunity for
growth for JMAR. The expiration dates of these patents range from 2004 to 2021.
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. JMAR is also a party to an
exclusive license with the University of Central Florida covering certain EUV
technology. 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. Employees Currently, the Company has approximately 70 full-time employees. The
Company is not subject to any collective bargaining agreements and believes
that it maintains excellent relations with its employees. INFORMATION REGARDING INDUSTRY SEGMENTS, SIGNIFICANT CUSTOMERS AND EXPORT SALES The Company operates 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, 2003 is incorporated by reference from
Note 13 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. 13




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The Research Division leases 9,280 square feet located 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 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
Company expects to obtain a two year extension of the lease. 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 expects to obtain a one year
extension of the lease. The Company sold JPSI in July 2003 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. In connection with the
sale of JPSI, the buyer assumed 14 of the remaining 25 months of this lease. 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 Macrotech Lawsuit Among the remaining liabilities of JMAR Semiconductor, Inc. (JSI) included
on the Companys Consolidated Balance Sheet at December 31, 2003 is a debt
owing to Macrotech, Inc., a former supplier of chip manufacturing services to
JSI. This debt arose out of several purchase orders for FIFO chip manufacturing
issued by JSI to Macrotech between 2000 and 2002. JSI claimed that these
purchase orders were cancelable as to amounts that had not yet been confirmed
for production and that JSI timely canceled all but approximately $200,000 of
the remaining obligations under those purchase orders. In October, 2003,
Macrotech filed a Complaint against JSI alleging breach of contract and other
related claims and seeking payment of approximately $680,000, as well as
punitive damages in an unspecified amount. Macrotech also alleged that JMAR was
the alter ego of JSI and should be held responsible for JSIs debts. In
February 2004, the Company and Macrotech executed a settlement agreement
whereby the Company agreed to pay Macrotech $137,500 in full satisfaction of
all amounts owed to Macrotech. The lawsuit was dismissed with prejudice in
February, 2004. 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT 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 14




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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. 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. 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 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. (now the
Systems Division) as President in August 2001 when SAL, Inc. was merged into
JSAL. Dr. Fleming became Senior Vice President and 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. 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 position with
JMAR. He most recently served as President and Chief Executive Officer of 15




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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 Advanced Technologies, a California-based manufacturer of advanced
satellite communications 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 of JSI Microelectronics in October, 2002. 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. 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. SCOTT H. BLOOM, Ph.D.,joined JMAR as the General Manager of the Research
Division in March 2003. Prior to joining the Company, he served as Chief
Technical Officer of AirFiber, Inc., a developer of high-bandwidth wireless
communication systems that he founded in 1998. Prior to that, Dr. Bloom served
as Vice President, Commercial Business Development for AstroTerra Corporation,
a developer of free space optics equipment. While there, he was responsible
for both commercial and government new business development, and he initiated a
partnership with Lucent Technologies that was instrumental in advancing the
organization toward the goal of product commercialization. Dr. Bloom also has
held senior management positions with Trex Communications Corporation, where he
led research and development work on laser communications products and systems
for terrestrial, air, and space applications, and for ThermoTrex Corporation,
where he directed R&D in the areas of laser communications, atomic line
filters, diamond electronics, and laser based wind speed sensors. Dr. Bloom
holds a Bachelor of Science degree from the California Institute of Technology,
a Masters of Business Administration from the University of California, Los
Angeles, and a Doctorate degree in Physics from Tufts University in Condensed
Matter Physics. 16




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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 SmallCap Market under
the symbol JMAR. The 2003 and 2002 high and low transaction prices for the
common stock as reported by NASDAQ are set forth in the following table. Common Stock Price High
    
    Low2003First Quarter
    
    
    1.25
    
    
    
    0.76Second Quarter
    
    
    1.49
    
    
    
    0.82Third Quarter
    
    
    2.55
    
    
    
    1.10Fourth Quarter
    
    
    2.51
    
    
    
    1.312002First Quarter
    
    
    3.53
    
    
    
    2.00Second Quarter
    
    
    2.52
    
    
    
    1.65Third Quarter
    
    
    2.20
    
    
    
    1.27Fourth Quarter
    
    
    1.65
    
    
    
    0.92
 As of March 9, 2004, there were approximately 15,400 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. In December 2003, the Company issued $2 million of Series D Convertible
Preferred Stock (Series D Preferred) to Laurus Master Fund Ltd. (Laurus).
The Series D Preferred has a fixed conversion price of $1.56 per share. Also
issued in this transaction were warrants to purchase 200,000 shares of common
stock at a price of $2.25 per share. These issuances were exempt under Section
4(2) of the Securities Act of 1933. 17




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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 2003,
2002, 2001 and 2000 and Arthur Andersen LLP for 1999. 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, 2003
    
    2002
    
    2001
    
    2000
    
    1999Revenues
    
    $
    17,296,508
    
    
    $
    18,383,810
    
    
    $
    12,903,811
    
    
    $
    9,114,357
    
    
    $
    14,452,054Gross profit
    
    
    3,964,627
    
    
    
    3,413,492
    
    
    
    3,499,243
    
    
    
    2,328,406
    
    
    
    3,433,171Operating expenses
    
    
    5,383,251
    
    
    
    6,523,346
    
    
    
    4,989,402
    
    
    
    3,222,903
    
    
    
    3,714,334Loss from operations
    
    
    (1,418,624
    )
    
    
    (3,109,854
    )
    
    
    (1,490,159
    )
    
    
    (894,497
    )
    
    
    (281,163
    )Realized gain on sale of
marketable securities
    
    
    
    
    
    
    1,349,721
    
    
    
    1,189,273
    
    
    
    2,184,476
    
    
    
    Interest and other income
    
    
    63,225
    
    
    
    67,404
    
    
    
    252,282
    
    
    
    273,626
    
    
    
    87,519Interest and other expense
    
    
    (731,315
    )
    
    
    (284,174
    )
    
    
    (107,950
    )
    
    
    (106,466
    )
    
    
    (192,905
    )Income (loss) from continuing
operations before income taxes
    
    
    (2,086,714
    )
    
    
    (1,976,903
    )
    
    
    (156,554
    )
    
    
    1,457,139
    
    
    
    (386,549
    )Income tax expense
    
    
    
    
    
    
    (484,423
    )
    
    
    
    
    
    
    
    
    
    
    Income (loss) from continuing
operations
    
    
    (2,086,714
    )
    
    
    (2,461,326
    )
    
    
    (156,554
    )
    
    
    1,457,139
    
    
    
    (386,549
    )Loss from operations of
discontinued operations
    
    
    (1,396,749
    )
    
    
    (5,839,367
    )
    
    
    (14,544,980
    )
    
    
    (2,681,904
    )
    
    
    (1,862,445
    )Gain (loss) on disposal of discontinued
operations
    
    
    205,000
    
    
    
    (3,200,000
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (3,278,463
    )
    
    
    (11,500,693
    )
    
    
    (14,701,534
    )
    
    
    (1,224,765
    )
    
    
    (2,248,994
    )Preferred stock dividends
    
    
    (942,903
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss applicable to common stock
    
    
    (4,221,366
    )
    
    
    (11,500,693
    )
    
    
    (14,701,534
    )
    
    
    (1,224,765
    )
    
    
    (2,248,994
    )Basic income (loss) per share:Income (loss) per share from
continuing operations
    
    
    (0.12
    )
    
    
    (0.11
    )
    
    
    (0.01
    )
    
    
    0.06
    
    
    
    (0.02
    )Loss per share from
discontinued operations
    
    
    (0.04
    )
    
    
    (0.38
    )
    
    
    (0.64
    )
    
    
    (0.12
    )
    
    
    (0.10
    )Loss per share applicable to
common stock
    
    
    (0.16
    )
    
    
    (0.49
    )
    
    
    (0.65
    )
    
    
    (0.06
    )
    
    
    (0.12
    )Basic shares used in computation of
income (loss) per share
    
    
    25,618,296
    
    
    
    23,618,169
    
    
    
    22,484,905
    
    
    
    21,468,763
    
    
    
    18,045,914
 Consolidated Balance Sheet Data  December 31, 2003
    
    2002
    
    2001
    
    2000
    
    1999Working capital (deficit)
    
    $
    2,427,166
    
    
    $
    (780,117
    )
    
    $
    7,843,465
    
    
    $
    21,543,381
    
    
    $
    7,468,743Total assets
    
    
    13,493,183
    
    
    
    15,121,660
    
    
    
    26,618,625
    
    
    
    34,191,574
    
    
    
    20,673,768Short-term debt
    
    
    2,340,431
    
    
    
    1,556,405
    
    
    
    3,007,152
    
    
    
    1,291,178
    
    
    
    5,195,490Long-term liabilities
    
    
    449,873
    
    
    
    1,708,804
    
    
    
    1,419,632
    
    
    
    339,908
    
    
    
    642,913Preferred stock
    
    
    2,217,150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    5,277,800
    
    
    
    3,677,994
    
    
    
    14,299,655
    
    
    
    28,444,669
    
    
    
    10,909,461
 18




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##### Table of Contents



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview JMAR Technologies, Inc. develops, manufactures, and supports advanced
laser, automated alignment and positioning, and sensor systems for applications
in the semiconductor, biotech, homeland security and nanotechnology markets. The U.S.
Department of Defense is the principal source of funds for the Companys
collimated plasma lithography (CPL) light source, X-ray stepper systems, and
X-ray mask research and development programs. JMAR also provides X-ray steppers
and services to the University of Wisconsins Center for Nanotechnology, to BAE
Systems in New Hampshire, and to others. In addition to the development of
nanolithography tools, JMAR provides semiconductor fabrication process
integration and maintenance support to the Department of Defenses Defense
Microelectronics Activity in Sacramento, California. As noted in Sources of Revenues below, over 95 percent of the Companys
revenues are derived from government contracts or related subcontracts. These
contracts generate intellectual property owned by the Company (with limited
residual rights held by the government) in areas in which the Company believes
there are significant commercial applications. In addition to commercial
opportunities, reliance on these contracts has presented certain challenges and
risks. Opportunities, Challenges and Risks Our program to produce CPL light sources for semiconductor lithography has
proven to be technologically challenging, evolving over the past decade from
scientific research and development, to laboratory proof of concept, to the
current beta stage. In 2003 we successfully integrated our CPL source with our
Systems Division X-ray stepper and printed high quality patterns on wafers. Our
initial operating experience with the beta CPL source taught us that
fundamental engineering refinement is necessary to achieve the levels of power
stability and operational reliability needed for sustained lithography
operations. We made the management decision to start work on a second CPL
source that will retain many of the design elements of the existing CPL source,
but embodies new engineering solutions where necessary. This decision also
involved proactive steps to complement Research Divisions traditional
excellence in laser science with a team of skilled mechanical, electrical and
software engineers. This new team of engineers is working to increase the X-ray power output
and reliability of our CPL source to meet the needs of compound semiconductor
chip manufacturing and other applications. We believe that this work will
continue to be largely funded by our DARPA contract, but could require
financing beyond the funding provided by the Companys government contracts.
Failure to resolve these challenges within the timeframe demanded by potential
customers may have an adverse impact on the success of our efforts to
manufacture and sell our CPL systems. In addition, the Companys cost models
contemplate that multiple suppliers will emerge and greater volume purchases of
high cost components will result in reduced CPL source manufacturing costs and
appropriate gross margins. CPL offers dramatically increased throughput for compound semiconductor
manufacturing compared to the use of direct-write e-beam lithography. The
compound semiconductor market is not expanding at the fast pace predicted three
years ago because of the unanticipated decline in the telecom industry, and so
the expected increased demand for the increased throughput offered by the
Companys CPL system has been delayed. Although the Company plans to enter this
market when it recovers, we cannot estimate when we will receive our first CPL
system order for the compound semiconductor market. However, JMARs work to
upgrade its CPL source to achieve higher X-ray power with high reliability
should position JMAR for the compound semiconductor markets recovery. The Company believes that its CPL source technology is also a potential
candidate to meet the semiconductor industrys need to produce better contact
holes in semiconductor chips, but considerable challenges must be overcome. If
193 immersion lithography is successful down to the 45 nm node, the 19




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##### Table of Contents



need for the Companys CPL system as a mix-and-match solution to the contact
hole problem will be greatly diminished. Furthermore, the silicon contact hole
market at the 65 nm feature will require production systems by 2008. For JMAR
to enter the silicon contact hole market in 2008, an end-user (foundry or chip
manufacturer) must commit to JMARs XRL solution in 2005 thereby providing the
lead time needed to develop appropriate stepper, mask and resist technology for
this niche market. Finally, in order to meet the needs for the contact hole
market, JMAR must improve CPL source reliability, increase its power output to
150 watts from the 20 watts produced today, and reduce projected manufacturing
cost to create a viable commercial source. Once CPL is successful in the contact hole segment of the silicon market,
the Company plans to position its sources more broadly to the mainstream
silicon market as the most cost effective approach to lithography at the 32 nm
node and below. Production systems for this market will not be required until
2010, with development systems being provided in the earlier years. Since 2002, the Company has been working actively to establish strong
alliances with the semiconductor industry to deliver CPL to the mainstream
silicon market. JMAR is continuing these efforts, but does not yet have a
commitment from an industry partner. However, the Company is optimistic that
once the beta CPL stepper system is fully operational and reliable, the Company
will make faster progress in forming an alliance that brings together the
industry support needed to move CPL forward. Achieving market acceptance for our new and proposed CPL products requires
a significant effort to convince semiconductor manufacturers to adopt the
Companys CPL technology over other alternative lithography technologies. This
will require substantial technical, marketing and sales efforts and the
expenditure of significant funds. Currently, the semiconductor industry is
exploring several different technologies for its near-term and long-term
lithography needs, some of which currently have greater acceptance than CPL. In addition to its CPL efforts, the Company is pursuing other laser
produced plasma (LPP) applications. JMAR has worked with the University of
Central Florida over the past three years to develop LPP-based Extreme
Ultraviolet (EUV) lithography light source technology. JMAR believes that the
knowledge and IP resulting from this work positions JMAR to participate in EUV
source development on a contract basis. JMAR is also investigating
opportunities to use its LPP X-ray source technology in non-lithography
applications such as the potential development of a table top X-ray
microscope for the research and biotech communities. JMARs Systems Division is working to apply its automation systems
expertise to design and produce advanced sensor systems. In alliance with
FemtoTrace, Inc. (a company formed with technology licensed from JPL), JMAR is designing and manufacturing
portable sensor systems capable of detecting, in real time, minute quantities
of PCBs and PFTs for end use by utilities in the U.S. and Europe. The Companys Systems Division is working to expand its relationship with
FemtoTrace for the production of advanced sensor systems (READ) by marketing
this ultra sensitive sensor technology for military and homeland security
applications. The Companys Microelectronics Division 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. This
Division is also in the custom application specific integrated circuit (ASIC)
business. It seeks to increase its revenue base by expanding its ASIC business
to include power management chip fabrication. Sources of Revenue Currently, over 95 percent of the Companys revenues are derived as the
prime contractor or subcontractor for government contracts. The most
significant ongoing contract is the multi-year $34.5 million contract issued to
JMARs Research Division by the U.S. Army Research Laboratory sponsored by 20




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##### Table of Contents



DARPA for further development of the Companys CPL system. Through 2003, a
total of $16.6 million has been received under this contract and the Company
expects to receive an additional $7 million in funding in 2004. Although the $7
million funding has been appropriated by Congress, DARPA controls the timing of
the funding. The Company had expected to receive $1.6 million of this $7
million in funding by December 31, 2003. DARPA had not released these funds to
JMAR by December 31, 2003. DARPA had indicated that they would release the $1.6
million in funds upon the successful completion of a reliability and
performance test, which was completed on March 21, 2004. On March 22, 2004,
based on the preliminary results of the tests, DARPA released
$800,000 of these funds, with the remaining $800,000 to be released
upon satisfaction of further milestones.
The release of the remaining $5.4 million during 2004 is also subject to
milestones related to the further improvement of the beta
source. The Company believes that it will meet all of the milestones for
release of all of the remaining $6.2 million. JMARs next most significant contract is a $10 million contract issued to
JMARs Systems Division by Naval Air Warfare Center AD to procure sub-100 nm
X-ray masks used in the development and production of high performance GaAs
MMICs (Navair Contract). Through 2003, a total of $6.4 million has been
received under this contract and the Company expects to receive $2.4 million in
funding in 2004. The funding for this contract has also been appropriated by
Congress. In connection with the award of the Navair Contract, the Company
entered into a subcontract with IBM to manufacture and deliver X-ray masks to
JMAR. In October 2003, the Company was notified by IBM that effective December
31, 2003 it was discontinuing its Vermont X-ray lithography mask-making
operations and terminating this subcontract. The Company believes it has
sufficient masks for its planned lithography exposure tests until another mask
supplier subcontract can be signed. The Company has had discussions with other
mask suppliers and believes that it will enter into a subcontract with one or
more of these suppliers in 2004 to continue to provide masks. The failure to
redirect the Navair Contract funding to an alternative mask supplier or other
project of interest to Navair, could result in a shortfall in recognizing the
full $2.4 million expected under the Navair Contract in 2004. The third major ongoing revenue source involves the subcontract between
JMARs Microelectronics Division and GDAIS to enhance and maintain the
semiconductor wafer fabrication processes installed at the McClellan Air Force
Base in Sacramento for the DMEA. This work, which started in 1998, has resulted
in a new subcontract each year out of funds available in the DMEAs budget as
an element of the Department of Defenses Advanced Technology Support Program.
The Company received $5 million and $3.5 million in contracts in 2003 and 2004,
respectively, for this program. Additionally, in 2004, the Company has submitted five Small Business
Innovative Research proposals to the U.S. Government of approximately $100,000
each in the areas of X-ray microscopy, laser communications, missile defense,
oceanic mine detection and material processing. Management believes that the work performed under the above contracts has
commercial applications, particularly the work under the DARPA contract for the
development of JMARs CPL technology. In February 2004, the Company received $8 million in financing from Laurus
Master Fund (Laurus). We intend to use these funds to initiate and advance new
product research and development efforts and to acquire or license products,
technologies or businesses to expand our revenue base and potential. While we
believe these investments will lead to increased revenue in the future, the
initial expenditure of these funds will increase the Companys research and
development expenses and, correspondingly, its net loss in the near term. Results of Operations Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 21




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Revenues.Total revenues for the years ended December 31, 2003 and 2002
were $17,296,508 and $18,383,810, respectively, of which contract revenues
accounted for $16,740,905 and $17,543,334, respectively. Revenues by segment
for 2003 and 2002 were as follows: 2003
    
    2002Research Division
    
    $
    6,206,123
    
    
    $
    6,951,114Systems Division
    
    
    6,561,372
    
    
    
    7,602,336Microelectronics Division
    
    
    4,529,013
    
    
    
    3,830,360$
    17,296,508
    
    
    $
    18,383,810
 The decrease in revenues for the year ended December 31, 2003 compared to
the year ended December 31, 2002 was primarily attributable to a decrease in
revenues of the Research and Systems Divisions related to the DARPA contract of
$2,477,779 due to lower funding received on that contract. This decrease was
offset in part by an increase in contract revenues at the Microelectronics
Division of $751,732, related to the receipt of approximately $5 million in
contracts from GDAIS in February 2003. For the year ended December 31, 2003
compared to the year ended December 31, 2002, there was also an increase in the
Navair Contract revenues of $984,522 at the Systems Division. Losses.The net loss for the years ended December 31, 2003 and 2002 was
$(3,278,463) and $(11,500,693), respectively. The loss from continuing
operations for those same periods was $(2,086,714) and $(2,461,326),
respectively, while the loss from operations for those same periods was
$(1,418,624) and $(3,109,854), respectively. Included in the net loss for the
years ended December 31, 2003 and 2002 is a loss from operations of
discontinued operations (see below) of $(1,396,749) and $(5,839,367),
respectively, and a gain (loss) on disposal of discontinued operations for the
years ending December 31, 2003 and 2002 of $205,000 and $(3,200,000),
respectively. Included in the net loss and loss from operations for the year
ended December 31, 2003 are asset writedowns of $346,060. Included in the net
loss and loss from operations for the year ended December 31, 2002 is a special
item of $1,074,324 for charges recorded related to the retirement benefits 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 a gain on the sale of marketable securities of $1,349,721.
Included in the net loss and loss from continuing operations for the year ended
December 31, 2002 is a deferred income tax expense of $484,423 resulting from
an increase in the valuation allowance against the Companys deferred tax
assets. Gross Margins.Gross margins for the fiscal years ended December 31, 2003
and 2002 were 22.9% and 18.6%, respectively. The Companys margins are low
because the majority of its revenues are from government contracts or
subcontracts, which inherently generate lower margins than product revenues.
The increase in the gross margin in 2003 compared to the prior year was
primarily due to higher gross margins on the DARPA contract (33.7% and 26.5% in
2003 and 2002, respectively) due in part to a higher utilization of direct
labor, a $245,000 reserve recorded in 2002 for a contract at the Systems
Division related to estimated cost overruns on that contract and higher gross
margins on the Microelectronics Division contract with GDAIS (19.9% and 17.1%
in 2003 and 2002, respectively) due to lower material costs in 2003 offset in
part by a contract cost overrun of $70,000 in 2003. The majority of the
Companys revenues in 2004 will be derived from government contracts or
subcontracts, so gross margins are expected to continue at similar levels as
they were in 2003. Selling, General and Administrative (SG&A).SG&A expenses for the fiscal
years ended December 31, 2003 and 2002 were $4,508,152 and $4,594,716,
respectively. Decreases in SG&A expenses in 2003 at the Systems Division of
$260,284 primarily due to staff and other cost reductions were offset in part
by higher ASIC marketing costs of approximately $119,000 and ISO 9000 costs of
approximately $64,000 incurred by the Microelectronics Division. 22




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##### Table of Contents



Research, Development and Engineering Program (RD&E).The Companys RD&E
consists of two types: customer-funded RD&E (U.S. government and other
companies) and company-funded RD&E. Both types of RD&E costs are expensed when
incurred. Customer-funded RD&E costs incurred, included in Contract Costs of
Sales, totaled $9,606,745 and $11,528,915 for the fiscal years ended December
31, 2003 and 2002, respectively. The decrease in customer-funded RD&E
expenditures for 2003 is related to a decrease in contract costs of $2,369,387
incurred related to the DARPA contract and decreases in two contracts at the
Systems Division of $399,972 offset in part by an increase in contract costs of
$847,189 related to the Navair Contract. Company-funded RD&E costs are included in Operating Expenses and totaled
$529,039 and $854,306 for the fiscal years ended December 31, 2003 and 2002,
respectively. Hence, total RD&E expenditures for those two years were
$10,135,784 and $12,383,221, respectively. Total RD&E expenditures as a
percentage of sales were 58.6% and 67.4% for the years ended December 31, 2003
and 2002, respectively. These expenditures are primarily related to the
continued development of CPL systems for the semiconductor industry and the
continued development of a high efficiency EUV generation system for advanced
semiconductor lithography. In February 2004, the Company received $8 million in
financing from Laurus. JMAR intends to use these funds to initiate and advance
new product research and development efforts and to acquire or license
products, technologies or businesses. Accordingly, the Company expects
company-funded RD&E to increase significantly in 2004. Discontinued Operations.The loss from operations of discontinued
operations of $1,396,749 for the year ended December 31, 2003 consists of
$457,413 related to the standard semiconductor products business and $939,336
related to the precision equipment business. The loss from operations of
discontinued operations of $5,839,367 for the year ended December 31, 2002
consists of $1,856,381 related to the standard semiconductor products business
and $3,982,986 related to the precision equipment business. In July 2003, the
Company sold JMAR Precision Systems, Inc. (JPSI) to several private
investors. The results of operations of the precision equipment business for
2003 through the sale date are reported in discontinued operations in 2003. The
decrease in the loss of operations of discontinued operations is primarily due
to the shutdown of the operations of the semiconductor products business in
2002 and the sale of JPSI in July 2003. The gain (loss) on disposal of discontinued
operations of $205,000 and $(3,200,000) for the years ended
December 31, 2003 and 2002, respectively, relates to the sale
of JPSI. Prior to December 31, 2001, as the level of business expected from the
standard semiconductor products business did not materialize, the Company
decided to take action to sublease the Irvine facility and move the standard
products business into a smaller facility and has recorded a reserve
against the Irvine facility lease. The Company does not yet have a subtenant
for this facility. The lease provides for rent and related expenses of
approximately $36,000 per month through August 2005. Gain on Sale of Marketable Securities.The gain on sale of marketable
securities of $1,349,721 for 2002 is related to the sale of 545,500 shares of
the Companys investment in Bede plc in January 2002. Interest and Other Expense.Interest and other expense for the years ended
December 31, 2003 and 2002 was $731,315 and $284,174, respectively. Interest
and other expense are higher for 2003 versus 2002 primarily due to the
financing transactions the Company entered into in 2003 (see Consolidated
Liquidity and Financial Condition below). Included in interest expense for the
year ended December 31, 2003 is $289,063 related to the beneficial conversion
feature associated with the securities issued in these financing transactions.
Also, interest expense for the years ended December 31, 2003 and 2002 includes
$171,358 and $48,159, respectively, related to the discounted liability for the
retirement in August 2002 of the Companys former Chairman and Chief Executive
Officer. Preferred Stock Dividends.Included in the loss applicable to common stock
in the Statement of Operations for the year ended December 31, 2003 are
preferred stock dividends of $942,903. This amount represents $78,479 of
preferred stock dividends paid or payable in cash and $864,424
related to the discount representing the beneficial
conversion feature of the redeemable convertible preferred stock and
the fair value of warrants issued in connection with the preferred
stock. 23




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##### Table of Contents



Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Revenues.Total revenues for the years ended December 31, 2002 and 2001
were $18,383,810 and $12,903,811, respectively, of which contract revenues
accounted for $17,543,334 and $12,033,271, respectively. Revenues by segment
for 2002 and 2001 were as follows: 2002
    
    2001Research Division
    
    $
    6,951,114
    
    
    $
    7,701,840Systems Division
    
    
    7,602,336
    
    
    
    2,151,154Microelectronics Division
    
    
    3,830,360
    
    
    
    3,050,817$
    18,383,810
    
    
    $
    12,903,811
 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 DARPA contract revenue
of $921,323. The Systems Division was acquired in August, 2001. In 2002, the
Systems Division received the Navair Contract discussed above, which accounted
for $2,435,168 in revenues in 2002. Losses.The net loss for the years ended December 31, 2002 and 2001 was
$(11,500,693) and $(14,701,534), respectively. The loss from continuing
operations for those same periods was $(2,461,326) and $(156,554),
respectively, while the loss from operations for those same periods was
$(3,109,854) and $(1,490,159), respectively. Included in the net loss for the
years ended December 31, 2002 and 2001 is a loss from operations of
discontinued operations of $(5,839,367) and $(14,544,980), respectively, and a
loss on disposal of discontinued operations for the year ending December 31,
2002 of $(3,200,000). Included in the net loss and loss from operations for the
year ended December 31, 2001 are asset writedowns of $226,899. Included in the
net loss and loss from operations for the year ended December 31, 2002 is a
special item of $1,074,324 for charges recorded related to the retirement
benefits 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
years ended December 31, 2002 and 2001 is a gain on the sale of marketable
securities of $1,349,721 and $1,189,273, respectively. Included in the net loss
and loss from continuing operations for the year ended December 31, 2002 is a
deferred income tax expense of $484,423 resulting from an increase in the
valuation allowance against the Companys deferred tax assets. Gross Margins.Gross margins for the fiscal years ended December 31, 2002
and 2001 were 18.6% and 27.1%, respectively. The decrease in the gross margin
in 2002 compared to 2001 was primarily due to the $245,000 reserve mentioned in
the Gross Margin section above and due to the Navair Contract having lower
margins due to its high subcontract component, and the Companys absorption of
some of the costs incurred due to limited funding on that contract. Selling, General and Administrative (SG&A).SG&A expenses for the fiscal
years ended December 31, 2002 and 2001 were $4,594,716 and $4,159,523,
respectively. The increase in SG&A expenses in 2002 compared to 2001 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. Research, Development and Engineering Program (RD&E).Customer-funded RD&E
costs included in Contract Costs of Sales, totaled
$11,528,915 and $7,035,286
for the fiscal years ended December 31, 2002 and 2001, respectively. The
increase in customer-funded RD&E expenditures for 2002 compared to 2001 is
related to an increase of $933,880 for the DARPA contract funding, and an
increase in contract costs of $3,559,749 incurred by the Systems Division
(approximately $2,346,000 of 24




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##### Table of Contents



which is related to the Navair Contract) which was acquired in August
2001. Company-funded RD&E costs totaled $854,306 and $602,980 for the fiscal
years ended December 31, 2002 and 2001, respectively. Hence, total RD&E
expenditures for those two years were $12,383,221 and $7,638,266, respectively.
Total RD&E expenditures as a percentage of sales were 67.4% and 59.2% for the
years ended December 31, 2002 and 2001, respectively. Discontinued Operations.The loss from operations of discontinued
operations of $5,839,367 for the year ended December 31, 2002 consists of
$1,856,381 related to the standard semiconductor products business and
$3,982,986 related to the precision equipment business. The loss from
operations of discontinued operations of $14,544,980 for the year ended
December 31, 2001 consists of $9,270,075 related to the standard semiconductor
products business and $5,274,905 related to the precision equipment business.
The decrease in the loss of operations of discontinued operations is primarily
due to the shutdown of the operations of the standard semiconductor product
business in 2002. The loss on disposal of discontinued operations of
$3,200,000 for the year ended December 31, 2002 relates to the
sale of JPSI. Gain on Sale of Marketable Securities.The gain on sale of marketable
securities of $1,349,721 and $1,189,273 for 2002 and 2001, respectively, is
related to the sale of 545,500 shares and 500,000 shares, respectively, of the
Companys investment in Bede plc in January 2002 and April 2001, respectively. Interest and Other Expense.Interest and other expense for the years ended
December 31, 2002 and 2001 was $284,174 and $107,950, 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.
Also, interest expense for the year ended December 31, 2002 includes $48,159
related to the discounted liability for the retirement in August 2002 of the
Companys former Chairman and Chief Executive Officer. Liquidity and Financial Condition Cash and cash equivalents at December 31, 2003 was $4,171,179. The
increase in unrestricted cash and cash equivalents from 2002 to 2003 of
$1,924,915 resulted primarily from proceeds from the issuance of preferred and
common stock of $6,441,232 and the conversion of $1,550,000 of restricted cash
to unrestricted cash (due to the termination of the line of credit with
Comerica Bank in March 2003) offset by cash used in continuing operations of
$3,579,238 primarily related to operating losses and a reduction in liabilities
and cash used in discontinued operations of $2,016,481. At December 31, 2003,
the Company had working capital of $2,427,166. JMARs operations will continue to use cash in 2004 for, among other
requirements, 1) product research and development efforts and to acquire or
license products, technologies or businesses; 2) temporary funding delays
related to government contracts; 3) corporate costs, primarily related to the
cost of being a public company; 4) facility costs for discontinued businesses;
5) preferred stock redemptions and dividends; and 6) other working capital
needs. As a result of the financing activity discussed below, management
believes that the Company has adequate resources to fund operations and working
capital requirements at least through December 31, 2004. 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. Working capital (deficit) as of December 31, 2003 and 2002 was
$2,427,166 and $(780,117), respectively. The increase in working capital is
primarily due to proceeds from the issuance of preferred stock of $5.5 million
and the conversion into common stock of $1,173,000 of the Companys line of
credit, offset in part by the classification as a current liability as of
December 31, 2003 of $1.2 million in notes owed to the former SAL noteholders
due in February 2004 and the Companys losses. In February 2004, the Company
repaid the full amount of the notes to the former SAL noteholders, plus accrued
interest, by retiring a total of $364,239 in notes and $3,034 in accrued
interest with the issuance of 118,121 shares of common stock valued at $3.11
per share and repaying the remaining amount of $835,761 in notes and accrued
interest of $6,961 with cash. 25




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##### Table of Contents



In March 2003, the Company entered into a Revolving Fixed Price
Convertible Note (Working Capital Line) with Laurus. The Working Capital Line
allows the Company to borrow from time-to-time up to 85% of eligible accounts
receivable of the Company to a maximum of $3 million. Advances in excess of
this formula are allowed, however, with the consent of Laurus. Laurus can
convert any portion of the principal outstanding to common stock at a fixed
price per share (Conversion Price) any time the market price of the Companys
common stock is in excess of the Conversion Price. The Company can convert a
portion of the principal outstanding to common stock at 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. The initial terms of the
Working Capital Line provided that after $2 million of conversions into equity,
the Conversion Price would be increased. The Conversion Price initially was
$.92, but was increased to $2.85 in January 2004 after $2 million of the
Working Capital Line had been converted. The interest rate on the Working Capital Line is equal to the prime rate
(4% at December 31, 2003) plus 0.75 percent, subject to a floor of 5.00
percent. Accrued interest is payable monthly. The Working Capital Line requires
that the Companys quick ratio, as defined, be 0.90 or higher. The quick ratio
is defined as the sum of cash and accounts receivable divided by the sum of
current liabilities, exclusive of current liabilities of discontinued
operations. The Companys quick ratio was 1.52 at December 31, 2003. As of
December 31, 2003, approximately $1.3 million was outstanding under the Working
Capital Line. The term of the Working Capital Line runs until March, 2006. The
available borrowings under the Working Capital Line were approximately $2.3
million at December 31, 2003, based on the amount of eligible accounts
receivable at that date, with approximately $941,000 unused at December 31,
2003. In 2003 and 2004, the Company sold the following series of Preferred Stock
to Laurus for cash: Converted in 2003
    
    Converted in 2004Conversion
    
    
    
    
    
    Shares
    
    
    
    
    
    SharesIssuance Date
    
    Series
    
    Amount
    
    Dividend
    
    Price
    
    Amount
    
    Issued
    
    Amount
    
    IssuedMarch, 2003
    
    
    A
    
    
    $
    1,000,000
    
    
    
    8
    %
    
    $
    0.88
    
    
    $
    1,000,000
    
    
    
    1,136,363
    
    
    
    
    
    
    
    March, 2003
    
    
    B
    
    
    $
    1,000,000
    
    
    
    3
    %
    
    $
    0.88
    
    
    $
    1,000,000
    
    
    
    1,136,364
    
    
    
    
    
    
    
    September, 2003
    
    
    C
    
    
    $
    1,500,000
    
    
    
    8
    %
    
    $
    2.08
    
    
    
    
    
    
    
    
    
    
    $
    1,500,000
    
    
    
    721,154December, 2003
    
    
    D
    
    
    $
    2,000,000
    
    
    
    8
    %
    
    $
    1.56
    
    
    
    
    
    
    
    
    
    
    $
    936,000
    
    
    
    600,000January, 2004
    
    
    E
    
    
    $
    1,500,000
    
    
    
    8
    %
    
    $
    2.85
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February, 2004
    
    
    F
    
    
    $
    2,000,000
    
    
    
    2
    %
    
    $
    3.11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February, 2004
    
    
    G
    
    
    $
    2,000,000
    
    
    
    2
    %
    
    $
    3.28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February, 2004
    
    
    H
    
    
    $
    4,000,000
    
    
    
    2
    %
    
    $
    3.47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The Series D, E, F, G and H Preferred Stock are redeemable in cash (or
common stock if the closing market price of the Companys common stock is 118%
of the Conversion Price or higher for the 11 trading days prior to the
redemption date) at various amounts and dates (see below under Commitments),
if not previously converted. Conversions to equity are offset against the
required repayments. Except for the conversion price, the conversion terms of
the Series D through H Preferred Stock are the same as the conversion terms of
the Working Capital Line. In connection with all of the above financing transactions with Laurus,
the Company issued warrants to Laurus to purchase a total of 1,390,000 shares
of common stock at prices ranging from $1.058 to $5.15. In addition, Laurus was
granted the right to receive a warrant to purchase one share of common stock at
$3.13 for every $20 of principal of the Working Capital Line converted to
equity in excess of the first $2 million up to a total of 50,000 shares. The shares of common stock issuable to Laurus under all of the preferred
stock and warrants described above have been included in registration
statements declared effective by the Securities and Exchange Commission. 26




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##### Table of Contents



In February, 2003, under a 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
Companys stockholders equity was $5,277,800 as of December 31, 2003.
In May, 2003, the Company transferred to the Nasdaq SmallCap Market, where it
is required to maintain no less than $2.5 million of stockholders equity to
retain its listing. Continued losses without increases in equity would cause
the Company to fall below this NASDAQ requirement, which would require it to
come into compliance or face delisting. The delisting of the Companys stock
could adversely affect its ability to raise funds in the future. The Company
believes that it has available to it several potential sources of capital to
meet NASDAQ listing standards, particularly the above-described financings. In February 2004 the Company received approximately $3.5 million in
additional contracts from General Dynamics. In addition, JMAR expects to
receive approximately $7 million in additional CPL contract funding from DARPA
and another $2.4 million in funds from NAVAIR. Commitments Future minimum annual commitments under bank and other debt agreements,
non-cancellable operating leases (net of subleases) and post-employment
benefits as of December 31, 2003 are as follows (unaudited): 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    TotalDebt
    
    $
    1,200,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,200,000Operating leases
    
    
    915,010
    
    
    
    496,277
    
    
    
    39,970
    
    
    
    
    
    
    
    
    
    
    
    1,451,257Post-employment benefits
    
    
    211,172
    
    
    
    211,172
    
    
    
    211,172
    
    
    
    211,172
    
    
    
    138,074
    
    
    
    982,762$
    2,326,182
    
    
    $
    707,449
    
    
    $
    251,142
    
    
    $
    211,172
    
    
    $
    138,074
    
    
    $
    3,634,019
 The Debt consisted of convertible notes (SAL Notes) issued in 2001 to
the former shareholders of SAL. The SAL Notes were repaid in February 2004,
plus accrued interest, by retiring a total of $364,239 in notes and $3,034 in
accrued interest with the issuance of 118,121 shares of common stock valued at
$3.11 per share and repaying the remaining amount of $835,761 in notes and
accrued interest of $6,961 with cash. The operating leases are primarily for
office facilities. The post-employment benefits are presented at the amount to
be paid, while the liability has been discounted for financial reporting
purposes and are retirement benefits for the Companys prior Chairman and Chief
Executive Officer who retired in August 2002. Excluded from the above table are redemption obligations under Series C,
D, E, F, G and H Preferred Stock in the gross amount of
$13 million. The Series E, F, G and H Preferred Stock was
issued subsequent to December 31, 2003. Also excluded from the above table is the Companys $3 million
Working Capital Line. The gross amount of the Working Capital Line was
approximately $1.3 million at December 31, 2003. If not previously converted,
the Series C through H Preferred Stock and Working Capital Line
are redeemable or payable as follows: Converted
    
    Scheduled RedemptionsDescription
    
    Amount
    
    in 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    TotalSeries C Preferred
    
    $
    1.5M
    
    
    $
    1,500,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Series D Preferred
    
    $
    2.0M
    
    
    $
    936,000
    
    
    
    
    
    
    
    1,064,000
    
    
    
    
    
    
    
    
    
    
    
    1,064,000Series E Preferred
    
    $
    1.5M
    
    
    
    
    
    
    
    416,667
    
    
    
    1,000,000
    
    
    
    83,333
    
    
    
    
    
    
    
    1,500,000Series F Preferred
    
    $
    2.0M
    
    
    
    
    
    
    
    
    
    
    
    450,000
    
    
    
    450,000
    
    
    
    1,100,000
    
    
    
    2,000,000Series G Preferred
    
    $
    2.0M
    
    
    
    
    
    
    
    
    
    
    
    450,000
    
    
    
    450,000
    
    
    
    1,100,000
    
    
    
    2,000,000Series H Preferred
    
    $
    4.0M
    
    
    
    
    
    
    
    
    
    
    
    900,000
    
    
    
    900,000
    
    
    
    2,200,000
    
    
    
    4,000,000Working Capital Line
    
    $
    1.3M
    
    
    
    1,254,500
    
    
    
    64,708
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,708$
    481,375
    
    
    $
    3,864,000
    
    
    $
    1,883,333
    
    
    $
    4,400,000
    
    
    $
    10,628,708
 27




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Under the Merger Agreement entered into with the former shareholders and
creditors of SAL, Inc. (now operating as the Companys Systems Division), those
persons 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 Companys
CPL beta source is integrated with the stepper at the Systems Division in
Vermont and has satisfied certain negotiated source performance
criteria. In successful tests of the integrated system in
March 2004, the source demonstrated improved reliability and
performance; however, the
specific source performance criteria specified in the Merger
Agreement have not yet been met. If issued, the
$500,000 in Convertible Notes will be due 24 months after issuance and will
have a conversion price equal to 120% of the average of the closing prices for
the ten days prior to issuance. The third earnout condition can result in payment of up to 354,736 JMAR
shares and up to $1.2 million in convertible notes upon receipt by the Company
of a qualifying order for a CPL system from a commercial customer and delivery
to the customer. Under the Merger Agreement, the deadline for receipt of this
order is 180 days after the CPL source is integrated with the stepper at the
Systems Division in Vermont and has satisfied the above mentioned source
performance criteria. If earned, this earnout payment is payable 30 days after
delivery and acceptance of the system by the customer. At December 31, 2003, the Company had approximately $57 million of Federal
net operating loss carryforwards subject to certain annual limitations, which
expire from 2004 through 2023. To the extent the Company has taxable income in
the future, these carryforwards may be used by the Company to reduce its cash
outlay for taxes. Critical Accounting Policies and Estimates Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses JMARs consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments,
including those related to revenues, allowances for doubtful accounts,
inventory reserves, goodwill and intangible assets, deferred taxes, litigation
accrual, warranty reserve and stock based compensation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Revenues Product revenues are recognized when the product is shipped FOB shipping
point, all risks of ownership have passed to the customer and the Company has
performed all obligations in accordance with Staff Accounting Bulletin No 101,
Revenue Recognition in Financial Statements (SAB No. 101). Contract revenues are recognized based on the percentage of completion
method wherein income is recognized pro-rata over the life of the contract
based on the ratio of total incurred costs to anticipated total costs of the
contract. The program manager prepares a statement of work, schedule and 28




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##### Table of Contents



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. 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. Patent costs capitalized
are amortized over ten years, and other intangible assets are amortized over
not more than five years. Patent costs capitalized are reviewed quarterly for
realizability. Beneficial Conversion Feature In accordance with Financial Accounting Standards Board (FASB) Emerging
Issues Task Force Issue (EITF) No. 98-5 and FASB EITF No. 00-27, the Company
records a beneficial conversion feature (BCF) related to the issuance of
convertible preferred stock and convertible debt that have conversion features
at fixed rates that are in-the-money when issued and records the fair value of
warrants issued with those instruments. The BCF for the convertible instruments
and fair value of warrants is recognized and measured by allocating a portion
of the proceeds to additional paid-in capital and as a discount to the
convertible instrument equal to the intrinsic value of the conversion features.
Such amount is calculated at the issuance date as the difference between the
conversion price and the relative fair value of the common stock and warrants
into which the security is convertible or exercisable. For convertible preferred stock and related warrants, the recorded
discount is recognized as a dividend from the date of issuance to the earlier
of the redemption dates or the conversion dates using the effective yield
method. For convertible debt and related warrants, the recorded discount is
recognized as interest expense using the effective yield method based on the
life of the debt, over the period from the issuance date to the conversion
dates. 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. 29




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##### Table of Contents



Stock-Based Compensation Plans The Company accounts for its stock option and warrant plans under APB
Opinion No. 25, using the intrinsic value method, under which no compensation
cost has been recognized for issuances to employees. Options and warrants
issued to non-employees (other than directors) are accounted for based on the
fair value of the equity instrument issued. The fair value is
calculated based
on the Black-Scholes pricing model. 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 new products into the commercial marketplace or to apply those
products, projects or processes to alternative applications are forward-looking
statements. These forward-looking statements 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. In addition to the several risks and uncertainties described in the
Business Section and in this Managements Discussion and Analysis of Financial
Condition and Results of Operations, additional risks and uncertainties include
the following:  
    
    the possible lack of funds to continue development and
commercialization of our CPL products due to delays in funding or
cancellation of government contracts;
    
    possible 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;
    
    the possible inability to develop, manufacture and market, in a
timely manner, innovative products that meet the needs of new customers
and new industries, which will require the Company to increase its
product engineering, manufacturing and sales and marketing
infrastructure;
    
    the possible inability to achieve the levels of power and
reliability in its CPL source required to enter the GaAs, contact hole
and mainstream silicon markets, despite the expenditure of additional
significant funds;
    
    the possible delay in the near-term recovery of the GaAs chip
market resulting in further delays in the demand for the increased
throughput offered by the Companys CPL system;
    
    despite substantial technical, marketing and sales efforts and the
expenditure of significant funds by the Company, the failure to
convince semiconductor manufacturers to adopt the Companys CPL
technology over other existing and possible future alternative
lithography technologies, including the use of electron beam systems
for GaAs chip manufacturing, 193 immersion lithography for silicon
contact hole processing and EUV lithography for future mainstream
silicon manufacturing;
    
    the possible failure of the Companys other new product development
efforts, which can involve lengthy and capital intensive programs that
are subject to many unforeseen risks, delays, problems and costs and
uncertainties as to the markets demand for such new products;
    
    the possible failure to form alliances with stepper, mask and
resist companies to develop the appropriate infrastructure to support
the Companys CPL lithography technology;
    
    the possible lack of availability of critical components from third
party suppliers, including laser diodes, x-ray collimators, x-ray masks
and photo-resist, or the inability to obtain such components at
acceptable costs;
    
    possible fluctuations in margins, or the failure to lower
manufacturing costs sufficiently to achieve acceptable margins;
    
    the possible failure of pending patents to be issued and
uncertainties as to the breadth or degree of protection of existing or
future patents in the fields of x-ray lithography and EUV light
sources; and
    
    other risks detailed in the Companys other filings with the
Securities and Exchange Commission. 30




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##### Table of Contents



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 Certified Public Accountants are
set forth at the end of this Report on pages 35 through 60. 
 Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 
 Item 9A. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is
accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and the Companys Chief Financial Officer, of the
effectiveness as of December 31, 2003 of the design and operation of the
Companys disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)). Based on such evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures were effective in timely alerting them to material information
required to be included in the Companys reports filed or submitted under the
Exchange Act of 1934. There have been no significant changes in the Companys internal control
over financial reporting during the quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 
 PART III 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is set forth in the 2004 Proxy
Statement under the captions Election of Directors,
Section 16(a) Beneficial Ownership Reporting
Compliance and The Audit Committee and is incorporated herein by
reference except that the information regarding our executive officers is
included in Part I of this Form 10-K under the heading Executive Officers of
the Registrant. The Company has adopted a Code of Business Conduct and Ethics in
compliance with the applicable rules of the Securities and Exchange Commission
that applies to all employees, including all officers, and our non-employee
directors, and a Code of Ethics for our Chief Executive Officer,
Division General Managers and all senior
financial 31




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##### Table of Contents



officers, including the Chief Financial Officer and principal accounting
officer. The Company has filed a copy of these policies as exhibits to this Form
10-K. In the event we amend or waive any of the provisions of the Code of
Ethics, we intend to disclose the same on the Companys website at
http://www.jmar.com under the caption Corporate Governance  Code of Ethics. 
 Item 11. EXECUTIVE COMPENSATION The information required by Item 11 is set forth in the 2004 Proxy
Statement under the caption Executive Compensation and is incorporated herein
by this reference. 
 Item 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS The information required by Item 12 is set forth in the 2004 Proxy
Statement under the captions Information About JMAR Stock
Ownership and Equity Compensation Plan Information 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 2004 Proxy
Statement under the caption Certain Transactions with
Management and Others
and is incorporated herein by this reference. 
 Item 14. PRINCIPAL AUDITOR FEES AND SERVICES The information required by Item 14 is set forth in the 2004 Proxy
Statement under the captions Report of the Audit
Committee, Audit Fees, Audit-Related
Fees, Tax Fees, All Other Fees and Audit Committee Pre-Approval of Audit and
Permissable Non-Audit Services of Independent Auditors and is
incorporated herein by this reference. 
 PART IV 
 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 Certified Public Accountants
    
    
    35Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    36Consolidated Statements of Operations for the Years
Ended December 31, 2003, 2002 and 2001
    
    
    37Consolidated Statements of Comprehensive Loss for the Years
Ended December 31, 2003, 2002 and 2001
    
    
    38Consolidated Statements of
Stockholders Equity for the Years Ended December 31, 2003, 2002 and 2001
    
    
    39Consolidated Statements of Cash
Flows for the Years Ended December 31, 2003, 2002 and 2001
    
    
    40Notes to Consolidated Financial Statements
    
    
    41
  2.
    
    Financial Statement Schedule. The following financial
statement schedule of JMAR Technologies, Inc., for the years ended
December 31, 2003, 2002 and 2001 is filed as part of this Report and
should be read in conjunction with the Consolidated Financial
Statements of JMAR Technologies, Inc. 32




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##### Table of Contents



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 listed in the accompanying Exhibit
Index on pages 63 to 66 are filed as part of this Form 10-K.  (b)
    
    Reports on Form 8-K The Company filed a Report on Form 8-K on November 20, 2003 related to the
announcement of its financial results for the quarter ended September 30, 2003. 33




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##### Table of Contents



Index to Consolidated Financial Statements Report of Independent Certified Public Accountants
    
    
    35Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    36Consolidated Statements of Operations for the Years
Ended December 31, 2003, 2002 and 2001
    
    
    37Consolidated Statements of Comprehensive Loss for the Years
Ended December 31, 2003, 2002 and 2001
    
    
    38Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2003, 2002 and 2001
    
    
    39Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001
    
    
    40Notes to Consolidated Financial Statements
    
    
    41
 34




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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Shareholders  We have audited the accompanying consolidated balance sheets of JMAR
Technologies, Inc. (a Delaware corporation) as of December 31, 2003 and 2002,
and the related consolidated statements of operations, comprehensive loss, stockholders equity and cash flows for each of the three years in the
period ended December 31, 2003. 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, 2003 and 2002, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 2003, 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, 2003. 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. GRANT THORNTON LLP Irvine, California  35




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2003 and 2002 2003
    
    2002ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,171,179
    
    
    $
    2,246,264Restricted cash
    
    
    
    
    
    
    1,550,000Accounts receivable, net
    
    
    2,802,025
    
    
    
    2,894,393Inventories
    
    
    307,152
    
    
    
    389,467Current assets held for sale
    
    
    
    
    
    
    1,349,758Prepaid expenses and other
    
    
    695,170
    
    
    
    524,863Total current assets
    
    
    7,975,526
    
    
    
    8,954,745Property and equipment, net
    
    
    791,773
    
    
    
    1,248,198Intangible assets, net
    
    
    684,041
    
    
    
    930,056Other assets
    
    
    250,936
    
    
    
    197,754Goodwill, net
    
    
    3,790,907
    
    
    
    3,790,907TOTAL ASSETS
    
    $
    13,493,183
    
    
    $
    15,121,660LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,102,873
    
    
    $
    1,864,405Accrued liabilities
    
    
    561,716
    
    
    
    1,558,307Accrued payroll and related costs
    
    
    582,357
    
    
    
    797,987Customer deposits
    
    
    
    
    
    
    832,607Line of credit and notes payable, net of discount
    
    
    2,340,431
    
    
    
    1,556,405Current liabilities of discontinued operations, including notes payable
    
    
    960,983
    
    
    
    3,125,151Total current liabilities
    
    
    5,548,360
    
    
    
    9,734,862Notes payable and other long-term liabilities, net of current portion
    
    
    449,873
    
    
    
    1,708,804Redeemable convertible preferred stock, 350,000 shares issued and outstanding as of
December 31, 2003
    
    
    2,217,150
    
    
    
    Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; 350,000 issued and
outstanding as of December 31, 2003 included in redeemable convertible
preferred stock above, and none issued and outstanding as of December 31,
2002
    
    
    
    
    
    
    Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 27,654,845 shares as of December 31, 2003 and
23,852,024 shares as of December 31, 2002
    
    
    276,548
    
    
    
    238,520Additional paid-in capital
    
    
    62,420,135
    
    
    
    56,636,991Accumulated deficit
    
    
    (57,418,883
    )
    
    
    (53,197,517
    )Total stockholders equity
    
    
    5,277,800
    
    
    
    3,677,994TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    13,493,183
    
    
    $
    15,121,660
 The accompanying notes to these consolidated financial statements are an integral part of these consolidated balance sheets. 36




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Contract sales
    
    $
    16,740,905
    
    
    $
    17,543,334
    
    
    $
    12,033,271Product sales
    
    
    555,603
    
    
    
    840,476
    
    
    
    870,540Total revenues
    
    
    17,296,508
    
    
    
    18,383,810
    
    
    
    12,903,811Contract costs of sales
    
    
    13,055,237
    
    
    
    14,548,712
    
    
    
    9,092,586Product costs of sales
    
    
    276,644
    
    
    
    421,606
    
    
    
    311,982Total costs of sales
    
    
    13,331,881
    
    
    
    14,970,318
    
    
    
    9,404,568Gross profit
    
    
    3,964,627
    
    
    
    3,413,492
    
    
    
    3,499,243Operating expenses:Selling, general and administrative
    
    
    4,508,152
    
    
    
    4,594,716
    
    
    
    4,159,523Research and development
    
    
    529,039
    
    
    
    854,306
    
    
    
    602,980Asset writedowns and special item
    
    
    346,060
    
    
    
    1,074,324
    
    
    
    226,899Total operating expenses
    
    
    5,383,251
    
    
    
    6,523,346
    
    
    
    4,989,402Loss from operations
    
    
    (1,418,624
    )
    
    
    (3,109,854
    )
    
    
    (1,490,159
    )Realized gain on sale of marketable securities
    
    
    
    
    
    
    1,349,721
    
    
    
    1,189,273Interest and other income
    
    
    63,225
    
    
    
    67,404
    
    
    
    252,282Interest and other expense
    
    
    (731,315
    )
    
    
    (284,174
    )
    
    
    (107,950
    )Loss from continuing operations before
income taxes
    
    
    (2,086,714
    )
    
    
    (1,976,903
    )
    
    
    (156,554
    )Income tax expense
    
    
    
    
    
    
    (484,423
    )
    
    
    Loss from continuing operations
    
    
    (2,086,714
    )
    
    
    (2,461,326
    )
    
    
    (156,554
    )Discontinued operations:Loss from operations of discontinued operations
    
    
    (1,396,749
    )
    
    
    (5,839,367
    )
    
    
    (14,544,980
    )Gain (loss) on disposal of discontinued operations
    
    
    205,000
    
    
    
    (3,200,000
    )
    
    
    Net loss
    
    
    (3,278,463
    )
    
    
    (11,500,693
    )
    
    
    (14,701,534
    )Deemed preferred stock dividends
    
    
    (942,903
    )
    
    
    
    
    
    
    Loss applicable to common stock
    
    $
    (4,221,366
    )
    
    $
    (11,500,693
    )
    
    $
    (14,701,534
    )Basic and diluted loss per share:Loss per share from continuing operations
    
    $
    (0.12
    )
    
    $
    (0.11
    )
    
    $
    (0.01
    )Loss per share from discontinued operations
    
    
    (0.04
    )
    
    
    (0.38
    )
    
    
    (0.64
    )Basic and diluted loss per share applicable to common stock
    
    $
    (0.16
    )
    
    $
    (0.49
    )
    
    $
    (0.65
    )Shares used in computation of basic and diluted loss per share
    
    
    25,618,296
    
    
    
    23,618,169
    
    
    
    22,484,905
 The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements. 37




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Net loss
    
    $
    (3,278,463
    )
    
    $
    (11,500,693
    )
    
    $
    (14,701,534
    )Other comprehensive loss:Holding gains (losses)
    
    
    
    
    
    
    (75,143
    )
    
    
    24,797Reclassification adjustment for gains included in net loss
    
    
    
    
    
    
    (1,349,721
    )
    
    
    (1,189,273
    )Other comprehensive loss
    
    
    
    
    
    
    (1,424,864
    )
    
    
    (1,164,476
    )Comprehensive loss
    
    $
    (3,278,463
    )
    
    $
    (12,925,557
    )
    
    $
    (15,866,010
    )
 The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements. 38




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2003, 2002 and 2001 AccumulatedCommon Stock
    
    Preferred Stock
    
    Additional
    
    Other  Comprehensive
    
    Accumulated
    
    TotalShares
    
    Amount
    
    Shares
    
    Amount
    
    Paid-in
    
    Income
    
    Deficit
    
    EquityBalance, December 31, 2000
    
    
    22,224,650
    
    
    $
    222,247
    
    
    
    
    
    
    $
    
    
    
    $
    52,628,372
    
    
    $
    2,589,340
    
    
    $
    (26,995,290
    )
    
    $
    28,444,669Stock issued upon exercise of
warrants and options
    
    
    26,013
    
    
    
    260
    
    
    
    
    
    
    
    
    
    
    
    44,652
    
    
    
    
    
    
    
    
    
    
    
    44,912Issuance of stock for services
    
    
    1,571
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    4,884
    
    
    
    
    
    
    
    
    
    
    
    4,900Issuance of stock related to
acquisition of Continuum
Engineering
    
    
    807
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    3,808
    
    
    
    
    
    
    
    
    
    
    
    3,816Repurchase of stock
    
    
    (18,700
    )
    
    
    (187
    )
    
    
    
    
    
    
    
    
    
    
    (55,456
    )
    
    
    
    
    
    
    
    
    
    
    (55,643
    )Change in unrealized gain on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,164,476
    )
    
    
    
    
    
    
    (1,164,476
    )Issuance of stock related to
legal settlement
    
    
    3,000
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    10,316
    
    
    
    
    
    
    
    
    
    
    
    10,346Issuance of stock related to
acquisition of SAL
    
    
    603,051
    
    
    
    6,030
    
    
    
    
    
    
    
    
    
    
    
    1,706,635
    
    
    
    
    
    
    
    
    
    
    
    1,712,665Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,701,534
    )
    
    
    (14,701,534
    )Balance, December 31, 2001
    
    
    22,840,392
    
    
    
    228,404
    
    
    
    
    
    
    
    
    
    
    
    54,343,211
    
    
    
    1,424,864
    
    
    
    (41,696,824
    )
    
    
    14,299,655Issuance of stock for services
    
    
    11,632
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    11,053
    
    
    
    
    
    
    
    
    
    
    
    11,169Change in unrealized gain on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,424,864
    )
    
    
    
    
    
    
    (1,424,864
    )Issuance of common stock and
warrants
    
    
    1,000,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    1,769,920
    
    
    
    
    
    
    
    
    
    
    
    1,779,920Modification to existing option
and warrant terms
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    512,807
    
    
    
    
    
    
    
    
    
    
    
    512,807Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,500,693
    )
    
    
    (11,500,693
    )Balance, December 31, 2002
    
    
    23,852,024
    
    
    
    238,520
    
    
    
    
    
    
    
    
    
    
    
    56,636,991
    
    
    
    
    
    
    
    (53,197,517
    )
    
    
    3,677,994Issuance of stock and warrants
for services
    
    
    11,026
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    42,512
    
    
    
    
    
    
    
    
    
    
    
    42,622Issuance of common stock from
preferred stock conversions (net of costs of $46,267)
    
    
    2,272,727
    
    
    
    22,727
    
    
    
    
    
    
    
    
    
    
    
    1,931,006
    
    
    
    
    
    
    
    
    
    
    
    1,953,733Issuance of common stock from
working capital line
conversions
    
    
    1,275,000
    
    
    
    12,750
    
    
    
    
    
    
    
    
    
    
    
    1,160,250
    
    
    
    
    
    
    
    
    
    
    
    1,173,000Beneficial conversion feature of
preferred stock and working
capital line, and fair value of
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,262,240
    
    
    
    
    
    
    
    
    
    
    
    2,262,240Issuance of common stock and
warrants for cash
    
    
    100,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    100,000Stock issued upon exercise of
warrant
    
    
    144,068
    
    
    
    1,441
    
    
    
    
    
    
    
    
    
    
    
    288,136
    
    
    
    
    
    
    
    
    
    
    
    289,577Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (942,903
    )
    
    
    (942,903
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,278,463
    )
    
    
    (3,278,463
    )Balance,
December 31, 2003
    
    
    27,654,845
    
    
    $
    276,548
    
    
    
    
    
    
    $
    
    
    
    $
    62,420,135
    
    
    $
    
    
    
    $
    (57,418,883
    )
    
    $
    5,277,800
 The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements. 39




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Loss from continuing operations
    
    $
    (2,086,714
    )
    
    $
    (2,461,326
    )
    
    $
    (156,554
    )Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) continuing operating activities:Depreciation, amortization and debt discount
    
    
    938,718
    
    
    
    777,317
    
    
    
    478,042Services received in exchange for
common stock or warrants
    
    
    42,622
    
    
    
    11,169
    
    
    
    15,246Gain on sale of marketable securities
    
    
    
    
    
    
    (1,349,721
    )
    
    
    (1,189,273
    )Asset writedowns and special item
    
    
    346,060
    
    
    
    512,807
    
    
    
    226,899Change in assets and liabilities:Accounts receivable, net
    
    
    92,368
    
    
    
    1,307,241
    
    
    
    (425,747
    )Inventories
    
    
    82,315
    
    
    
    (94,983
    )
    
    
    (9,908
    )Prepaid expenses and other
    
    
    (80,051
    )
    
    
    (93,534
    )
    
    
    (44,970
    )Other assets
    
    
    (53,182
    )
    
    
    484,423
    
    
    
    (86,450
    )Customer deposits
    
    
    (832,607
    )
    
    
    (647,779
    )
    
    
    1,480,386Accounts payable and accrued liabilities
    
    
    (2,028,767
    )
    
    
    1,078,871
    
    
    
    344,091Net cash provided by (used in) continuing operations operating
activities
    
    
    (3,579,238
    )
    
    
    (475,515
    )
    
    
    631,762Loss from discontinued operations
    
    
    (1,191,749
    )
    
    
    (9,039,367
    )
    
    
    (14,544,980
    )Changes in net assets and liabilities of discontinued operations
    
    
    (824,732
    )
    
    
    5,143,770
    
    
    
    10,474,627Net cash used in discontinued operations
    
    
    (2,016,481
    )
    
    
    (3,895,597
    )
    
    
    (4,070,353
    )Net cash used in operating activities
    
    
    (5,595,719
    )
    
    
    (4,371,112
    )
    
    
    (3,438,591
    )Cash flows from investing activities:Proceeds from sale of marketable securities
    
    
    
    
    
    
    1,399,746
    
    
    
    1,207,923Capital expenditures
    
    
    (123,393
    )
    
    
    (393,564
    )
    
    
    (394,255
    )Intangible assets, other assets and goodwill
    
    
    (272,304
    )
    
    
    (204,157
    )
    
    
    (128,872
    )Payments received on notes receivable
    
    
    
    
    
    
    
    
    
    
    7,738Payment for purchase of JSAL, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (1,112,309
    )Net cash provided by (used in) investing activities
    
    
    (395,697
    )
    
    
    802,025
    
    
    
    (419,775
    )Cash flows from financing activities:Net proceeds from the issuance of preferred and common stock
    
    
    6,441,232
    
    
    
    1,779,920
    
    
    
    Net borrowings (payments) under line of credit
    
    
    (285,999
    )
    
    
    (1,450,000
    )
    
    
    1,900,000(Increase) decrease in restricted cash
    
    
    1,550,000
    
    
    
    1,450,000
    
    
    
    (3,000,000
    )Cash
payments of preferred stock dividends
    
    
    (78,479
    )
    
    
    
    
    
    
    Payments of notes payable and other long-term liabilities
    
    
    
    
    
    
    (41,463
    )
    
    
    (1,386
    )Increase in notes payable and other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    35,000Repurchases of stock
    
    
    
    
    
    
    
    
    
    
    (55,643
    )Net proceeds from the exercise of options and warrants
    
    
    289,577
    
    
    
    
    
    
    
    44,912Net cash provided by (used in) financing activities
    
    
    7,916,331
    
    
    
    1,738,457
    
    
    
    (1,077,117
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,924,915
    
    
    
    (1,830,630
    )
    
    
    (4,935,483
    )Cash and cash equivalents, beginning of period
    
    
    2,246,264
    
    
    
    4,076,894
    
    
    
    9,012,377Cash and cash equivalents, end of period
    
    $
    4,171,179
    
    
    $
    2,246,264
    
    
    $
    4,076,894Cash paid for interest
    
    $
    314,218
    
    
    $
    183,466
    
    
    $
    106,176
 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 807 ($3,816) earn-out shares were
issued in 2001 (see Note 3). During the year ended December 31, 2003, the
holder of Series A and B Convertible Preferred Stock converted $2 million of
the preferred stock into 2,272,727 shares of common stock of the Company (see
Note 11). In addition, during the year ended December 31, 2003, $1,173,000 of
the Companys working capital line of credit was converted into 1,275,000
shares of common stock of the Company (see Note 8). In 2003, the
Company recorded $864,424 related to the discount representing the
beneficial conversion feature of the redeemable convertible preferred
stock and the fair value of warrants issued in connection with the
preferred stock (see Note 11). The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements. 40




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003 and 2002  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. JMAR Technologies, Inc. develops, manufactures, and supports advanced
laser, automated alignment and positioning, and sensor systems for applications
in semiconductor, biotech, homeland security and nanotechnology markets. The U.S.
Department of Defense is the principal source of funds for the Companys
Collimated Plasma Lithography (CPL) light source, X-ray stepper systems, and
X-ray mask research and development programs. JMAR also provides X-ray steppers
and services to the University of Wisconsins Center for Nanotechnology, to BAE
Systems in New Hampshire, and to others. In addition to the development of
nanolithography tools, JMAR provides semiconductor fabrication process
integration and maintenance support to the Department of Defenses Defense
Microelectronics Activity in Sacramento, California. In the first quarter of 2002, the Company decided to discontinue the
standard semiconductor products business and shift more of its resources to
accelerate the market entry of its CPL products. Also, in furtherance of its
efforts to focus its resources on its CPL business, during the later half of
2002, the Company concluded that its precision equipment business did not fit
with the strategic direction of the Companys CPL business area and that the
markets for that business products would continue to be slow in the near term.
Therefore, in December, 2002, the Company decided to initiate the process of
selling the precision equipment business and, in July 2003, the Company
completed the sale of that business. The standard semiconductor products business and the precision equipment
business have been accounted for in the accompanying consolidated financial
statements as discontinued operations (see Note 9).  2.
    
    Summary of Significant Accounting Policiesa.
    
    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 includes $1,550,000 as
compensating balance for the Companys line of credit with Comerica Bank which was terminated in March 2003 (see Note 8).  b.
    
    Fair Value of Financial Instruments The carrying value of certain of the Companys financial instruments,
including accounts receivable, accounts payable and accrued expenses,
approximates fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of its notes payable, capital lease obligations and borrowings under the
Companys line of credit approximates fair value.  c.
    
    Pervasiveness of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. 41




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  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. 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.
    
    Goodwill and 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.  h.
    
    Intangible Assets Patent costs are amortized over ten years, and other intangible assets are
amortized over not more than five years. Accumulated amortization of intangible
assets was $784,083 and $604,771 at December 31, 2003 and 2002, respectively.
Patent costs capitalized are reviewed quarterly for realizability.  i.
    
    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. 42




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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.  j.
    
    Marketable Securities Marketable securities are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, which
requires that the Company determine the appropriate classification of
marketable securities at the time of purchase based on managements intent.
Available for sale marketable securities are stated at fair value, with net
unrealized gains or losses, if any, net of tax, reported as a separate
component of stockholders equity. Realized gains or losses from the sale of
marketable securities are included in the accompanying Statements of Operations
while unrealized gains (losses) are presented in the Consolidated Statement of
Comprehensive Loss.  k.
    
    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). The majority of
the Companys revenues are contract revenues, which 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. Reimbursable or recoverable general and administrative (G&A) costs are
charged to G&A expense as incurred. Estimated losses are fully charged to operations when identified.  l.
    
    Beneficial Conversion Feature In accordance with Financial Accounting Standards Board (FASB) Emerging
Issues Task Force Issue (EITF) No. 98-5 and EITF
No. 00-27, the Company records a beneficial conversion feature
(BCF) related to the issuance of convertible preferred stock and convertible
debt that have conversion features at fixed rates that are in-the-money when
issued and records the fair value of warrants issued with those instruments.
The BCF for the convertible instruments and fair value of warrants is
recognized and measured by allocating a portion of the proceeds to additional
paid-in capital and as a discount to the convertible instrument equal to the
intrinsic value of the conversion features. Such amount is calculated at the
issuance date as the difference between the conversion price and the relative
fair value of the common stock and warrants into which the security is
convertible or exercisable. For convertible preferred stock and related warrants, the recorded
discount is recognized as a dividend from the date of issuance to the earlier
of the redemption dates or the conversion dates using the effective yield
method. For convertible debt and related warrants, the recorded discount is
recognized as interest expense using the effective yield method based on the
life of the debt, over the period from the issuance date to the conversion
dates.  m.
    
    Earnings Per Share The Company accounts for earnings per share in accordance with SFAS No.
128, Earnings per Share. Basic earnings per common share were computed by
dividing loss applicable to common stock by the weighted average number of
shares of common stock outstanding during the year. For the years ended
December 31, 2003, 2002 and 2001, the denominator in the diluted loss per share
computation was the same as the denominator for basic loss per share due to
antidilutive effects of the Companys 43




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) warrants, stock options, convertible debt
and convertible preferred stock. As of December 31, 2003, 2002 and 2001, the
Company had shares issuable under outstanding warrants, stock options,
convertible debt and convertible preferred stock of 8,124,184, 4,647,075 and 4,013,976,
respectively, all of which are antidilutive and were excluded from the
computation of diluted loss per share.  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 .
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 computed
using the Black-Scholes pricing model. The resulting value is amortized over
the service period. The Company accounts for these plans under APB Opinion No. 25 using the
intrinsic value method, 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 loss applicable to common stock and
loss per share would have been the following pro forma amounts (unaudited): 2003
    
    
    
    2002
    
    
    
    2001Loss applicable to common stock:
    
    As Reported
    
    $
    (4,221,366
    )
    
    $
    (11,500,693
    )
    
    $
    (14,701,534
    )Pro Forma
    
    
    (5,249,506
    )
    
    
    (13,441,692
    )
    
    
    (16,415,610
    )Basic and diluted
loss per share:
    
    As Reported
    
    
    (0.16
    )
    
    
    (0.49
    )
    
    
    (0.65
    )Pro Forma
    
    
    (0.20
    )
    
    
    (0.57
    )
    
    
    (0.73
    )
 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 2001, 2002 and 2003: risk-free
interest rate of approximately 2.74 percent in 2003, 4 percent in 2002 and 6
percent in 2001; expected dividend yields of 0 percent and expected lives of 6
years. For grants in 2003, 2002 and 2001, the expected volatility used was 275
percent, 142 percent, 191 percent, respectively.  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
and 2001 results from changes in the value of the Companys investment in Bede
plc.  p.
    
    Reclassifications Certain reclassifications have been made to the prior year financial
statements to conform with the 2003 presentation.  q.
    
    Recent Accounting Pronouncements In September 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 44




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Reporting by Oil and Gas Producing Companies, and is effective for
financial statements issued for fiscal years beginning after September 15,
2002. The Company has implemented SFAS No. 143 effective January 1, 2003. The
impact of such adoption did not have a material effect on the Companys
financial statements. Statement of Financial Accounting Standards No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146
addresses accounting and reporting costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. This statement requires that a liability for a cost
associated with an exit or disposal activity shall be recognized and measured
initially at its fair value in the period which the liability is incurred. This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company has implemented SFAS No. 146 effective January
1, 2003. The impact of such adoption did not have a material effect on the
Companys financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of SFAS No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of SFAS
No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company has implemented SFAS No. 148
effective January 1, 2003 regarding disclosure requirements for condensed
financial statements for interim periods. The FASB has issued Interpretation No. 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 as of 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 September
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The implementation of this
Interpretation did not have a material effect on the Companys financial
statements. 45




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In November 2002, the EITF reached a consensus on Issue 00-21, titled
Accounting for Revenue Arrangements with Multiple Deliverables, which
addresses how to account for arrangements that involve the delivery or
performance of multiple products, services, and/or rights to use assets.
Revenue arrangements with multiple deliverables are divided into separate units of
accounting if the deliverables in the arrangement meet the following criteria:
(1) the delivered item has value to the customer on a standalone basis; (2)
there is objective and reliable evidence of the fair value of undelivered
items; and (3) delivery of any undelivered item is probable. Arrangement
consideration should be allocated among the separate units of accounting based
on their relative fair values, with the amount allocated to the delivered item
being limited to the amount that is not contingent on the delivery of
additional items or meeting other specified performance conditions. The new
standard is required to be adopted for all new applicable revenue arrangements
no later than the third quarter of 2003. The implementation of EITF 00-21 did
not have a material effect on the Companys financial statements. In May 2003 FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
requires that certain financial instruments previously presented as equity or
temporary equity be presented as liabilities. Such instruments include
mandatory redeemable preferred and common stock, and certain options and
warrants. SFAS 150 is effective for financial instruments issued, entered into
or modified after May 31, 2003 and is generally effective at the beginning of
the first interim period beginning after September 15, 2003. The adoption of
SFAS 150 did not have a material effect on the Companys financial statements. In December 2003 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104 (SAB No. 104), Revenue Recognition to
update SAB No. 101, Revenue Recognition in Financial Statements. SAB No. 104
revises or rescinds portions of the interpretive guidance included in SAB No.
101 in order to make SAB No. 101 consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The principal
revisions relate to the recission of material no longer necessary because of
private sector developments in U.S. generally accepted accounting principles.
SAB No. 104 also rescinds the Revenue Recognition in Financial Statements
Frequently Asked Questions and Answer document issued in conjunction with SAB
No. 101 and incorporates related portions of that document into SAB No. 104.
The adoption of SAB No. 104 did not have a material effect on 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 (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 (SAL
Notes). The SAL Notes were repaid in February 2004, plus accrued interest, by
retiring a total of $364,239 in notes and $3,034 in accrued interest with the
issuance of 118,121 shares of common stock valued at $3.11 per share and
repaying the remaining amount of $835,761 in notes and accrued interest of
$6,961 with cash. 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 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: 46




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Goodwill
    
    $
    3,790,907Identifiable intangibles
    
    
    785,000Fair value of tangible assets acquired
    
    
    671,593Liabilities 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 has satisfied certain negotiated source
performance criteria. In successful tests of the integrated system in
March 2004, the source demonstrated improved reliability and
performance; however, the specific source performance criteria specified in
the Merger Agreement have not yet been met. If issued, the $500,000 in Convertible Notes will be due 24 months after
issuance and will have a conversion price equal to 120% of the average of the
closing prices for the ten days prior to issuance. The third earnout condition can result in payment of up to 354,736 JMAR
shares and up to $1.2 million in convertible notes upon receipt by the Company
of a qualifying order for a CPL system from a commercial customer and delivery
to the customer. Under the Merger Agreement, the deadline for receipt of this
order is 180 days after the CPL source is integrated with the stepper at the
Systems Division in Vermont and has satisfied the above mentioned source
performance criteria. If earned, this earnout payment is payable 30 days after
delivery and acceptance of the system by the customer. The 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, 2001. In
connection with the Acquisition, SAL entered into agreements with several of
its creditors which reduced the related liabilities due those creditors by
approximately $8,000,000 through a combination of debt forgiveness and by
payment of the $1.2 million cash purchase price by the Company. Such debt
reductions are not reflected in the statement of operations of the Company. The
proforma loss from continuing operations excludes any impact, other than
interest expense, from the debt settlements of SAL directly attributable to the
Acquisition. The 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, 2001 or which may be
expected to occur in the future. Year EndedDecember 31, 2001(Unaudited)Total revenues
    
    $
    13,622,000Loss from continuing operations
    
    $
    (1,490,000
    )Loss per share
    
    $
    (.06
    )
 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 92,160 shares of its common stock to the sole shareholder of
CEI. The purchase price was negotiated at arms length, and the 47




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) acquisition was accounted for as a purchase effective December 1, 1998. In 2001, the Company
issued 807 earn-out shares of common stock to the sole shareholder of CEI,
accounted for as additional purchase price. The earn-out ceased on December 31,
2001.  4.
    
    Inventories At December 31, 2003 and 2002, inventories consisted of the following: 2003
    
    2002Raw materials, components and sub-assemblies
    
    $
    214,694
    
    
    $
    222,077Work-in-process
    
    
    87,981
    
    
    
    125,315Finished goods
    
    
    4,477
    
    
    
    42,075$
    307,152
    
    
    $
    389,467
  5.
    
    Accounts Receivable At December 31, 2003 and 2002, accounts receivable consisted of the
following: 2003
    
    2002Trade
    
    $
    546,505
    
    
    $
    1,384,112Trade  unbilled
    
    
    108,800
    
    
    
    920U.S. Government  billed
    
    
    522,123
    
    
    
    1,056,321U.S. Government  unbilled
    
    
    1,624,597
    
    
    
    453,040$
    2,802,025
    
    
    $
    2,894,393
 All unbilled receivables at December 31, 2003 are expected to be billed
and collected within one year except for withheld contract fees of $403,581
which will be billed and collected at the completion of the applicable
contract. 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. Included in the
unbilled amount is $747,825 related to the Companys contract
with DARPA (see Note 16). Of the remaining balance of unbilled receivables, $359,948 is
related to withheld fees for prior contracts to be billed pending DCAA audit,
$113,243 is billable upon the achievement of milestones specified in the
applicable contract, and $108,800 is related to the normal billing cycle.  6.
    
    Property and Equipment At December 31, 2003 and 2002, property and equipment consisted of the
following: 2003
    
    2002Equipment and machinery
    
    $
    2,774,470
    
    
    $
    2,983,443Furniture and fixtures
    
    
    435,043
    
    
    
    420,188Leasehold improvements
    
    
    280,283
    
    
    
    280,2833,489,796
    
    
    
    3,683,914Less-Accumulated depreciation
    
    
    (2,698,023
    )
    
    
    (2,435,716
    )$
    791,773
    
    
    $
    1,248,198
 During 2003, the Company wrote-off an asset recorded at $200,056 that will
not be used by the Company in the future. 48




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)  7.
    
    Commitments and Contingenciesa.
    
    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, 2003, are as follows: Year Ending December 31,2004
    
    $
    915,0102005
    
    
    496,2772006
    
    
    39,970$
    1,451,257
 Related rent expense was $1,193,998, $1,185,303 and $981,794 for the years
ended December 31, 2003, 2002 and 2001, respectively.  b.
    
    Litigation Among the remaining liabilities of JMAR Semiconductor, Inc. (JSI) included
on the Companys Consolidated Balance Sheet at December 31, 2003 (see Note 9)
is a debt owing to Macrotech, Inc., a former supplier of chip manufacturing
services to JSI. This debt arose out of several purchase orders for FIFO chip
manufacturing issued by JSI to Macrotech between 2000 and 2002. JSI claimed
that these purchase orders were cancelable as to amounts that had not yet been
confirmed for production and that JSI timely canceled all but approximately
$200,000 of the remaining obligations under those purchase orders. In October,
2003, Macrotech filed a Complaint against JSI alleging breach of contract and
other related claims and seeking payment of approximately $680,000, as well as
punitive damages in an unspecified amount. Macrotech also alleged that JMAR was
the alter ego of JSI and should be held responsible for JSIs debts. In
February 2004, the Company and Macrotech executed a settlement agreement
whereby the Company agreed to pay Macrotech $137,500 in full satisfaction of
all amounts owed to Macrotech. The lawsuit was dismissed with prejudice in
February, 2004.  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 was 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. 49




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. The Company recorded interest expense of $171,358
and $48,159 in 2003 and 2002, respectively, for the amortization of the
discount.  8.
    
    Line of Credit and Notes Payable Line of credit and notes payable as of December 31, 2003 and 2002, were
as follows: 2003
    
    2002Working capital line with Laurus in the
amount of $3,000,000. Advances bear
interest at the prime rate (4% at
December 31, 2003) plus .75%, but not
less than 5%. Interest on the line is
payable monthly. Advances are secured
by all assets of the Company.
Borrowings may be converted to common
stock
    
    $
    1,140,431
    
    
    $
    Convertible notes payable issued to
former shareholders and creditors of
SAL, Inc. bearing interest at 8%
interest due quarterly, principal paid
in February 2004
    
    
    1,200,000
    
    
    
    1,200,000Working capital line of credit
(Comerica Line) with Comerica Bank -
California (Comerica). At December
31, 2002, the line was secured by a
$1.5 million compensating cash balance.
The Comerica Line was paid off and
terminated in March 2003
    
    
    
    
    
    
    1,500,000Post-employment benefits (see Note 7)
    
    
    449,873
    
    
    
    504,887Other notes payable
    
    
    
    
    
    
    60,3222,790,304
    
    
    
    3,265,209Less: Current portion
    
    
    (2,340,431
    )
    
    
    (1,556,405
    )$
    449,873
    
    
    $
    1,708,804
 In March 2003, the Company entered into a Revolving Fixed Price
Convertible Note (Working Capital Line) with Laurus Master Fund (Laurus).
The Working Capital Line allows the Company to borrow from time-to-time up to
85% of eligible accounts receivable of the Company to a maximum of $3 million.
Advances in excess of this formula are allowed, however, with the consent of
Laurus. Laurus can convert any portion of the principal outstanding to common
stock at a fixed price per share (Conversion Price) any time the market price
of the Companys common stock is in excess of the Conversion Price. The Company
can convert a portion of the principal outstanding to common stock at 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. The
initial terms of the Working Capital Line provided that after $2 million of
conversions into equity, the Conversion Price would be increased. The
Conversion Price initially was $.92, but was increased to $2.85 in January 2004
after $2 million of the Working Capital Line had been converted. As of December
31, 2003, $1,173,000 of the Working Capital Line had been converted (see Note
11). The interest rate on the Working Capital Line is equal to the prime rate
(4% at December 31, 2003) plus 0.75 percent, subject to a floor of 5.00
percent. Accrued interest is payable monthly. The Working Capital Line requires
that the Companys quick ratio, as defined, be 0.90 or higher. The quick ratio
is defined as the sum of cash and accounts receivable divided by the sum of
current liabilities, exclusive of current liabilities of discontinued
operations. The Companys quick ratio was 1.52 at December 31, 2003. As of
December 31, 2003, approximately $1.3 million less discount of approximately 50




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) $175,000 was outstanding under the Working Capital Line. The term of the
Working Capital Line runs until March, 2006. The available borrowings under the
Working Capital Line were approximately $2.3 million at December 31, 2003,
based on the amount of eligible accounts receivable at that date, with
approximately $941,000 unused at December 31, 2003. In
March 2003, in connection with the Working Capital Line, the
Company issued warrants to Laurus to purchase 400,000 shares of
common stock at prices ranging from $1.06 to $3.13 and paid fees of
$74,400. In connection with the Working Capital Line, the Company recorded a
discount of $412,633 representing the intrinsic value of the
beneficial conversion feature and fair value of warrants. The discount is
amortized over 3 years or upon conversion, resulting in $289,063 of interest
expense in 2003. The weighted average interest rate on the Laurus Line was 5% for 2003.
The maximum amount outstanding was $2,485,255 for 2003, and the average amount
outstanding was approximately
$1,263,000 during 2003. The weighted average interest rate on the Comerica Line
was 4.69% for 2002. The maximum amount outstanding was $3,000,000 for 2002,
and the average amount outstanding was $1,393,151 during 2002. The convertible notes (SAL Notes) were issued to the former shareholders
of SAL. The SAL Notes were repaid in February 2004, plus accrued interest, by
retiring a total of $364,239 in notes and $3,034 in accrued interest with the
issuance of 118,121 shares of common stock valued at $3.11 per share and
repaying the remaining amount of $835,761 in notes and accrued interest of
$6,961 with cash. Interest paid for the years ended December 31, 2003, 2002 and 2001 was
$314,218, $183,466 and $106,176, respectively.  9.
    
    Discontinued Operations/Assets Held for Sale The
loss from operations of discontinued operations of $1,396,749 for the
year ended December 31, 2003 consists of $457,413 related to the standard
semiconductor products business and $939,336 related to the precision equipment
business. The loss from operations of discontinued operations of $5,839,367 for
the year ended December 31, 2002 consists of $1,856,381 related to the standard
semiconductor products business and $3,982,986 related to the precision
equipment business. In July 2003, the Company sold JMAR Precision Systems, Inc.
(JPSI) to several private investors. Under the terms of the sale, JMAR received
$500,000 in a combination of cash and promissory notes, and the buyer assumed
14 of the remaining 25 months of JPSIs facility lease. The notes are secured
by the assets of JPSI and the lease obligation is secured by personal property
of the buyers. In addition, all JPSI receivables as of the closing were
assigned to JMAR and JMAR agreed to pay all trade and employee related
liabilities existing as of the closing and unknown liabilities, if any. The
buyers have assumed all other ongoing commitments of JPSI. The results of
operations of the precision equipment business for 2003 through the sale date
are reported in discontinued operations in 2003. The decrease in the
loss from operations of discontinued operations is primarily due to the shutdown of the
operations of JMAR Semiconductor, Inc. (JSI) in 2002 and the sale of JPSI in
July 2003. The gain (loss) on disposal of discontinued
operations of $205,000 and $(3,200,000) for the
years ended December 31, 2003 and 2002, respectively, relates to the sale of JPSI. Prior to December 31, 2001, as the level of business expected from the
standard semiconductor products business did not materialize, the Company
decided to take action to sublease the Irvine facility and move the standard
semiconductor products business into a smaller facility and recorded
a reserve against the Irvine facility lease. The Company does not yet have a
subtenant for this facility. The lease provides for rent and related expenses
of approximately $36,000 per month through August 2005. At December 31, 2003 and December 31, 2002, net assets and liabilities of
assets discontinued and held for sale consisted of the following: 51




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31,2003
    
    2002Current Assets:Cash
    
    $
    
    
    
    $
    101,238Accounts receivable
    
    
    
    
    
    
    454,557Inventories
    
    
    
    
    
    
    727,983Prepaid expenses and other
    
    
    
    
    
    
    65,980$
    
    
    
    $
    1,349,758Current Liabilities:Payable to distributor
    
    $
    
    
    
    $
    692,314Facility lease accrual
    
    
    598,466
    
    
    
    548,374Accounts payable
    
    
    230,978
    
    
    
    1,154,463Employee related contractual
commitments
    
    
    10,384
    
    
    
    555,000Note payable
    
    
    121,155
    
    
    
    175,000$
    960,983
    
    
    $
    3,125,151
  10.
    
    Income Taxes The tax effects of temporary differences that give rise to significant
deferred tax assets and liabilities at December 31, 2003 and 2002 are presented
below: 2003
    
    2002Deferred tax assets:Net operating loss carryforwards
    
    $
    19,409,000
    
    
    $
    15,022,000Asset writedowns
    
    
    
    
    
    
    2,523,000Losses on discontinued operations
    
    
    
    
    
    
    1,312,000Other
    
    
    575,000
    
    
    
    1,688,000Total gross deferred tax assets
    
    
    19,984,000
    
    
    
    20,545,000Less valuation reserve
    
    
    (19,984,000
    )
    
    
    (20,545,000
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 The valuation reserve as of December 31, 2003 and 2002 represents deferred
tax assets which management believes, based on the Companys history of
operating losses, may not be realized in future periods. The valuation
allowance was decreased by $561,000 in 2003 and increased by $4,460,000 in
2002, including $484,000 charged to expense for the net carrying value of
remaining deferred tax assets. The effective income tax rate for the years ended December 31, 2003, 2002
and 2001 varied from the statutory federal income tax rate as follows: 2003
    
    2002
    
    2001Statutory federal income tax rate
    
    
    (34
    )%
    
    
    (34
    )%
    
    
    (34
    )%State income tax
    
    
    (6
    )
    
    
    (6
    )
    
    
    (6
    )Valuation allowance
    
    
    
    
    
    
    25
    
    
    
    Benefit recorded due to net operating loss
carryforward position
    
    
    40
    
    
    
    40
    
    
    
    40
    
    
    
    25
    %
    
    
    
 52




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 2003, the Company had Federal net operating loss
carryforwards expiring as follows: Expires2004
    
    $
    164,0002005
    
    
    2,840,0002006
    
    
    961,0002007
    
    
    4,546,0002008
    
    
    6,932,0002009
    
    
    6,860,0002010
    
    
    2,265,0002011
    
    
    585,0002019
    
    
    1,102,0002020
    
    
    3,740,0002021
    
    
    3,247,0002022
    
    
    15,201,0002023
    
    
    8,642,000Total
    
    $
    57,085,000
 The
Company has approximately $1,692,000 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
$695,000 apply to approximately $4,294,000 of Company and acquired company loss
carryforwards. Approximately $52,791,000 of the net operating loss
carryforwards are not subject to annual limitations.  11.
    
    Stockholders Equity During 2003, $1,173,000 of the Working Capital Line (see Note 8) was
converted into 1,275,000 shares of common stock of the Company and subsequent
to December 31, 2003, another $827,000 was converted into 898,913 shares of
common stock. In March 2003, the Company sold for cash $1 million in 8 percent Series A
Convertible Preferred Stock (Series A Preferred) to Laurus at a fixed conversion
price of $.88 per share. The proceeds received under the Series A Preferred
were initially restricted, however, the funds were released as the Preferred
Stock was converted to common stock. The Company also issued $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. All of the Series A
Preferred and Series B Preferred was converted into 2,272,727 shares of common
stock by December 31, 2003. In September 2003, the Company sold for cash $1.5 million of 8 percent
Series C Convertible Preferred Stock (Series C Preferred) to Laurus at a
fixed conversion price of $2.08 per share. All
of the Series C Preferred was converted to common stock
subsequent to December 31, 2003. 53




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In December 2003, the Company sold for cash $2 million of 8 percent Series
D Convertible Preferred Stock (Series D Preferred) to Laurus at a fixed
conversion price of $1.56 per share. The Series D Preferred is redeemable in
cash (or common stock if the closing market price of the Companys common stock
is 118% of the Conversion Price or higher for the 11 trading days prior to the
redemption date) in eighteen equal monthly installments starting in November
2004, if not previously converted. Conversions to equity are offset against the
required repayments. Except for the conversion price, the conversion terms of
the Series D Preferred are the same as the conversion terms of the Working
Capital Line. Subsequent to December 31,
2003, $936,000 of
the Series D Preferred was converted into 600,000 shares of common stock of the
Company. In connection with all of the above preferred stock financing transactions
with Laurus, the Company issued warrants to Laurus to purchase 650,000 shares
of common stock at prices ranging from $1.10 to $2.60 and paid fees of
$274,250. The Company valued these warrants using the Black-Scholes pricing
model. The following table summarizes the above
preferred stock financings. BCF andGross
    
    Fair Value
    
    
    
    2003
    
    2003
    
    Net BalanceSeries
    
    Amount
    
    of Warrants
    
    Fees and Costs
    
    Amortization
    
    Conversions
    
    at December 31, 2003A
    
    
    $1,000,000
    
    
    $310,640
    
    $
    63,900
    
    
    $
    374,540
    
    
    $
    1,000,000
    
    
    $
    B
    
    
    1,000,000
    
    
    310,641
    
    
    68,517
    
    
    
    379,158
    
    
    
    1,000,000
    
    
    
    C
    
    
    1,500,000
    
    
    637,251
    
    
    72,000
    
    
    
    84,474
    
    
    
    
    
    
    
    875,223D
    
    
    2,000,000
    
    
    591,075
    
    
    93,250
    
    
    
    26,252
    
    
    
    
    
    
    
    1,341,927$5,500,000
    
    
    $1,849,607
    
    
    $297,667
    
    
    
    $864,424
    
    
    
    $2,000,000
    
    
    
    $2,217,150
 All of the preferred stock, warrants and the Working Capital Line (the
Securities) held by Laurus contain provisions that restrict the right of
Laurus to convert or exercise its JMAR securities in order to limit its
percentage beneficial ownership. If Laurus were to waive these beneficial
ownership limitations the Securities would be convertible for or exercisable
into more than 4.99% of the outstanding shares of the Companys common stock.
However, Laurus has not requested such a waiver. Laurus has also agreed that
none of the Securities shall be converted or exercised to the extent that
conversion or exercise of the Securities would result in Laurus beneficially
owning more than 19.9% of the Companys outstanding number of shares of common
stock unless and until the Company obtains stockholder approval in accordance
with NASDAQ corporate governance rules, or an exemption from the applicable
provision of NASDAQ corporate governance rules. All of the preferred stock issuances require redemption payments, if not
previously converted. As of March 24, 2004, all of the preferred stock
discussed above was converted except for Series D Preferred in the amount of
$1,064,000, which is redeemable in 2005, if not previously converted. In February, 2003, under the Companys 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
sale of the Series A and B Convertible
Preferred Stock, 300,000 of the Warrants described above and the underlying
common shares were also registered under the Shelf Registration Statement. In March 2002, under the 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 pricing model 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. 54




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During the years ended December 31, 2003 and 2001, the Company received
net proceeds of approximately $289,577 and $44,040, respectively, from the
exercise of warrants and options into approximately 144,068 and 26,013 shares
of common stock, respectively. During 2003, 2002 and 2001, the Company issued 11,026, 11,632 and 1,571
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 (1991 Plan), the 1999 Stock Option Plan (1999 Plan), the Management
Anti-Dilution Plan (the Anti-Dilution Plan), an incentive plan which provided
for the issuance of warrants to JPSI employees (the JPSI Plan) and two
incentive plans which provide for the issuance of options and warrants to
Research Division employees (Research Division Plans). The Company may also
from time-to-time enter into equity compensation agreements with individuals
that are not covered by a plan and currently is a party to non-plan option and
warrant agreements with several individuals. 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, 450,000 shares under the JPSI Plan and 350,000 shares under
the Research Division Plans (Plans). As of December 31, 2003, the Company has
granted 1,252,392 options under the 1991 Plan, 1,033,172 options under the 1999
Plan, 306,920 warrants under the Anti-Dilution Plan, 53,000 warrants under the
JPSI Plan and 199,000 options and warrants under the Research Division Plans.
In addition, 613,000 non-qualified options have been granted to five 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, 2003, 866,828 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 of the above plans as of December 31, 2003, 2002 and 2001 and
changes during the years then ended is presented in the tables below: 2003
    
    2002
    
    2001Wtd Avg
    
    
    
    
    
    Wtd Avg
    
    
    
    
    
    Wtd AvgShares
    
    Ex Price
    
    Shares
    
    Ex Price
    
    Shares
    
    Ex PriceOutstanding at beg. of year
    
    
    3,214,834
    
    
    $
    2.93
    
    
    
    2,436,802
    
    
    $
    3.53
    
    
    
    2,185,933
    
    
    $
    1.34Granted
    
    
    489,500
    
    
    
    1.05
    
    
    
    898,800
    
    
    
    1.48
    
    
    
    496,686
    
    
    
    2.47Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,983
    )
    
    
    3.11Forfeited
    
    
    (676,087
    )
    
    
    3.50
    
    
    
    (120,768
    )
    
    
    4.04
    
    
    
    (212,834
    )
    
    
    6.74Outstanding at end of year
    
    
    3,028,247
    
    
    
    2.43
    
    
    
    3,214,834
    
    
    
    2.93
    
    
    
    2,436,802
    
    
    
    3.53Exercisable at end of year
    
    
    1,945,969
    
    
    
    
    
    
    
    1,977,859
    
    
    
    
    
    
    
    1,586,912Weighted average fair value
of options or warrants granted
    
    
    0.92
    
    
    
    
    
    
    
    1.38
    
    
    
    
    
    
    
    3.42
 A summary of the options outstanding as of December 31, 2003, 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: 55




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Options Outstanding
    
    Options ExercisableExercise
    
    Number
    
    Weighted-Average
    
    Weighted-
    
    Number
    
    Weighted-Range of
    
    Outstanding
    
    Remaining
    
    Average
    
    Exercisable
    
    AveragePrices
    
    at 12/31/03
    
    Contractual Life
    
    Exercise Price
    
    at 12/31/03
    
    Exercise Price$.53 to $1.79
    
    
    1,329,239
    
    
    6.1 years
    
    $
    0.95
    
    
    
    423,071
    
    
    $
    1.342.00 to 2.99
    
    
    691,888
    
    
    
    4.5
    
    
    
    2.48
    
    
    
    611,989
    
    
    
    2.473.00
    
    
    391,920
    
    
    
    4.3
    
    
    
    3.00
    
    
    
    391,920
    
    
    
    3.003.13 to 4.56
    
    
    483,270
    
    
    
    6.2
    
    
    
    3.68
    
    
    
    387,059
    
    
    
    3.735.56 to 9.50
    
    
    131,930
    
    
    
    2.4
    
    
    
    8.02
    
    
    
    131,930
    
    
    
    8.02$.53 to $9.50
    
    
    3,028,247
    
    
    
    
    
    
    
    
    
    
    
    1,945,969
  13.
    
    Segment Information In the first quarter of 2002, the Company decided to discontinue and sell
its standard semiconductor products business and shift more of its resources to
accelerate the market entry of its CPL products. Also, in furtherance of its efforts to focus its resources on its CPL
business, during the later half of 2002, the Company concluded that the
precision equipment business did not fit with the strategic direction of the
Companys CPL business area and that the markets for that business products
would continue to be slow in the near term. Therefore, in December, 2002, the
Company decided to initiate the process of selling that business and, in July
2003, the Company completed the sale of that 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)  Located in San Diego,
California, this segment carries out contract research and development
involving JMARs patented high brightness (Britelight) lasers and
laser-produced plasma (LPP) technology. The results of this R&D are applied to
the Companys CPL light source, EUV generators, and related laser products.
Until recently, the principal focus of the Research Divisions R&D efforts has
been in advanced semiconductor lithography applications. In 2003, the Company
embarked on an effort to identify additional applications for its laser and LPP
technologies. Substantially all of the Research Divisions R&D is funded by
contracts from the Defense Advanced Research Projects Agency (DARPA) of the
U.S. Department of Defense. During 2003, this segment accounted for
approximately 36% of the Companys revenues. The technologies developed at the Research Division are transitioned to
JMARs Systems Division for product engineering and future production. Systems Division (formerly JMAR/SAL NanoLithography)  This segment
develops and manufactures X-ray lithography steppers. Located in Vermont, this
Division also serves as JMARs product design and manufacturing arm, carrying
out the engineering, production, and integration of JMARs CPL light sources
and CPL stepper systems. The Systems Division also applies its engineering and
manufacturing expertise to the development of new products using a combination
of JMAR and third party technology, as in the case of its design and
manufacture of alpha and beta READ sensors for FemtoTrace, Inc. for
environmental and homeland security applications. During 2003, this segment
accounted for approximately 38% of the Companys revenues. Microelectronics Division (formerly JMAR Semiconductor)  This segment
provides process integration and maintenance support for the Defense
Microelectronics Activitys semiconductor fabrication facility in Sacramento,
California. It also designs and produces application specific integrated
circuits (ASICs) for military and commercial markets. During 2003, this segment
accounted for approximately 26% of the Companys revenues. 56




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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 ended December 31, 2003, 2002 and 2001
(excluding discontinued operations) is as follows: Research
    
    Systems
    
    MicroelectronicsDivision
    
    Division
    
    Division
    
    Corporate
    
    Total2003:Revenues
    
    $
    6,206,123
    
    
    $
    6,561,372
    
    
    $
    4,529,013
    
    
    $
    
    
    
    $
    17,296,508Asset writedowns
    
    
    (346,060
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (346,060
    )Operating income (loss)
    
    
    152,738
    
    
    
    (1,455,035
    )
    
    
    151,242
    
    
    
    (267,569
    )
    
    
    (1,418,624
    )Total assets
    
    
    3,119,115
    
    
    
    4,626,299
    
    
    
    1,708,504
    
    
    
    4,039,265
    
    
    
    13,493,183Goodwill
    
    
    
    
    
    
    3,790,907
    
    
    
    
    
    
    
    
    
    
    
    3,790,907Capital expenditures
    
    
    38,349
    
    
    
    13,449
    
    
    
    61,767
    
    
    
    9,828
    
    
    
    123,393Depreciation and
amortization
    
    
    226,995
    
    
    
    311,857
    
    
    
    24,427
    
    
    
    375,439
    
    
    
    938,7182002:Revenues
    
    
    6,951,114
    
    
    
    7,602,336
    
    
    
    3,830,360
    
    
    
    
    
    
    
    18,383,810Special item
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    
    
    
    13,771,902Goodwill
    
    
    
    
    
    
    3,790,907
    
    
    
    
    
    
    
    
    
    
    
    3,790,907Capital expenditures
    
    
    311,890
    
    
    
    52,144
    
    
    
    28,021
    
    
    
    1,509
    
    
    
    393,564Depreciation and
amortization
    
    
    369,940
    
    
    
    307,614
    
    
    
    14,837
    
    
    
    84,926
    
    
    
    777,3172001:Revenues
    
    
    7,701,840
    
    
    
    2,151,154
    
    
    
    3,050,817
    
    
    
    
    
    
    
    12,903,811Asset writedowns
    
    
    (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
    
    
    
    20,310,112Goodwill
    
    
    
    
    
    
    3,777,998
    
    
    
    
    
    
    
    
    
    
    
    3,777,998Capital expenditures
    
    
    248,805
    
    
    
    5,210
    
    
    
    3,521
    
    
    
    136,719
    
    
    
    394,255Depreciation and
amortization
    
    
    254,347
    
    
    
    135,957
    
    
    
    12,352
    
    
    
    75,386
    
    
    
    478,042
 The asset writedowns for 2003 of $346,060 relates to an asset held by the
Research Division that will not be used by the Company in the future and patent
costs. The special item for 2002 of $1,074,324 relates to the retirement
benefits in August 2002 of the Companys former Chairman and Chief Executive
Officer. The asset writedowns for 2001 related to discontinued projects. Significant Customers Sales to the United States Government aggregated $11,868,974, $12,484,601
and $9,128,110 in 2003, 2002 and 2001, respectively. Accounts receivable from
the United States Government at December 31, 2003 and 2002 was $2,146,720 and
$1,509,361, respectively. In addition, sales to General Dynamics Advanced
Information Systems (GDAIS) were $2,712,770, $4,306,801 and $3,555,069 in 2003,
2002 and 2001, respectively. Accounts receivable from GDAIS at December 31,
2003 and 2002 was $471,506 and $1,256,971, respectively. 57




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Export Sales For the years ended December 31, 2003, 2002 and 2001, all revenues were
generated from the United States and all assets of the Company are located in
the United States.  14.
    
    Quarterly Financial Information (Unaudited) The following is a summary of unaudited quarterly results for the years
ended December 31, 2003 and 2002. Year Ended
    
    
    
    
    
    
    
    
    
    Gain
(Loss) from
    
    LossApplicable to
    
    Loss Per Share
    
    WeightedAverageDecember 31,
    
    
    
    
    
    Gross
    
    Discontinued
    
    Common
    
    Continuing
    
    Discontinued
    
    Shares2003
    
    Revenues
    
    Profit
    
    Operations
    
    Stock
    
    Operations
    
    Operations
    
    OutstandingDecember 31
    
    $
    3,570,210
    
    
    $
    1,098,602
    
    
    $
    8,741
    
    
    $
    (684,621
    )
    
    $
    (0.03
    )
    
    $
    
    
    
    
    26,992,354September 30
    
    
    3,964,930
    
    
    
    983,222
    
    
    
    (53,673
    )
    
    
    (1,063,451
    )
    
    
    (0.04
    )
    
    
    
    
    
    
    25,500,260June 30
    
    
    5,027,654
    
    
    
    971,819
    
    
    
    (686,830
    )
    
    
    (1,561,214
    )
    
    
    (0.03
    )
    
    
    (0.03
    )
    
    
    24,236,140March 31
    
    
    4,733,714
    
    
    
    910,984
    
    
    
    (459,987
    )
    
    
    (912,080
    )
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    23,886,503$
    17,296,508
    
    
    $
    3,964,627
    
    
    $
    (1,191,749
    )
    
    $
    (4,221,366
    )
    
    
    (0.12
    )
    
    
    (0.04
    )
    
    
    25,618,296
 Year Ended
    
    
    
    
    
    
    
    
    
    Loss from
    
    LossApplicable to
    
    Income (Loss) Per Share
    
    WeightedAverageDecember 31,
    
    
    
    
    
    Gross
    
    Discontinued
    
    Common
    
    Continuing
    
    Discontinued
    
    Shares2002
    
    Revenues
    
    Profit (Loss)
    
    Operations
    
    Stock
    
    Operations
    
    Operations
    
    OutstandingDecember 31
    
    $
    3,726,900
    
    
    $
    (251,210
    )
    
    $
    (5,418,415
    )
    
    $
    (6,914,251
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )
    
    
    23,849,904September 30
    
    
    6,462,633
    
    
    
    1,149,804
    
    
    
    (1,321,299
    )
    
    
    (2,836,656
    )
    
    
    (0.06
    )
    
    
    (0.06
    )
    
    
    23,844,685June 30
    
    
    4,585,622
    
    
    
    1,467,807
    
    
    
    (489,436
    )
    
    
    (1,002,165
    )
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    23,841,609March 31
    
    
    3,608,655
    
    
    
    1,047,091
    
    
    
    (1,810,217
    )
    
    
    (747,621
    )
    
    
    0.05
    
    
    
    (0.08
    )
    
    
    22,879,711$
    18,383,810
    
    
    $
    3,413,492
    
    
    $
    (9,039,367
    )
    
    $
    (11,500,693
    )
    
    
    (0.11
    )
    
    
    (0.38
    )
    
    
    23,618,169
  15.
    
    Intangible Assets The Company adopted SFAS No. 142 Goodwill and Other Intangible Assets
(SFAS 142) effective January 1, 2002. In accordance with SFAS 142, the Company
does not amortize goodwill. The Companys goodwill of $3,790,907 at December
31, 2003 and 2002 is related to the Systems Division, acquired in August, 2001.
As of December 31, 2003, the Company had the following amounts related to other
intangible assets: Gross Carrying
    
    Accumulated
    
    Net IntangibleAmount
    
    Amortization
    
    AssetsPatents
    
    $
    953,124
    
    
    $
    421,583
    
    
    $
    531,541Unpatented Technology
    
    
    450,000
    
    
    
    362,500
    
    
    
    87,500License
    
    
    65,000
    
    
    
    
    
    
    
    65,000$
    684,041
 Aggregate amortization expense of
the intangible assets with determinable
lives was $282,055, $379,205
and $163,187 for the years ended December 31, 2003,
2002 and 2001, respectively. The unamortized balance of intangible assets is
estimated to be amortized as follows: 58




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the Year Ending
    
    Estimated AmortizationDecember 31,
    
    Expense2004
    
    $
    194,6932005
    
    
    66,2672006
    
    
    66,2672007
    
    
    44,6012008
    
    
    49,723Beyond
    
    
    262,490$
    684,041
 The following table summarizes the loss applicable to common stock and
loss per share applicable to common stock for the years ended December 31,
2003, 2002 and 2001 adjusted to exclude goodwill amortization expense: Year Ended December 31,2003
    
    2002
    
    2001Loss applicable to common stock:Reported loss
    
    $
    (4,221,366
    )
    
    $
    (11,500,693
    )
    
    $
    (14,701,534
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    67,501Adjusted loss
    
    $
    (4,221,366
    )
    
    $
    (11,500,693
    )
    
    $
    (14,634,033
    )Basic and diluted loss per share:Reported basic and diluted
loss per share
    
    $
    (0.16
    )
    
    $
    (0.49
    )
    
    $
    (0.65
    )Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    Adjusted basic and diluted
loss per share
    
    $
    (0.16
    )
    
    $
    (0.49
    )
    
    $
    (0.65
    )
  16.
    
    Subsequent Events In January 2004, the Company sold for cash $1.5 million of 8 percent
Series E Convertible Preferred Stock (Series E Preferred) to Laurus at a
fixed conversion price of $2.85 per share. The Series E Preferred is redeemable
in cash or stock (if the closing market price of the Companys common stock is
118% of the Conversion Price or higher for the 11 trading days prior to the
redemption date) in eighteen equal monthly installments starting in August
2004, if not previously converted. Conversions to equity are offset against the
required repayments. Except for the conversion price, the conversion terms of
the Series E Preferred are the same as the conversion terms of the Working
Capital Line (see Note 8). In February 2004, the Company sold for cash $8 million of 2 percent
Convertible Preferred Stock (2% Preferred) to Laurus at a fixed conversion
price range of $3.11 to $3.47 per share, with an average fixed price of $3.34
per share. The 2% Preferred is redeemable in cash or stock (if the closing
market price of the Companys common stock is 118% of the Conversion Price or
higher for the eleven trading days prior to the redemption date) in twenty-five
equal monthly installments of $150,000 starting in January 2005 with the
balance redeemable in February 2007, if not previously converted. Conversions
to equity are offset against the required repayments. Except for the conversion
price, the conversion terms of the 2% Preferred are the same as the conversion
terms of the Working Capital Line (see Note 8). The initial terms of the Working Capital Line (see Note 8) provided that
after $2 million of conversions into equity, the Conversion Price would be
increased. The Conversion Price initially was $0.92, but was increased to $2.85
in January 2004 after $2 million of the Working Capital Line had been
converted. 59




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of March 19, 2004 all of the preferred stock, warrants and Working
Capital Line held by Laurus is convertible or exercisable into approximately
5.1 million shares. In connection with the above financing transactions with Laurus, the
Company issued to Laurus warrants to purchase 290,000 shares of common stock at
prices ranging from $3.42 to $5.00. In addition, in connection with the
adjustment to the conversion price on the Working Capital Line, the Company
issued to Laurus warrants to purchase 100,000 shares of common stock at an
exercise price of $5.15. As a result of the convertible securities and warrants issued, the Company
estimates it will record a discount representing the beneficial
conversion feature and the fair value of the warrants issued of approximately
$1.9 million. The beneficial conversion feature will be recognized during the
first quarter of fiscal year 2004 as a reduction of preferred stock
or debt and
amortized to loss applicable to common stock over the earlier of the
redemption or payment period or the conversion dates (see Note 2). In March 2004, DARPA released
$800,000 in funds related to the Companys CPL contract after
the successful completion of the demonstration of planned
improvements to the beta source power output and reliability. 60




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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 29, 2004
    
    By: /s/ Ronald A. WalrodChief 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. Blackman
    
    Chairman of the Board
    
    March 29, 2004Vernon H. Blackman/s/ Ronald A. Walrod
    
    Chief Executive Officer and Director
    
    March 29, 2004Ronald A. Walrod/s/ Dennis E. Valentine
    
    Chief Financial Officer
    
    March 29, 2004and Chief Accounting OfficerDennis E. Valentine/s/ C. Neil Beer
    
    Director
    
    March 29, 2004C. Neil Beer/s/ Charles A. Dickinson
    
    Director
    
    March 29, 2004Charles A. Dickinson/s/ John S. Martinez
    
    Director
    
    March 29, 2004John S. Martinez/s/ Edward P. OSullivan II
    
    Director
    
    March 29, 2004Edward P. OSullivan II/s/ Barry Ressler
    
    Director
    
    March 29, 2004Barry Ressler
 61




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##### Table of Contents



Schedule II JMAR TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 AdditionsBalance at
    
    Charged to Costs
    
    
    
    
    
    
    
    
    
    Balance atDescription
    
    Beginning of Year
    
    and Expenses
    
    Other
    
    Deductions
    
    End of YearFor the year ended December 31, 2003:Warranty reserve
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Reserve for inventory excess and obsolescence
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    $
    
    
    
    $
    
    
    
    $
    115,233Reserve for inventory excess and obsolescence
    
    
    992,460
    
    
    
    1,811,000
    
    
    
    
    
    
    
    (688,317
    )
    
    
    2,115,143Allowance for doubtful accounts
    
    
    55,436
    
    
    
    
    
    
    
    
    
    
    
    (27,624
    )
    
    
    27,812
 (A) This reserve relates to inventory of JPSI, which is classified as
discontinued operations in 2002. 62




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##### Table of Contents



Index to Exhibits ExhibitNo.
    
    Description2.1 (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.2.2 (19)
    
    
    Agreement of Purchase and Sale of Stock, dated July 18, 2003, between JMAR
Technologies, Inc., JMAR Precision Systems, Inc., Chandu Vanjani and Veena
Kaul.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 (17)
    
    
    Form of Stock Option Agreement between the Company and the employees listed
on attached schedule. (+)4.4 (17)
    
    
    Stock Option Agreement, dated October 14, 2002, between the Company and
Ronald A. Walrod. (+)4.5 (16)
    
    
    Common Stock Purchase Warrant for 300,000 shares dated March 14, 2003 issued
to Laurus Master Fund, Ltd (Laurus) in connection with the issuance of
Series A Preferred Stock and Series B Preferred Stock.4.6 (17)
    
    
    Convertible Note dated March 21, 2003 executed by the Company in favor of
Laurus evidencing receivables  based line of credit for up to $3 million.4.7 (17)
    
    
    Common Stock Purchase Warrant for 400,000 shares dated March 21, 2003
issued to Laurus in connection with $3 million receivables financing
facility.4.8 (18)
    
    
    Amendment, dated April 28, 2003, between Laurus Master Fund, Ltd. and JMAR
Technologies, Inc.
 63




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##### Table of Contents



ExhibitNo.
    
    Description4.9 (20)
    
    
    Common Stock Purchase Warrant for 150,000 shares
dated September 30, 2003 issued to Laurus in connection with the issuance of
Series C Preferred Stock.4.10 (21)
    
    
    Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of Series D 8% Convertible
Preferred Stock, $0.01 Par Value Per Share.4.11 (21)
    
    
    Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of Series E 8% Convertible
Preferred Stock, $0.01 Par Value Per Share.4.12 (22)
    
    
    Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of Series F Convertible
Preferred Stock, $0.01 Par Value Per Share.4.13 (22)
    
    
    Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of Series G Convertible
Preferred Stock, $0.01 Par Value Per Share.4.14 (22)
    
    
    Certificate to set forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of Series H Convertible
Preferred Stock, $0.01 Par Value Per Share.4.15 (21)
    
    
    Common Stock Purchase Warrant for 200,000 shares
dated December 17, 2003 issued to Laurus in connection with the issuance of
Series D Preferred Stock.4.16 (21)
    
    
    Common Stock Purchase Warrant for 90,000 shares dated
January 7, 2004 issued to Laurus in connection with the issuance of Series E Preferred
Stock.4.17 (21)
    
    
    Common Stock Purchase Warrant for 100,000 shares dated
January 7, 2004 issued to Laurus in connection with the amendment of the Convertible Notes.4.18 (22)
    
    
    Common Stock Purchase Warrant for 50,000 shares dated
February 5, 2004 issued to Laurus in connection with the issuance of Series F Preferred
Stock.4.19 (22)
    
    
    Common Stock Purchase Warrant for 50,000 shares dated
February 5, 2004 issued to Laurus in connection with the issuance of Series G Preferred
Stock.4.20 (22)
    
    
    Common Stock Purchase Warrant for
100,000 shares dated February 5, 2004
issued to Laurus in connection with the issuance of Series H Preferred
Stock.10.1 (6)
    
    
    The Companys 1991 Stock Option Plan, as amended. (+)10.2 (15)
    
    
    The Companys 1999 Stock Option Plan, as amended. (+)10.3 (12)
    
    
    Employment Agreement between the Company and Daniel J. Fleming, dated
August 7, 2001. (+)10.4 (7)
    
    
    Amended and Restated Employment Agreement between the Company and John S.
Martinez, dated May 1, 1996 (+)10.5 (12)
    
    
    Amendment dated September 7, 2001 to Amended and Restated Employment
Agreement between the Company and John S. Martinez. (+)10.6 (14)
    
    
    Agreement dated September 16,
2002 between the Company and John S. Martinez. (+)10.7 (13)
    
    
    Employment Agreement between the Company and Ronald A. Walrod, dated
October 14, 2002. (+)
 64




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##### Table of Contents



ExhibitNo.
    
    Description10.8 (17)
    
    
    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.10.9 (19)
    
    
    Secured Promissory Note, dated July 18, 2003, executed by Chandu Vanjani in
favor of JMAR Technologies, Inc. in the principal amount of $150,000.10.10 (19)
    
    
    Secured Promissory Note, dated July 18, 2003, executed by Veena Kaul in
favor of JMAR Technologies, Inc. in the principal amount of $100,000.14.1
    
    
    Code of Business Conduct and Ethics
for all employees and directors.14.2
    
    
    Code of Ethics for CEO, General
Managers and Senior Financial Officers.21.1
    
    
    Subsidiaries of the Company include JMAR Research, 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.31.1
    
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted 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 filed June 17, 1998.(9)
    
    Incorporated by reference to the exhibit filed with the Companys Form
8-A filed 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 filed 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 filed October 15, 2002. 65




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##### Table of Contents



(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 filed March 17, 2003.(17)
    
    Incorporated by reference to the exhibit filed with the Companys Form
10-K for the year ended December 31, 2002.(18)
    
    Incorporated by reference to the exhibit filed with the Companys Form
8-K filed May 1, 2003.(19)
    
    Incorporated by reference to the exhibit filed with the Companys Form
8-K filed July 31, 2003.(20)
    
    Incorporated by reference to the exhibit filed with the Companys Form
S-3 filed November 5, 2003.(21)
    
    Incorporated by reference to the exhibit filed with the Companys Form
S-3 filed January 16, 2004.(22)
    
    Incorporated by reference to the exhibit filed with the Companys Form
S-3 filed February 9, 2004. 66