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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, 2000
                                        ------------------

                                       or

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

Commission file number                  1-10515
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                             JMAR Technologies, Inc.
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             (Exact name of registrant as specified in its charter)


<TABLE>
<CAPTION>
             Delaware                                               68-0131180
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<S>                                                              <C>
     (State or other jurisdiction                                (I.R.S. Employer
    of incorporation or organization)                            Identification No.)
</TABLE>

<TABLE>
<CAPTION>
    5800 Armada Drive, Carlsbad, CA                            92008
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<S>                                                          <C>
(Address of principal executive offices)                     (Zip code)
</TABLE>

Registrant's telephone number, including area code:        (760) 602-3292
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Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
    Title of each class                 Name of each exchange on which registered
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<S>                                     <C>
    -------------------                 -----------------------------------------
</TABLE>



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

      Common Stock, $.01 par value
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        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

        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]

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        The aggregate market value of common stock held by non-affiliates of the
Registrant as of March 15, 2001 was approximately $79 million. The aggregate
market value was based on the closing price on March 15, 2001 for the common
stock as quoted on the NASDAQ National Market System, excluding the common stock
held by executive officers, directors and stockholders whose ownership exceeds
5% of the common stock outstanding at March 15, 2001. 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 -- 22,226,788 shares as of March 15, 2001.


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<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS


GENERAL

        Founded in 1987, San Diego, California based JMAR Technologies, Inc.
(the "Company" or "JMAR") is a microelectronics industry-focused company. JMAR
is a leading developer of proprietary advanced laser and X-ray light sources for
high-value microelectronics manufacturing and metrology. It is also a fabless
provider of high performance integrated circuits for the rapidly growing
broadband communications market and other microelectronics applications. In
addition, JMAR manufactures precision measurement, positioning and light-based
manufacturing systems for inspection and repair of semiconductors and continues
to play an important role in adapting its precision semiconductor manufacturing
technology to the fabrication of advanced bio-chip and optical communications
products. JMAR's two business segments, both located in Southern California, are
as follows:

        MICROELECTRONICS EQUIPMENT -- This segment includes the operations of
JMAR Precision Systems, Inc. ("JPSI") and JMAR's NanoLight division which
includes JMAR Research, Inc. ("JRI"). The Company manufactures state-of-the-art
precision measurement, motion control and light-based manufacturing and
metrology systems for the microelectronics industry, including high-performance
laser-light based precision systems for repairing defective semiconductors and
fabricating advanced bio-chip products; and conceives and creates leading-edge
microelectronics manufacturing systems based on the Company's patented X-ray and
other advanced light sources for higher-performance semiconductor manufacturing
and inspection.

        SEMICONDUCTOR PRODUCTS AND PROCESSES -- JMAR Semiconductor, Inc. ("JSI")
is a "fabless" supplier of semiconductors using advanced software design tools
and established semiconductor manufacturing facilities (foundries), focusing on
the development and delivery of high performance custom and standard
microcircuits for the commercial and military marketplaces with emphasis on
broadband communications applications. JSI also provides high value
technology services related to semiconductor fabrication and production
processes.


BUSINESS SUMMARY

MICROELECTRONICS EQUIPMENT SEGMENT:

PRECISION SYSTEMS

        The Microelectronics Equipment segment includes the following products
which are manufactured and sold by JPSI:

        MEASUREMENT AND INSPECTION ("M & I") SYSTEMS. During 2000, JMAR's
non-contact video and laser-based Measurement and Inspection Systems product
line accounted for approximately $4.1 million, or 21 percent of the Company's
revenues. JMAR's measurement and inspection systems are sold primarily to
manufacturers of semiconductors, biochips, printer systems and computer disk
drives. This product line utilizes state-of-the-art machine vision and laser
position sensors integrated with programmable optics and lighting control,
precision X-Y-Z motion control and other computer controlled functions to check
variations in geometries in microelectronics components. Proprietary algorithms
are written by JPSI for edge-sensing, height-sensing and point-locating and fed
into mathematical formulas to determine straightness of lines, dimensional data,
height measurements, angles and radii of curvature of microelectronic devices.

        JPSI manufactures and markets a range of non-contact, high-resolution
video/laser measurement systems, including its compact Mirage(TM) tabletop model
that complements the larger JMAR series 3000 and 4000 systems, all of which are
targeted at the microelectronics industry. The extremely versatile


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Mirage(TM) is used by the Company's customers for a variety of applications
including incoming and outgoing inspection, off-line process control of
manufacturing equipment, process verification and many laboratory functions.
Accordingly, it has become a key and proven pillar of the Company's Measurement
and Inspection product line. JPSI's standard Series 3000 system contains larger
size X-Y stages that allow measurement and inspection of parts having dimensions
exceeding the capability of the Mirage(TM) while the even larger Series 4000
system combines video and laser height probes to provide high accuracy
measurements in all three dimensions (X-Y-Z).

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

        POSITIONING AND MOTION CONTROL PRODUCTS. During 2000, the Positioning
and Motion Control product line accounted for approximately $1.7 million, or 9
percent of the Company's revenues. JMAR manufactures a wide range of precision
positioning stages and motion control devices for the microelectronics industry.
These stages, which are the fundamental building blocks of many microelectronic
manufacturing systems, are often integrated into higher value custom measurement
and microelectronic processing products and systems manufactured by both JMAR as
well as its turnkey OEM system customers.

        LITHOGRAPHY SYSTEMS FOR BIO-MEDICAL APPLICATIONS. During 2000, this
product line accounted for approximately $3.5 million, or 18 percent of the
Company's revenues. JMAR provides lithography alignment systems for
manufacturing DNA biochips which are used by the biomedical industry to acquire,
analyze and manage genetic information to improve the diagnosis, monitoring and
treatment of diseases. The adaptation to the biochip market of JMAR's precision
positioning, alignment and lithography technologies is a natural spin-off from
the Company's current semiconductor equipment product lines.

        LASER REPAIR SYSTEMS. The Precision Systems division also manufactures
and sells laser microelectronics repair systems. During 2000, this product line
accounted for approximately $1.2 million, or 6 percent of the Company's
revenues. JMAR's laser repair systems utilize state-of-the-art lasers for
microelectronics repair. There is a continuing need for higher precision
instruments to probe, inspect and repair semiconductor assemblies such as
Multi-Chip Modules ("MCM"). The Company's optical inspection stations are used
to locate open and short circuits while its Laser Processing Stations are
designed to meet today's demanding requirements for repair of MCM and other
microelectronic circuits.

        JMAR's current laser repair system models use excimer lasers to repair
short circuits by removing excess material. This type of laser is capable of
delivering a broad combination of power levels, material removal, spot sizes and
energy uniformity.

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

        ATOMIC VISION PRODUCTS. In 2000, JPSI introduced a new line of
nanometrology Atomic Vision instruments which integrate atomic force microscopy
(AFM) technology into certain JPSI measurement and inspection products, such as
the Company's Disk Inspection Systems (DIS), to extend their imaging resolution
to better than one thousandth of a micron. These new Atomic Vision (AV) systems
are currently undergoing evaluation by both the semiconductor and disk drive
industries for failure analysis, process control and research and development
applications where nanometrology precision is required. JMAR's fully integrated
AV systems can rapidly verify and map product flaws of nanometer scale, enable
precision optical identification of microelectronic components and perform
off-line high speed atomic force scanning of a variety of high value in-process
and finished parts.


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<PAGE>   5

ADVANCED X-RAY SOURCE DEVELOPMENT

        The Company performs profitable research and development contract work
at JRI for third party customers, including the U.S. government. The goals of
these efforts are to develop commercially significant products based on the
Company's proprietary laser and advanced optical technology. JMAR's contract and
company-funded R&D programs have created a broad world-class technology base
that provides the foundation for an array of important new commercial product
lines and business areas. During 2000, JMAR's revenues from government contracts
for advanced lithography constituted approximately 26 percent of the Company's
revenues.

        NANOLIGHT BUSINESS AREA. During the fourth quarter of 2000, the Company
formed its new NanoLight(TM) division to expedite the commercialization of the
Company's proprietary X-ray and related advanced optical technologies. John H.
Carosella, who joined JMAR in May of 2000, was named President of this new
division which is located in San Diego, California.

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

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

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

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

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


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        The goal of JMAR's XRL program has been to provide an acceptable
alternative to the synchrotron for semiconductor manufacturing applications by
developing a proprietary compact point source that, when completed, is expected
to be economically competitive with and no larger than conventional optical
lithography sources. JMAR's Picosecond X-ray Source ("PXS") is only a few cubic
feet in size, consisting of several individual modules each powered by the
Company's patented Britelight(TM) laser. These modules produce a rapid train of
very short and powerful light pulses having intensities of many hundreds of
trillions of watts per square centimeter that are focused into a
microwave-oven-size chamber to produce X-rays. The Company believes that once
these much smaller and more cost effective X-ray lithography systems become
commercially available, they will be well received by the semiconductor
industry.

        Semiconductors are manufactured using a variety of substances, with the
predominant substrate being silicon. Other substances, often referred to as
"compound semiconductors," are used for certain, specific applications, such as
for ultra-high speed communications semiconductors. The compound semiconductor
material which has been used most frequently for these high-speed purposes has
been Gallium Arsenide (GaAs). Until recently, GaAs has been used principally for
military communications applications, but its commercial uses have been
increasing. The market for gallium arsenide chips, which presently stands at
about $2 billion, is expected to grow at a solid 30% per year through 2004, when
it is estimated to hit $6 billion. The "high bandwidth" segment of this market
is reported to be growing at an even faster rate. The Company believes that
X-ray lithography could play a key role in enabling the cost-effective
manufacture of the high performance circuits needed for these applications.

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

        JMAR's advanced lithography development program has benefited from the
investment of in excess of $30 million in Company and government funds over the
past decade. In January 1994, after working on company funds and relatively
small government funded X-ray lithography R&D contracts, JMAR received a $6.9
million multi-year contract to develop its laser-plasma PXS for use in a point
source X-ray stepper system. In July, 1998, JMAR received an additional $13
million multi-year contract to continue this development and to construct an
X-ray lithography point source demonstration system. In June, 2000, JMAR began
another two-year $12.8 million phase of source development aimed at integrating
its scalable, modular X-ray source with an X-ray stepper supplied by SAL, Inc.,
a leading X-ray stepper manufacturer, and installing this integrated system at a
semiconductor manufacturing demonstration test site. These contracts were issued
by the U.S. Army Research Laboratory and are sponsored by the Defense Advanced
Research Projects Agency (DARPA) of the Department of Defense.

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

        During 2001, JMAR will continue to refine its PXS technology with the
objective of meeting a target of integrating PXS sources into one or more
available X-ray steppers for commercial or military gallium arsenide chip
manufacturers before the end of 2001. In addition, JMAR will be working to
scale-

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up the PXS to deliver higher wafer throughput lithography sources for both
gallium arsenide and specialty silicon processing systems for demonstration in
2002.

        In January 2001, JMAR announced that it awarded an initial phase
contract valued in excess of $1 million to SAL, Inc. ("SAL"), headquartered in
Burlington, Vermont, to start construction of an XRS 2000 Nano Pulsar X-ray
Lithography system which will be powered by a JMAR PXS-125 laser plasma X-ray
source. In addition to the JMAR PXS-125 and SAL's wafer stepper with its
supporting hardware, the complete Nano Pulsar system will include a collimator
developed by X-ray Optical Systems, Inc., under contract with JRI. This will be
the first X-ray point source system with a collimator intended for semiconductor
manufacturing.

        JMAR's high-power X-ray point source is also unique in the world in its
ability to accommodate an X-ray collimator at close proximity, and hence with
large collection efficiency. JMAR has subcontracted this collimator development
to other DARPA-sponsored companies and national laboratories. This effort has
produced the world's first full-field illumination collimators, with a recently
measured lithography exposure "gain" of 12 at the 90 cm point source to
mask/wafer exposure distance. A gain of 12 means that the exposure of the wafer
is 12 times faster than without the collimator and the illuminated field is free
from the distortions which are associated with an uncollimated point source.

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

        HIGH PERFORMANCE "SOFT" X-RAY SOURCES FOR METROLOGY APPLICATIONS. The
Company's NanoLight division is seeking to commercialize other applications of
its PXS technology. The Company believes that the very small, less than ten
microns in diameter X-ray spot size generated by the PXS coupled with its one
nanometer wavelength X-ray output also opens the door for JMAR to produce
additional major-market commercial X-ray systems for a range of processing
applications such as semiconductor wafer inspection for failure analysis, fault
detection, metrology of lithography and in-line defect or contamination
detection. Rather than using multiple PXS modules as is the case for lithography
and other higher power applications, these X-ray tools are expected to utilize a
single PXS module for high resolution X-ray imaging, X-ray fluorescence and
X-ray photoelectron spectroscopy.

        BEDE INVESTMENT. In May 2000, JMAR executed a series of technology,
financing and investment agreements (the "Agreements") with Bede Scientific
Instruments Ltd. ("Bede"), of Durham, England, a leading provider of advanced
X-ray -- based instruments for the semiconductor industry. Under the Agreements,
JMAR acquired rights to apply Bede's proprietary X-ray source and optics
technologies to certain nano-imaging and metrology applications for the
semiconductor industry. JMAR also made an interest-bearing loan to Bede in
return for which it received the right to purchase a minority interest in Bede
on attractive terms.

        Bede, which was privately held at the time of the Agreements, completed
its initial public offering on the London Stock Exchange in October 2000. At the
IPO, JMAR exercised an option which converted approximately $86,000 of its loan
into 1,935,500 freely-tradeable shares worth, at that time, approximately
$5,350,000. JMAR subsequently sold 46% of those shares in December 2000
realizing a gain of $2,184,476 and continues to hold the remainder of its
initial stake in Bede.

SEMICONDUCTOR PRODUCTS AND PROCESSES:

        During 2000, the Semiconductor Products and Processes segment conducted
by JMAR Semiconductor, Inc. ("JSI") accounted for approximately $3.9 million, or
20 percent of the Company's revenues. This segment is comprised of the following
three areas:


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        COMMUNICATIONS PRODUCTS. This is the emerging growth area for JSI and
the main thrust of JSI in 2000 and beyond. This business area focuses on the
introduction of a series of proprietary standard semiconductor products used in
communications systems, including computer networks, to increase the rate of
transfer of data, voice and video traffic. This area is specifically targeted at
the rapidly growing Local Area Network (LAN) and Wide Area Network (WAN) sectors
of the communications market. In 2000, JSI made substantial progress toward
transitioning the thrust of its business to high margin, proprietary standard
products for the communications sector including Internet applications with the
introduction of its high performance First In First Out ("FIFO") memory line.
In addition, several new products moved to the later stages of development
readying them for expected introduction in 2001. The extensive semiconductor
design, manufacturing and engineering capabilities originally established by JSI
to support its Custom ASIC product area play a key role in enabling JSI to
develop and produce state of the art semiconductors for the communications
market.

        In 2000, JSI entered into several strategic relationships including
agreements with 1st Silicon, a newly established wafer foundry located in
Kuching, Sarawak Malaysia, a wafer and packaged product manufacturing and supply
agreement with MacroTech Research headquartered in Taiwan for access and
logistic support to the foundry capacity of Taiwan Semiconductor Manufacturing
Corporation (TSMC) and a key distribution and sales agreement for its newly
developed standard semiconductor products with All American Semiconductor, the
fifth largest semiconductor distributor in North America. In 2000, JSI
introduced its first standard semiconductor product in the form of its
VeloSync(TM) Family of high performance FIFO memories. Substantial progress was
also made in the development of other high performance products slated to be
introduced in 2001, including Fast Ethernet transceivers and media access
controllers.

        CUSTOM APPLICATION SPECIFIC INTEGRATED CIRCUITS ("ASIC'S"). JSI's Custom
ASIC business area provides fully packaged custom complementary metal-oxide
semiconductor ("CMOS") gate arrays, standard cells, and mixed signal circuits
that are designed to meet customer's specific needs. In 2000, JSI shipped
finished products to several customers, including, KOFAX, Plexus, Inc. and
Applied Microsystems, among others. JSI's capabilities in this area were
bolstered dramatically with the signing of several sourcing and support
agreements involving state-of-the-art foundry technologies and libraries in
1999. Although its capabilities in this area remain strong, JSI made a conscious
business decision in 2000 to minimize sales efforts in this area to focus its
engineering resources on the development of its high potential gross margin
standard products for the communications marketplace.

        TECHNOLOGY SERVICES. During 2000, the Technology Services product line
accounted for approximately 18 percent of the Company's revenues. The Company
provides technology development and high-value technology services to other
semiconductor producers in the aerospace and defense industries. This area of
the business provided the majority of revenues for JSI in 2000. Largely based on
a contract originally awarded to JSI by General Dynamics Information Systems in
1998, this area continued to expand and grow in 2000. Work under this contract
includes the development, construction and operation of a new semiconductor
wafer fabrication facility at McClellan Air Force Base in Sacramento for the
Defense Microelectronics Activity. This facility was completed in 1999 with
facility qualification and process development continued throughout the year
2000. The outlook for the Technology Services area remains strong.

        In 2000, JSI continued its Technology Services work under contracts
awarded in 1998 from TRW Inc. and General Dynamics Information Systems. Under
these ongoing programs, JSI uses its unique semiconductor industry experience
and existing relationships to define and/or acquire the technologies needed to
support their customers' missions. New long-term programs were captured for the
placement, implementation and maintenance of these new state-of-the-art
technologies. In a unique arrangement, JSI maintains access to use these
facilities to support its commercial design and wafer fabrication needs. In
2000, JSI expanded its relationship with the government customer funding the
work in this area by entering into a Cooperative Research and Development
Agreement (CRADA) with the Defense Microelectronics Agency (DMEA) that
designates JSI as the commercial interface for the use of the DMEA capabilities
by other aerospace contractors. JSI expects to begin to generate revenue from
this commercial agreement starting in 2001.



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MARKET

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

MICROELECTRONICS EQUIPMENT

        MEASUREMENT AND INSPECTION SYSTEMS. In this market, the Company
concentrates on providing manufacturing equipment for the microelectronics
industry, including applicable sectors of the semiconductor, bio-chip, printer
systems and computer disk drive industries. The Company believes that the total
annual sales for all companies in the niches within this market in which it
currently competes is about $160 million.

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

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

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

        POSITIONING AND MOTION CONTROL SUBSYSTEMS. Positioning components
manufactured and sold by the Company include air bearing, cross-roller bearing
and linear motor positioning stages and motion controllers with positioning
accuracies ranging from 0.05 microns to 10 microns, motorized x-y tables,
z-elevators, linear and rotary stages, and complete motion control solutions.
These products are incorporated into the Company's measurement, inspection and
other manufacturing system products and are also sold to major semiconductor
equipment OEM's for sophisticated surface analysis and inspection equipment, and
to manufacturers of biochip micro-array systems. The Company believes that the
total annual sales in the niches within this market in which it currently
competes is about $80 million.

        ADVANCED LITHOGRAPHY. The total size of the lithography system market is
substantial. The semiconductor industry purchases between 1,500 to 2,000 new
lithography systems per year at prices ranging from approximately $700,000 to $8
million, depending upon the circuit feature sizes and other factors.
Historically, as circuit feature sizes have become smaller, the prices of the
lithography systems have increased rapidly.



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        Semiconductor manufacturers purchase lithography tools from established
optical stepper suppliers. The principal suppliers of optical lithography
steppers for high volume semiconductor production are Nikon, Canon, ASML,
Silicon Valley Group Lithography (SVGL) and Ultratech Systems.

        The Company understands that Canon and SVGL have also developed
prototype X-ray lithography steppers for use with synchrotrons. In addition,
Semiconductor Advanced Lithography, Inc. (SAL), a privately-owned company
headquartered in Vermont, was established several years ago to focus on the
X-ray lithography ("XRL") stepper market. According to SAL, as of the end of
2000, a total of 19 X-ray steppers have been sold worldwide for X-ray
lithography process development primarily for use with synchrotron X-ray
sources. Fifteen (15) of those have been provided by SAL.

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

        The silicon semiconductor industry is currently transitioning its
highest performance fab lines to the initial production of circuitry having
feature sizes as small as 0.18 microns (critical dimension). The Company
understands that, with the exception of SAL, the primary focus of stepper
manufacturers for the near-term will continue to be on the marketing of optical
lithography steppers. The "International Technology Roadmap for Semiconductors
("ITRS")" 1999 Edition, sponsored by the Semiconductor Industry Association,
projects that 0.13 micron generation lithography will also use optical
technology. The "next generation lithography" (NGL) technologies competing to
succeed optical lithography processes for the silicon market are XRL, extreme
ultraviolet (EUV), electron beam and ion projection technology. Each of these
NGL technologies has its major semiconductor manufacturer proponents. X-ray
lithography process development has been conducted over more than a decade, by
several other organizations, including IBM and several large Japanese
semiconductor companies, using synchrotron X-ray sources. The Company and other
proponents of XRL believe that as a result of this effort, XRL is the most
advanced and mature technology for the 0.10 micron generation and beyond.

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

        The demand for ultra-high speed communications devices is increasing
rapidly. The principal application is for routers and switches in fiber optic
networks being created to handle the "last mile": delivery of fiber optic
services from the main trunks to the factories, office buildings and eventually
homes of users. These devices need to transfer data at 40 gigabits per second or
faster. Gallium Arsenide, not silicon, is the material of choice for many
semiconductor components operating at these ultra-high bandwidths. By some
estimates, the GaAs chip market is growing 30% per year, with the market for the
highest-speed devices increasing faster -- 170% annually.

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


                                       10
<PAGE>   11
        The Company's XRL program is focused on the development of the PXS as a
commercially-viable X-ray source initially for the Gallium Arsenide chip market
and then for low-volume production, process development applications for the
silicon chip market, and ultimately as an alternative to the synchrotron and
other NGL technologies for high volume production of silicon chips. Commercial
PXS source/stepper systems for XRL are expected to cost less and be of
comparable, or smaller, size than projected optical DUV stepper systems for the
0.13 micron generation of silicon production and beyond.

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

SEMICONDUCTOR PRODUCTS AND PROCESSES

        JSI designs and produces fully packaged custom microcircuits commonly
referred to as ASIC's. These devices serve the non-captive portion of the ASIC
market, which was estimated to be in excess of $12 billion in 2000, and is
forecast to grow to over $14 billion and $23 billion by 2002 and 2004,
respectively*. JSI produces CMOS gate arrays, standard cells, and mixed signal
circuits designed to meet specific customer needs. It currently offers designs
and products using technologies from 0.18 micron to 1.0 micron (transistor gate
length) for digital and advanced analog designs.

        Starting in 1999 and continuing throughout 2000, JSI took major steps to
leverage its existing core competencies to position the Company as a leading,
high-growth "fabless" provider of high-speed semiconductor products and design
services targeted at the communications marketplace for voice, video and data
transfer.

        Market researchers forecast that the communications integrated circuit
market will be the driving force in semiconductor demand over the next five
years growing from $27.5 billion in 1999 to over $48.5 billion by 2004 with its
rapid growth driven by the strong worldwide demand to accelerate the
transmission of Internet, voice and video data to ever-faster rates*. In 2000
JSI began shipping products to address the needs of this market and capitalize
on this significant growth opportunity.

        The Company has generated a road map of designs and product offerings to
accomplish its strategy for market penetration. Total revenue for semiconductor
Wide-Area Network (WAN) and Local-Area Network (LAN) chips is projected to grow
from approximately $2.3 billion to over $7.5 billion in 2004*. Strategically,
JSI is focused on serving the WAN marketplace, however due to longer
developmental time required for these more sophisticated higher selling price
circuits, JSI has also tactically approached the LAN market first. Its revenues
from the commercial sales of communications chip products are expected to
commence in the first half of 2001. Furthermore, the current LAN product
development program will provide stepping-stones leading to the subsequent
development and market introduction of a planned series of high-value WAN
products.

        The Company's telecom semiconductor roadmap includes introductions in
three new product areas; (i) high performance specialty memories, including
high-speed First-In, First-out (FIFO) memories, (ii) high performance local area
network interface chips, including Fast Ethernet and Gigabit Ethernet
transceivers and Media Access Controllers and (iii) Application Specific
Standard Products (ASSP) for the WAN and SONET markets which will include
network processor-class products.

        FIRST-IN-FIRST-OUT MEMORY (FIFO). The First-in-First-out (FIFO) memory
market opportunity was estimated at approximately $300 million in 1999 and is
forecasted to grow to $510 million by 2004 due to ever-increasing product
performance demands*. FIFO's are widely used in the communications industry as
data handling chips that buffer and re-transmit data in a stream. JSI has
introduced its unique high-speed FIFO standard memory products to gain market
presence in the telecom marketplace.


                                       11
<PAGE>   12

Full-scale production commenced in the third quarter of 2000, with production
shipments made to JSI's distributor, All American Semiconductor, in late
December. JSI plans to broaden its FIFO family product offerings by introducing
additional new designs throughout 2001.

        APPLICATION SPECIFIC STANDARD PRODUCTS (ASSP). JSI's advanced ASSP
products are currently in the product development stage. This multi-stage
development program is underway to produce high performance network specific
semiconductors for both the LAN and WAN segments of the market. In 2000 the
development of JSI's line of high performance transceiver chips took shape,
readying the products for introduction in 2001. The Ethernet transceiver market,
including 10baseT, 100baseT (Fast Ethernet), and Gigabit Ethernet, was forecast
to be $638 million in 2000 and growing at a compounded annual growth rate (CAGR)
of 26% to a forecasted market of $2.047 billion in 2004*. JSI's transceiver
products are targeted to serve this market.

Also progressing in 2000 was JSI's Fast Ethernet and Gigabit Media Access
Controller chip. Scheduled for introduction in the third quarter of 2001, this
high value product is targeted at a market forecasted to grow at a CAGR rate of
43%, rising from a modest $18 million in 2000 to $55 million in 2004*. This
important technology will also be key for future product integrations at JSI.

        Longer term, JSI is focused on producing high-speed switching class
products with leading-edge features demanded by the marketplace. Planned
features include embedded network processing, programmability (both hardware and
software), encryption, high-speed and flexibility of use, all of which are
expected to continue the trend for this class of products to generate very
attractive gross profit margins. ASSP products are in high demand and are
drivers of product innovation. JSI has a solid understanding of the development
and production costs for these devices. The Company believes that gross margins
in excess of 60% are possible for these products.


MANUFACTURING

        The Company believes that alternative suppliers are readily available
for most of the critical components that it requires to manufacture its
precision instrument products. During 2000, the Company expanded its internal
machine shop capabilities at JPSI to enable it to fabricate many components
previously purchased from outside suppliers. With this expansion, JMAR continues
to realize improved costs, quality, and lead times that it believes will improve
its overall competitiveness in the marketplace. Due to the complex nature of the
capital equipment that the Company manufactures at its Precision Systems
division, it purchases a substantial amount of "off-the-shelf" components from
outside vendors for integration into its final systems. These items include
computers, optics, television cameras and motors. In the past, the Company has
encountered some difficulties procuring these items but does not rely on
exclusive sole source suppliers. Accordingly, it does not currently expect parts
availability to create any significant problems in the foreseeable future.

        JMAR has installed and integrated an internal information system which
includes a management information system that supports a fully integrated
material requirements planning system that is run on an internal local area
network. This system, which enables JPSI to control its material requirements
and production planning, as well as all phases of production, was expanded in
1999 to improve the Company's quality assurance program. Those improvements
contributed to JPSI's receipt of its ISO 9001 re-certification. Improvements
were also made in JPSI's communication network to speed responses to its
customers.

        Due to the complexity of the equipment that the Company's Precision
Systems division manufactures, delivery times after receipt of an order
typically range from 30 to 90 days for standard products and from 90 days to one
year for customized and special products.

        JMAR's Semiconductor Products and Processes division is a "fab-less"
supplier of products based on its existing semiconductor design and engineering
capabilities. To enable this, it has established manufacturing supply
arrangements with multiple semiconductor manufacturers for


*Market forecast information from the following Gartner Group/Dataquest reports:
Worldwide Communication Semiconductor Forecast dated January 22, 2001, LAN
Semiconductor Applications and Market dated December 18, 2000, WAN Semiconductor
Applications and Market dated January 22, 2001 and Worldwide Semiconductor
Trends and Forecast dated November 6, 2000.

                                       12
<PAGE>   13
semiconductor wafers, technology, design, and manufacturing support. The
Company believes its flexible manufacturing agreements with multiple sources
give JMAR Semiconductor the ability to offer a much broader variety of higher
performance products than could be economically produced if it maintained its
own fabrication facilities. Since JMAR Semiconductor is a fabless operation, its
time schedule for the development, manufacture and sale of its products is
dependent on the availability of capacity at outside foundries. Early 2000 was
an unprecedented time for the semiconductor foundries used by JMAR. Capacity was
at an extreme premium and even the largest fabless chip companies were
scrambling for wafers. JMAR was impacted early in 2000 by the loss of foundry
capacity at its prime wafer source. Considerable effort was expended throughout
the year to obtain reliable foundry sources for its future needs. JMAR believes
it has secured adequate foundry capacity for those needs.


RESEARCH AND DEVELOPMENT

        Company-funded expenditures for research, development and engineering
("RD&E") were $2,299,635, $2,105,294, $2,026,482, $1,699,010 and $1,304,119 for
the years ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
Total expenditures for RD&E, including funding provided by third party contracts
from the U.S. government and other companies were: $6,424,830, $7,250,287,
$5,863,796, $3,186,149 and $2,441,184 for the years ended December 31, 2000,
1999, 1998, 1997 and 1996, respectively.

        JMAR Research is performing R&D contract work based on its advanced
solid state laser technology. This work, which has important potential
commercial applications, is funded by the Defense Advanced Research Projects
Agency (DARPA) of the Department of Defense and other customers. Government
funding for these dual-use technologies, however, is very vulnerable to changes
in the political environment. For this reason, the Company is exploring
strategic alliance discussions with commercial microelectronics manufacturers to
enlist their participation in the continuing development and commercialization
of this technology.

        Some of the more significant research and development projects the
Company has worked on in 2000 include (i) the continued development of PXS point
X-ray and EUV sources for lithography for the semiconductor industry and other
metrology applications; (ii) the continued development of new communications
semiconductor products; (iii) the development of new software for the Company's
test and measurement systems; and (iv) the engineering development of higher
performance test, measurement and inspection systems for the semiconductor,
optical network and biomedical industries

        The main R&D emphasis in 2001 at JMAR's Research and NanoLight divisions
is the production of a modular PXS X-ray source to be integrated with a SAL
stepper for placement in a foundry for performance validations and process
evaluations during 2002.


DISTRIBUTION

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



                                       13
<PAGE>   14

        During 2000, JSI entered into a distribution agreement with All American
Semiconductor, Inc. ("All American"), a leading national distributor of
semiconductor and electronic components. Under the agreement, All American,
which maintains offices throughout North America and is recognized as the
nation's fifth largest distributor of semiconductors, became the premier,
non-exclusive stocking distributor for a range of JSI's standard, proprietary
and certain custom semiconductor products. Additionally, in late 2000, All
American began to purchase sufficient quantities of chips from JSI to establish
and maintain a representative inventory to provide adequate and timely delivery
to customers. They are now working closely with JSI's sales force to develop the
market for current and future chip products, including "design-ins" where
customers design their products to specifically operate with JSI's chips.

IMPACT OF UNCERTAIN ECONOMIC ENVIRONMENT

        There has been much discussion in the media about the current downturns
in both the U.S. and the world economies and the impact of those downturns on
the Technology Industry. The Company sells its products primarily to much larger
technology companies who either use them to manufacture their own
micro-electronic components or integrate them into electronic products which
they market directly to end users. Therefore, JMAR could be vulnerable to any
economic downturn which affects the viability of that portion of its customer
base, but it could also benefit from the increase in R&D funding which often
becomes available at such times.

        When the Technology Industry fails to upgrade its basic semiconductor
technology on a timely basis, inventories on customers' shelves start to climb.
End product manufacturers begin to curtail purchases so chip manufacturers start
slowing production. That is precisely when the Tech Industry needs to ramp-up
R&D budgets to accelerate the development of new high-impact, higher performance
products -- and we see signs of that beginning to happen at some of the major
chip firms.

        Two of JMAR's three operating divisions: JPSI and JSI are primarily
engaged in producing relatively high-end technology products and services, some
of which can contribute to the creation of revolutionary new products of the
type needed to jump-start the Industry. However, neither of them is postured to
take the lead in creating such products. Accordingly, the Company believes that
the future near-term business prospects of those two divisions will depend
primarily on the general level of economic activity in the Technology Industry
marketplace.

        On the other hand, JMAR's NanoLight organization, at the core of which
lies JRI -- the Company's source of more than a decade of innovative Advanced
Light technology -- is postured to play a key role in helping the semiconductor
industry begin to re-assert itself in the near future. Its new lithography
technology is helping to lay the foundation for the production of advanced
semiconductors that could provide the foundation for a wide-range of new end
products, the capabilities of which will only be limited by the creativity of
the overall Industry.

        JMAR's NanoLight organization, though capital limited today, is rapidly
moving to assemble all of the capabilities needed to provide the communications
industry with the ability to manufacture higher performance, more cost-effective
electronic circuitry having the potential to transport voice, video, and data at
much higher rates, and with greater clarity than ever before. By so doing, many
prototype or yet undemonstrated consumer, business, scientific and military
product applications, not practical today, because of poor economics,
insufficient band width (or speed), or both, may suddenly be brought to life and
inserted into the mainstream economy with the improved speeds and economics made
possible by their more powerful semiconductor chips. JMAR expects that its
rapidly advancing lithography technology, now nearing practical application at
JRI, will begin to play an ever-growing role in enabling chip manufacturers to
produce higher performance semiconductor products targeted, initially, for the
high band-width communications market.

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



                                       14
<PAGE>   15

COMPETITION

MICROELECTRONICS EQUIPMENT:

PRECISION SYSTEMS

        JMAR is an established provider of precision motion control X-Y staging,
components and systems. There are three major domestic competitors. These
competitors carry a much broader line, have much larger distribution channels,
and frequently have a larger stock of off-the-shelf inventory. In addition,
there are approximately five competitors (Newport, Anorad, NEAT, Schneeberger
and Aerotech) specializing in specific niches. Rather than compete in the
generalized motion control and positioning product marketplace, the Company has
established itself as an integrator of X-Y positioning and motion control
subsystems and platforms for several substantial OEM customers. The Company
continues to receive indications that the market for its precision X-Y stages
may be larger than originally estimated. Accordingly, the Company expanded its
internal machine shop capabilities at JPSI to improve its competitiveness in
price, quality and delivery time.

        JMAR believes that it is a recognized leader in measurement and
inspection systems utilizing vision and laser based depth probes. There are
approximately three major domestic (Newport, OGP and View Engineering) and three
major foreign competitors (Mitutoya, Nikon and Zeiss) within JMAR's marketplace.
The majority of JMAR's competitors in this area supply standard off-the-shelf
measurement and inspection systems for the microelectronics industry. JMAR's
strengths against its competition are its ability to integrate its positioning
and motion control products with its standard measurement and inspection systems
to provide turnkey system solutions for manufacturing, process control and
quality control requirements. The Company's vision and laser-based systems are
targeted for high-end applications requiring high resolution, sub-micron edge
detection, positioning and measurement accuracy. This enables the Company to set
itself apart from its primary competitors which choose to compete in the lower
resolution marketplace.

ADVANCED X-RAY SOURCE DEVELOPMENT

        The Company believes that it has established itself as the world's
leading developer of laser-plasma X-ray lithography point source systems.
Although other X-ray point source technologies are under development, the
Company also believes that it has achieved X-ray outputs which will enable it to
meet a throughput performance sufficient for GaAs foundry needs. This
performance exceeds any other existing X-ray point source's delivery of
collimated lithography X-ray power. The Company believes that its patented diode
pumped solid state laser-driven PXS, when fitted with X-ray collimator devices
developed by other DARPA contractors, will be capable of generating X-rays of
sufficient intensity to demonstrate 0.10 micron and smaller feature sizes at
commercially-viable manufacturing rates, for GaAs chip production and, with
planned increases in X-ray power, the Company believes its PXS will produce
sufficient X-rays for silicon chip process development and manufacturing in the
future.

SEMICONDUCTOR PRODUCTS AND PROCESSES:

        In its recent entry into the Communications Products area, JSI has
postured itself as a "second source" for high-speed FIFO memory devices with
industry-leading performance. Lower performance FIFO devices are currently
produced by Integrated Device Technology, Inc. ("IDT") and Cypress Semiconductor
("Cypress"), both of which are much larger than JMAR.

        In its custom ASIC product area, JMAR Semiconductor faces competition
from a number of microcircuit producers willing to serve lower volume
applications. While not limited in the volumes that it can supply, JMAR
Semiconductor chooses to target high value, lower volume customers who are not
served by the major producers. Using high performance software tools,
proprietary design routines, and


                                       15
<PAGE>   16

flexible foundry and production arrangements, JMAR Semiconductor believes it
provides a cost effective solution to these low volume customers.

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


PATENTS AND PROPRIETARY TECHNOLOGY

        During the past several years JMAR's patent protection efforts have
produced 11 issued patents containing 295 separate allowed claims covering
various types of laser plasma X-ray sources, high-brightness solid state lasers
and point-source lithography system technology. The Company has 8 additional,
multi-claim patents pending covering advanced collimator technology, improved
X-ray source chambers, improved laser amplifiers, internal imaging of
semiconductor devices (nanotomography), laser ablation of materials, and
ultraviolet and extreme ultraviolet (EUV) microlithography systems, each of
which represents a major opportunity for potential growth for JMAR. Furthermore,
JMAR Semiconductor's chip design activities have created a substantial body of
valuable proprietary technology. During 2000, the review and documentation of
patentable technology continued.

        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. The
field of semiconductor chip design is also very competitive with patent coverage
over many technologies and processes. The Company's Semiconductor division
intends to protect to the extent possible, its proprietary chip designs, as well
as avoid any patents held by others.


CUSTOMERS

        For fiscal years 2000, 1999 and 1998, the United States Government
accounted for approximately 45%, 58% and 33%, respectively, of total sales. A
major portion of the Company's government contract sales involves research and
development aimed at producing commercially-viable products and technology.
Foreign sales accounted for 7%, 11% and 32% of the Company's revenues in 2000,
1999 and 1998, respectively. In 2000, 1999 and 1998, IBM accounted for 5.6%,
10.3% and 29.6% of JMAR's revenues, respectively. Installations in IBM's foreign
facilities accounted for 0.7%, 6.0%, and 19.9% of the Company's revenues in
2000, 1999 and 1998, respectively, and are included in the above foreign sales
numbers. In 2000 and 1999, 16.3% and 13.4%, respectively, of the Company's
revenues were derived from sales of DNA biochip lithographic alignment systems
to Affymetrix, Inc.


EMPLOYEES

        Currently, the Company has approximately 130 full-time employees. The
Company is not subject to any collective bargaining agreements and believes that
it maintains excellent relations with its employees.



                                       16
<PAGE>   17

INFORMATION REGARDING INDUSTRY SEGMENTS, SIGNIFICANT CUSTOMERS AND EXPORT SALES

        The Company operates in two segments as follows: Microelectronics
Equipment and Semiconductor Products and Processes. Financial information
relating to the Company's segments, significant customers and export sales for
the three years ended December 31, 2000 is incorporated by reference from Note
14 of Notes to Consolidated Financial Statements.

ITEM 2. PROPERTIES

        The Company has a total of approximately 73,000 square feet of
laboratory, office, manufacturing and storage space under leases between the
Company or its three subsidiaries and their respective landlords. The Company's
corporate headquarters occupies 4,856 square feet in Carlsbad, California
approximately 35 miles north of San Diego International Airport. This lease
expires on September 30, 2005.

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

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

        JMAR Semiconductor leases 25,556 square feet of office and storage space
in Irvine, California south of Los Angeles which expires on August 31, 2005.

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

ITEM 3. LEGAL PROCEEDINGS

        In February 2000, the Company retained Auerbach, Pollack & Richardson,
Inc. (Auerbach) as warrant solicitation agent in connection with the exercise of
the Company's publicly traded warrants in March 2000. A dispute later arose
between the Company and Auerbach regarding the exercisability provisions of
Warrants the Company had previously issued to Auerbach as compensation for its
services as warrant solicitation agent. This resulted in the filing of a lawsuit
by the Company against Auerbach seeking a determination that the Auerbach
Warrants are not presently exercisable. In February 2001, JMAR and Auerbach
settled the dispute with JMAR agreeing to issue an additional 85,653 warrants at
an exercise price of $5.25 per share.

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

                                      None.


                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

        The Company's Common Stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market ("NASDAQ-NMS") under the symbol JMAR. On February 15,
2000, the Company called for redemption of its 2,449,749 Common Stock Purchase
Warrants which traded at that time on the Nasdaq National Market under the
symbol JMARW. Each Warrant was exercisable for one share of Common


                                       17
<PAGE>   18

Stock at $5.50 until March 20, 2000. After that time, the Warrants were no
longer exercisable, and holders had the right to receive only the redemption
price of $0.05 per Warrant. As of the redemption date, March 20, 2000, 2,442,444
Warrants had been exercised and 7,305 Warrants were redeemed. The 2000 and 1999
high and low transaction prices for the common stock as reported by NASDAQ-NMS
are set forth in the following table.

                               COMMON STOCK PRICE
<TABLE>
<CAPTION>
                                 HIGH          LOW
                                -------      -------
<S>                             <C>          <C>
2000
First  Quarter ..........        22.75         4.88
Second Quarter ..........        11.50         3.50
Third  Quarter ..........        12.50         4.69
Fourth Quarter ..........         8.72         2.50

1999
First  Quarter ..........         2.38         1.81
Second Quarter ..........         2.53         1.88
Third  Quarter ..........         2.03         1.50
Fourth Quarter ..........         4.56         1.50
</TABLE>

        As of March 1, 2001, there are approximately 12,600 holders of JMAR's
common stock.

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

        Pursuant to the Director Compensation Program adopted by the Company in
August, 1997, the Company issued a total of 308 shares of Common Stock in
October, 2000 and a total of 508 shares of Common Stock in December, 2000 to its
outside directors as compensation for services as a director. These transactions
were exempt under Section 4(2) of the Securities Act of 1933.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

        The Consolidated Statement of Operations for 1996 includes the
operations of JMAR Semiconductor since May 1996.


                                       18
<PAGE>   19

 CONSOLIDATED STATEMENTS OF OPERATIONS DATA -- FOR THE YEARS ENDED DECEMBER 31,

<TABLE>
<CAPTION>
                                           1996               1997               1998               1999               2000
                                       ------------       ------------       ------------       ------------       ------------
<S>                                    <C>                <C>                <C>                <C>                <C>
Revenues ........................      $ 16,331,090       $ 21,461,627       $ 24,560,834       $ 24,767,740       $ 19,626,600
Gross profit ....................         6,692,136          8,830,316          9,187,891          7,051,994          5,923,223
Operating expenses ..............         6,188,169          7,303,374          8,279,582          9,197,098          9,469,777
Income (loss) from operations ...           503,967          1,526,942            908,309         (2,145,104)        (3,546,554)
Interest expense ................          (288,372)          (181,562)          (181,227)          (240,928)          (136,313)
Interest income .................            61,484             88,402             89,575             25,205            324,550
Other income
  (expense), net ................           327,490             16,503            (27,612)           111,833          2,133,552
Income (loss) before income
    taxes .......................           604,569          1,450,285            789,045         (2,248,994)        (1,224,765)
Income tax (provision) benefit ..           175,000            345,000            (32,204)                --                 --
Net income (loss) ...............           779,569          1,795,285            756,841         (2,248,994)        (1,224,765)
Net income (loss) per basic share               .05                .11                .04               (.12)              (.06)
Basic shares used in
  computation of net income
  (loss) per share ..............        15,582,579         17,065,860         18,046,860         18,045,914         21,468,763
</TABLE>



                 CONSOLIDATED BALANCE SHEET DATA -- DECEMBER 31,


<TABLE>
<CAPTION>
                              1996             1997             1998             1999             2000
                           -----------      -----------      -----------      -----------      -----------
<S>                        <C>              <C>              <C>              <C>              <C>
Working capital .....      $ 5,743,747      $ 9,634,527      $ 9,213,134      $ 7,468,743      $21,543,381

Total assets ........       15,395,518       17,268,878       22,874,833       20,673,768       34,191,574

Short-term debt .....        2,317,861          922,246        2,693,975        5,195,490        1,291,178

Long-term liabilities          667,310          907,235          475,362          642,913          339,908

Stockholders' equity         9,368,905       12,488,212       13,253,179       10,909,461       28,444,669
</TABLE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The Company operates in two segments as follows: Microelectronics
Equipment and Semiconductor Products and Processes.

RESULTS OF CONSOLIDATED OPERATIONS

        Net (loss) income for each of the fiscal years ended December 31, 2000,
1999 and 1998 was $(1,224,765), $(2,248,994) and $756,841, respectively, while
income (loss) from operations for those same periods was $(3,546,554),
$(2,145,104) and $908,309, respectively. Revenues for 2000, 1999 and 1998 were
$19,626,600, $24,767,740 and $24,560,834, respectively.


                                       19
<PAGE>   20

        In 1999 the Semiconductor Products and Processes Segment recorded
significant revenue compared to 2000 attributable to non-recurring subcontracts
related to construction of a semiconductor fabrication facility for the
Department of Defense located in Sacramento, California. Furthermore, this
Segment's fiscal 2000 revenues were affected by the planned reassignment of a
substantial portion of the Company's semiconductor engineering staff from
government funded contract chip development work to internally funded commercial
product development and marketing activities consistent with the Company's plans
to accelerate its entry into the commercial telecom semiconductor product
market. This Segment's fiscal 2000 revenues were also impacted by delays in
market entry of its new standard products due to the loss of foundry capacity at
its prime wafer source in the early part of 2000 and longer than expected time
for device testing and qualification. These factors, along with the current
semiconductor product market downturn, have caused the Company to temper its
previous near-term outlook for its semiconductor chips.

        The Company's operating results in 2000 were also impacted by JMAR's
continuing investments to accelerate the time-to-market for several new
high-performance products for the microelectronics marketplace. These
investments include increased payroll costs with the addition of several senior
technical specialists and managers to direct and help speed the Company's new
precision instrument, laser and X-ray product development programs. As discussed
below, the Company-funded product development expenditures that were expensed
totaled $2,299,635 for the year ended December 31, 2000 compared to $2,105,294
for the year ended December 31, 1999.

        The Company's revenues in 1999 compared to 1998 were negatively impacted
by a decline in 1999 shipments of the Company's precision instrument products
related to the continuing slump in demand triggered by the 1998 Far East
economic slowdown which led to a decline in orders for the Company's products
from the computer disk drive industry, attributable mainly to technological
improvements that enabled significant capacity increases on each disk drive and
thus reducing overall demand for the number of disk drive units and a lower
demand for capital equipment in that industry. This decline was partially offset
by the growth in 1999 compared to 1998 in the Semiconductor Products and
Processes Segment and by the growth in 1999 of the Company's lithography
equipment sales to the biochip industry.

        The Company's ability to forecast orders for its precision instrument
products in its Microelectronics Equipment Segment continues to be somewhat
limited due to continuing marketplace uncertainties. In addition, certain of the
Company's revenues are from a limited number of customers. As a result, the
timing of receipt and shipment of orders for those customers could have a
material impact on quarterly results in 2001.

        In 2000, JMAR entered the specialty semiconductor memory products market
with its first in a planned series of higher-speed, lower power-consuming memory
devices. The first shipment of these chips was made to JMAR's distributor in
late December 2000.

        Gross margins for the fiscal years ended December 31, 2000, 1999 and
1998 were 30.2%, 28.5% and 37.4%, respectively. The higher gross margins for
2000 compared to 1999 are primarily due to a decline in the lower margin
contract revenues in the Semiconductor Products and Processes Segment. Also
included in 2000 is a charge to cost of sales to increase the reserve for excess
and obsolete inventory of $250,000 at JPSI. The lower gross margins for 1999
compared to 1998 were primarily due to a decline in sales of the Company's
higher margin precision instruments for the computer industry in 1999 compared
to 1998, the build-up of expenses associated with the increase in 1999 in the
Company's semiconductor-related business, competitive pricing pressures on
certain products and a charge to cost of sales to increase the reserve for
excess inventory of $389,000. The Company continues to experience competitive
pressures on certain precision instrument products, which may impact gross
margins in the future. The Company's Semiconductor Products and Processes
Segment conducted by JSI is in the process of evolving from a lower profit
margin contract development business to a commercial business focused on the
communications semiconductor products markets. JMAR believes, but can give no
assurance that, as this evolution progresses, a greater proportion of JMAR's
sales will be generated by higher profit margin commercial semiconductor
products. Therefore, to the extent that the Company's commercial semiconductor
products begin to generate a higher percentage of the Company's revenues, the
Company's gross margins should improve. The Company also expects that as its
patented, laser-


                                       20
<PAGE>   21

driven advanced light products enter the marketplace and gain acceptance, they
will also substantially improve its gross profit margins.

        Selling, general and administrative ("SG&A") expenses for the fiscal
years ended December 31, 2000, 1999 and 1998 were $7,170,142, $6,916,804 and
$6,153,100, respectively. The increase in SG&A expenses in 2000 is primarily due
to an increase in sales and marketing costs in the Semiconductor Products and
Processes Segment. The increase in SG&A expenses in 1999 compared to 1998 was
primarily due to higher payroll costs related to the addition of senior
technical and management staff.

        The Company's research, development and engineering program (RD&E)
consists of two types: Customer-Funded RD&E (U.S. government and other
companies) and Company-Funded RD&E. Both types of RD&E are expensed when
incurred. Customer-Funded RD&E costs incurred, included in "Contract Costs of
Sales", totaled $4,125,195, $5,144,993 and $3,837,314 for the fiscal years ended
December 31, 2000, 1999 and 1998, respectively. The decrease in Customer-Funded
RD&E expenditures for 2000 is related to a decrease of $737,128 related to the
Company's contract for the development of a unique microcircuit architecture and
devices for the replacement of obsolete integrated circuits and a decrease of
$282,670 in the X-ray lithography program funding provided by DARPA, most all of
which is directed toward development of JMAR's X-ray lithography source
technology for the commercial semiconductor market. Company-Funded RD&E costs
are shown in "Operating Expenses" and totaled $2,299,635, $2,105,294 and
$2,026,482, for the fiscal years ended December 31, 2000, 1999 and 1998,
respectively. Hence, total RD&E expenses for those three years were $6,424,830,
$7,250,287 and $5,863,796, respectively. Capitalized software development costs
of $2,325,075, $342,383 and $451,185 for the years ended December 31, 2000, 1999
and 1998, respectively, are not included in the above amounts. Including
capitalized software development costs, RD&E expenditures as a percentage of
sales were 44.6%, 30.7% and 25.7% for the years ended December 31, 2000, 1999
and 1998, respectively. RD&E expenditures are primarily related to the continued
development of PXS point X-ray sources for lithography for the semiconductor
industry and other metrology applications, the continued development of new
communications semiconductor products, the development of new software for the
Company's test and measurement systems and the engineering development of higher
performance test, measurement and inspection systems for the semiconductor,
optical network and biomedical industries.

        Included in 1999 is an accrual of $175,000 in termination costs for a
former employee. Included in 1998 is a writedown of $100,000 related to certain
fixed assets in the Semiconductor Products and Processes Segment.

        Interest expense for the fiscal years ended December 31, 2000, 1999 and
1998 was $136,313, $240,928 and $181,227, respectively. Interest expense is
significantly less in 2000 versus 1999 due to the repayment of the Company's
working capital line (the "Line") with Comerica Bank in late March 2000. The
full availability of the Line, subject to the formula discussed below, continues
in effect and can be drawn down if needed in the future. The terms of the Line
are described in "Consolidated Liquidity and Financial Condition," below. The
interest increase in 1999 is related to increased borrowings in that year
pursuant to the Line.

        Other income (expense) for 2000 includes a gain of $2,184,476 on the
sale of 890,000 shares of Bede in December 2000. Other income (expense) for 1999
includes a writedown of $88,344 of a note receivable from an officer of the
Company. Interest and other income (expense) for 1998 includes a writedown of
$50,000 of a note receivable from the defunct Santa Fe Laser Company.



                                       21
<PAGE>   22

RESULTS OF SEGMENT OPERATIONS

Microelectronics Equipment Segment

        Revenue for the year ended December 31, 2000 as compared to the year
ended December 31, 1999 for the Microelectronics Equipment Segment decreased
$688,889 from $16,464,982 to $15,776,093 or 4%. This decrease is attributable to
a decrease in contract revenues in this segment from $6,149,296 in 1999 to
$5,263,850 in 2000. Operating loss of the Microelectronics Equipment Segment for
the year ended December 31, 2000 as compared to the year ended December 31, 1999
was adversely affected as well, increasing $389,439 from a loss of $2,459,721 to
a loss of $2,849,160. This increase is due to lower margins of certain of the
Company's precision instrument products.

Semiconductor Products and Processes Segment

        Revenue for the year ended December 31, 2000 as compared to the year
ended December 31, 1999 for the Semiconductor Products and Processes Segment
decreased $4,452,251 from $8,302,758 to $3,850,507 or 54%. The revenues for 1999
included large one-time subcontracts let in 1999 as discussed above. The
revenues of this Segment in 2000 were impacted by the planned reassignment of
certain engineering staff from government contract chip development work to
internally funded commercial product development and marketing activities to
introduce a series of commercial telecom semiconductor chips, also discussed
above. This Segment's fiscal 2000 revenues were also impacted by delays in
market entry of its new standard products due to the loss of foundry capacity at
its prime wafer source in the early part of 2000 and longer than expected time
for device testing and qualification. These factors, along with the current
semiconductor product market downturn, have caused the Company to temper its
previous near-term outlook for its semiconductor chips. Because of the decrease
in revenues, as well as the build-up of the sales and marketing staff and
infrastructure related to the planned introduction of the Company's new
commercial semiconductor chips, operating income (loss) for the year ended
December 31, 2000 as compared to the year ended December 31, 1999 decreased from
income of $314,617 to a loss of $(697,394).


CONSOLIDATED LIQUIDITY AND FINANCIAL CONDITION

        Cash and cash equivalents at December 31, 2000 and 1999 were $9,856,768
and $2,323,127, respectively. The increase (decrease) in cash and cash
equivalents for the fiscal years ended December 31, 2000 and 1999 was $7,533,641
and $(1,525,056), respectively.

        The increase in cash for 2000 resulted primarily from the exercise of
warrants and options, including the Company's publicly traded warrants, of
$16,184,320 and proceeds from the sale of marketable securities of $2,224,337
offset in part by payments against the Company's working capital bank line of
credit of $3,890,000, software development costs of $2,325,075, cash used in
operations of $2,369,276 and capital expenditures of $1,772,228.

        JMAR's operations will continue to require the use of working capital.
The Company's working capital availability as of December 31 for each of the
five years ending with 2000 is summarized in the Consolidated Balance Sheet Data
on page 19. In the past, the working capital of the Company has generally been
funded through its $5,000,000 working capital line (the "Line") with Comerica
Bank (the "Bank") and through third party contracts. The Line consists of a $5
million primarily formula-based line of credit with interest at prime rate. Of
that amount, $750,000 is unrestricted. Advances on the balance of the $5 million
Line are based on a formula of 80 percent of eligible accounts receivable, 35
percent of eligible inventories (up to $2.5 million), 50 percent of unbilled
revenue on a long-term contract and up to $500,000 for certain foreign
receivables. The Line contains several covenants relating to, among other
matters, the maintenance of certain minimum income levels and financial ratios,
which, if not met by the Company, could impact the availability of advances
pursuant to the Line. As of December 31, 2000, the Company was in compliance
with these covenants. As of December 31, 2000, the amount borrowed pursuant to
the Line was $1,100,000.

        During 2000, the funds received from the exercise of warrants and
options have been used to help accelerate the Company's development of
high-value semiconductors for the rapidly growing Internet and Telecom markets
and to help accelerate the development and commercialization of its other high


                                       22
<PAGE>   23

value proprietary products. Management believes that the Company has adequate
resources to fund operations and working capital requirements for the next
twelve months based on the current level of operations and business conditions.

        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 new communications semiconductor products
and its patented PXS point X-ray sources for lithography for the semiconductor
industry and other metrology applications. In addition to the above financing
needs, additional funds could be required for future acquisitions should the
Company elect to pursue such acquisitions. The Company believes that it has
available to it several potential sources of capital including private offerings
to individual investors and additional debt or equity sales in the public
market. The Company also intends to pursue opportunities for strategic
relationships, which may include additional funding, in order to accelerate the
commercialization of its emerging products.

        At December 31, 2000, the Company had in excess of $28 million of
Federal net operating loss carryforwards subject to certain annual limitations,
which expire from 2004 through 2015. 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.

        In April 2000, the Company entered into a series of agreements with
Bede, including a loan (the "Loan") of 450,000 British pounds, with interest
accruing at 10% per annum, plus various equity rights in Bede. The equity rights
included the grant of an option to the Company to buy a 10% equity interest in
Bede on a fully-diluted, pre-IPO basis for 58,375 British pounds. Concurrent
with an initial public offering ("IPO") of Bede and the admission to trading of
Bede's shares on the London Stock Exchange on November 6, 2000, the Company
exercised its option and purchased 1,935,500 shares of Bede for the 58,375
British pounds exercise price. At the IPO share price of 1.90 pounds and an
exchange rate of approximately $1.47 per British pound, the Company's Bede
shares were valued at approximately $5.4 million. In addition, from the IPO
proceeds, Bede repaid the Company the remaining 391,625 British pounds, plus
accrued interest, owed on the unconverted portion of the loan. In December 2000,
the Company sold 890,000 shares of Bede for net proceeds of $2.2 million. In
connection with that sale, JMAR agreed to restrict the sale of its remaining
1,045,500 shares of Bede without the consent of Bede's underwriter until
September 20, 2001.


FACTORS THAT MAY AFFECT FUTURE RESULTS

        Certain statements contained in this Form 10-K which are not related to
historical results, including statements regarding JMAR's future sales or profit
growth, competitive position or products, projects or processes currently under
development, the ability of the Company to successfully introduce those products
into the commercial marketplace or to apply those products, projects or
processes to alternative applications and the availability of future bank or
equity investor financing are forward-looking statements that necessarily are
based on certain assumptions and are subject to certain risks and uncertainties
that could cause actual future performance and results to differ materially from
those stated or implied in the forward-looking statements. These risks and
uncertainties include concentration of sales to certain markets and customers,
delays in shipments or cancellations of orders, failure of expected orders to
materialize, fluctuations in margins, timing of future orders, lack of
availability of critical components, customer reorganizations, failure of
advanced technology and new intellectual property to perform as predicted, the
failure of pending patents to be issued, uncertainties associated with the
timing of the funding of government contracts, fluctuations in demand, delays in
development, introduction and acceptance of new products, changing business and
economic conditions in various geographic regions, technical obsolescence of
existing products, technical problems in the development or modification of
current products or manufacturing processes, the impact of competitive products
and pricing, shifts in demand for the Company's products, the degree of success
of technology transfer (e.g., advanced lithography sources, etc.) to commercial
products, availability of working capital to support growth, continued
government funding of advanced lithography, successful integration of
acquisitions, declining credit markets, other competitive factors and temporary
cessation of operations at one or more of its division facilities due to natural
events such as floods, earthquakes and fires.



                                       23
<PAGE>   24

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

The Company has made substantial progress in its PXS X-ray source
development program. However, in order to prove that its technology works and to
produce a completed product, the Company must integrate these highly technical
and complicated systems into a fully integrated prototype. With any new
technology, there is a risk that the market may not appreciate the benefits of
the product. In addition, the Company's X-ray source system may compete against
other developing technologies including the EUV source development supported by
key semiconductor industry participants. Development by others of new or
improved products, processes or technologies may make the Company's proposed
products obsolete or less competitive. Also, the development of sophisticated
laser and X-ray products is a lengthy and capital intensive process and is
subject to unforeseen risks, delays, problems and costs.

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

        During 2000, the Company entered the specialty semiconductor memory
products market with its first in a planned series of higher-speed, lower power
consuming memory devices. The Company will be competing in this market against
products from companies who have been selling products into this market for
awhile and who have greater resources than the Company. Development by these
companies or others of new or improved products may make the Company's products
obsolete or less competitive. Also, there is no assurance that these products
will be accepted in the marketplace.

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

        JMAR Semiconductor is a "fabless" supplier of products. Accordingly, its
cost and time schedule for the development, manufacture and sale of its products
are dependent on the availability of capacity at outside foundries.

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

        Recent electrical power shortages in California could have an adverse
impact on businesses in California, including the Company. The continuation of
significant power outages could result in interruptions in the Company's
operations and, together with sharp increases in energy costs, could have an
adverse impact on the Company's operating results.

        The operations of the Company involve the use of substances regulated
under various federal, state and international laws governing the environment.
It is the Company's policy to apply strict


                                       24
<PAGE>   25

standards for environmental protection even if not subject to regulations
imposed by local governments. The liability for environmental remediation and
related costs is accrued when it is considered probable and the costs can be
estimated. Environmental costs are presently not material to JMAR's operations
or financial position.

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

        The Company denominates its foreign sales in U.S. dollars and the
Company does not believe that foreign currency fluctuations will have a material
adverse impact on its ability to compete with its domestic-based competitors.
Foreign currency fluctuations, however, could make the Company's products less
affordable in foreign markets and thus, reduce the demand for such products, or
could either enhance or reduce the value of certain assets such as the Company's
holdings of shares of Bede which are denominated in British pounds.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company owns 1,045,500 shares of Bede. Since its initial placement
in November, 2000, the Bede shares have been traded on the London Stock
Exchange. The high and low of Bede shares has been 1.10 British pounds and 2.25
British pounds, respectively. JMAR's Bede investment is subject to foreign
exchange risk because it is valued in foreign currency (British pounds) and
changes in the foreign exchange rate will result in changes in the
dollar-denominated value of the Bede investment on the Company's financial
statements. As of December 31, 2000, the potential change in fair value of the
Bede investment assuming a 10% unfavorable change in the underlying foreign
exchange rates would be a reduction in the unrealized gain of approximately
$265,000.

        The Company's investment in Bede is reflected in its Consolidated
Balance Sheet and Statement of Operations and Comprehensive Income in accordance
with Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Reductions in value of
the Bede investment are reflected on the Consolidated Balance Sheet as
reductions in a current asset and stockholders' equity, and, when realized, as a
reduction in the unrealized gain unless the value of the Bede investment
declines below the Company's basis of $68,078, at which time the maximum loss to
the Company would be $68,078.

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


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The Company's consolidated financial statements prepared in accordance
with Regulation S-X and Report of Independent Public Accountants are set forth
at the end of this Report on pages F-1 through F-19.

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

        Not applicable.

                                       25
<PAGE>   26

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME                                   AGE      POSITION
----                                   ---      --------
<S>                                    <C>      <C>
John S. Martinez, Ph.D.                70       Chief Executive Officer and  Chairman of the Board
E. Fred Schiele                        49       President, Chief Operating Officer and President of JMAR Precision Systems
Dennis E. Valentine                    45       Vice President Finance, Chief Financial Officer and Chief Administrative Officer
Joseph G. Martinez                     43       Vice President, General Counsel and Secretary
John H. Carosella                      57       Vice President and President of Advanced Light Division
Richard M. Foster                      68       President of JMAR Research
Marvin W. Sepe                         45       President of JMAR Semiconductor
James H. Banister, Jr.                 70       Director
C. Neil Beer, Ph.D.                    65       Director
Vernon H. Blackman, Ph.D.              71       Director
Barry Ressler                          60       Director
</TABLE>

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

        JOHN S. MARTINEZ, PH.D., became Chairman of the Board, President, Chief
Executive Officer and a Director of the Company at its inception. He
relinquished the title of President in November 1998 at the time of the hiring
of Mr. Schiele. Prior to co-founding the Company in October 1987, he was
President of HLX Laser, Inc., an excimer laser development company and President
of Jamar Enterprises, a management and investment consultant to high-technology
companies. From 1976 to 1984, Dr. Martinez was President and Chief Executive
Officer of Physics International Company ("PI"), a high-technology research,
development and manufacturing company specializing in high-intensity energy
technology and X-ray generation equipment. During that period, PI's annual sales
grew from approximately $9,000,000 to over $42,000,000 and profits grew at a
compounded annual rate in excess of 32%. From 1961 to 1976, Dr. Martinez held a
number of management positions at TRW, Inc. He formed that company's High Energy
Laser program in 1970 and managed it until he left the company in 1976. Dr.
Martinez, a Ford Foundation and Atomic Energy Commission Fellowship holder,
earned his Ph.D. in Engineering Science from the University of California
(Berkeley) in 1962, his Bachelor's degree from Rensselaer Polytechnic Institute
(Troy, N.Y.) in 1951 and is a graduate of the Oak Ridge School of Reactor
Technology. He served on active duty in the U.S. Marine Corps during the Korean
War and was discharged as a Captain in 1954. He is the holder or co-holder of
six patents. Dr. Martinez is the father of Joseph G. Martinez, Vice President,
General Counsel of the Company.

        E. FRED SCHIELE joined JMAR in November 1998 as President and Chief
Operating Officer. In November 1999, Mr. Schiele was appointed President of JMAR
Precision Systems. Before joining JMAR, Mr. Schiele served for two years as Vice
President and General Manager of the Semiconductor Systems Group at ADE
Corporation. There he was responsible for the manufacture and marketing of more
than $100 million annually in high-speed metrology equipment for the
semiconductor industry. From 1993 to 1996 he was Group Vice President, Laser
Systems, for Electro Scientific Industries, a leading manufacturer of laser
systems for microelectronic repair, trimming, and micromachining. Mr. Schiele
received his B.S. in Physics in 1973 and an MBA in Management and Finance from
the University of Wisconsin in 1980.


                                       26
<PAGE>   27

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

        JOSEPH G. MARTINEZ joined the Company in June 1998 as Vice President and
General Counsel and has been the Company's Secretary since August 2000. 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. Mr. Martinez received both a Juris Doctor degree from the
University of California, Davis and a Master of Business Administration from
U.C. Berkeley (with an emphasis in Finance and Accounting) in a Joint Degree
Program. He received his B.A. in Genetics from U.C. Berkeley in 1980. Mr.
Martinez has been a member of the California State Bar since 1984. Mr. Martinez
is the son of Dr. John S. Martinez, the Company's Chairman and Chief Executive
Officer.

        JOHN H. CAROSELLA is a Vice President of JMAR and President of the
Company's Advanced Light Division. Prior to joining the Company in May 2000, for
the prior three years, he was President of Osmic, Inc., a Michigan-based leading
developer and provider of advanced X-ray and neutron optical instruments and
products for the semiconductor lithography and medical equipment manufacturing
industries. Under his leadership, revenues more than doubled to $9 million per
year. Prior to joining Osmic, Mr. Carosella served for nine years as President
of Speedring Systems, Inc., a precision systems manufacturer where he
transformed the company from a $1.5 million per year aerospace contractor to a
$10 million per year supplier of precision electromechanical and optical
equipment for the commercial imaging markets. Mr. Carosella began his
professional career with Eastman Kodak Co., where for 13 years he served as an
optical products development engineer and as engineering services manager. Mr.
Carosella holds a Bachelor of Science degree in Physics from Worchester
Polytechnic Institute and a Master of Science degree in Optical Engineering from
the University of Rochester.

        RICHARD M. FOSTER has been the President and a director of JMAR Research
since January 1994. From 1984 to 1990, he was Corporate Vice President and
Director of Marketing at Physics International Co. From 1968 to 1984, he was
with TRW Defense and Electronics and was Marketing Director for a number of
product lines including communication satellite systems, high energy lasers,
power and propulsion and the Physical Research Center. Mr. Foster also spent
three years in Washington D.C. as a TRW Senior Representative. He was a
principal engineer at Ford Aeronutronic in Newport Beach from 1960 to 1968 and
an Air Force Captain at Edwards AFB Rocket Propulsion Laboratory from 1957 to
1960. Mr. Foster graduated cum laude with a B.S. and M.S. in Engineering from
Stanford University in 1957.

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


                                       27
<PAGE>   28

Administration from Pepperdine University. Mr. Sepe has published a number of
papers and taught numerous workshops on the economics and use of semiconductors
in space applications.

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

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

        VERNON H. BLACKMAN, PH.D., has been a director of the Company since July
1991 and from time to time, has been a consultant of the Company since December
1991. Dr. Blackman served as Chairman of the Board and Chief Executive Officer
of Esscor, a training and simulation service company to the utility industry,
from December 1991 to July 1997. Dr. Blackman also served as Chairman of the
Board, President and Chief Executive Officer of JAYCOR from 1989 until March
1991. JAYCOR is a high-technology company that supplies R&D services to various
agencies of the U.S. Government, primarily the Department of Defense. Prior to
joining JAYCOR, Dr. Blackman acted as a venture investor for his own account and
helped to fund the early stage development of several companies. Dr. Blackman
has also served on the Boards of Directors of several other public companies,
including Newport Pharmaceuticals International, Inc. (1967-1974); Maxwell
Laboratories, Inc. (1966-1974); Topaz, Inc. (1979-1983) at which time Topaz was
acquired by Square D Corporation; and Optical Radiation Corporation (1970-1995).
From 1974 to 1982, Dr. Blackman served as President, CEO and Chairman of the
Board of S-Cubed, a high-technology company that provided services and products
to agencies of the U.S. Government. In 1959, Dr. Blackman co-founded MHD
Research which was acquired by Hercules Corporation in 1964. Dr. Blackman
received a BA in Physics from Colgate University in 1951 and a Ph.D. in Physics
from Princeton University in 1955, subsequent to which he served on the faculty
as a research associate for 2 years.

        BARRY RESSLER has been a director of the Company since January 1994. Mr.
Ressler is the Chief Executive Officer and Chairman of the Board of Triton
Thalassic Technologies, Inc. (T3I), a company engaged in the non-chemical
pathogen inactivation of blood products; photo-activation of therapeutic


                                       28
<PAGE>   29

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

ITEM 11. EXECUTIVE COMPENSATION

        The following table sets forth the annual and long-term compensation for
services in all capacities to the Company during each of the last three fiscal
years of the Company's Chief Executive Officer and the other four most highly
compensated individuals serving as executive officers as of December 31, 2000
whose compensation (salary and bonus) exceeded $100,000.

                           Summary Compensation Table

<TABLE>
<CAPTION>

                                                              Annual               Long-Term
                                                       Compensation (1)(3)        Compensation
                                                     -----------------------        Awards (2)
                                                                                 Shares Underlying
                                                     Salary            Bonus       Options and           Other
Name and Principal Position             Year           ($)              ($)        Warrants (#)      Compensation ($)
---------------------------             ----         -------          ------     -----------------   ----------------
<S>                                     <C>          <C>              <C>        <C>                 <C>
John S. Martinez,                       2000         231,000 (6)           0          60,000             88,344 (7)
Chief Executive                         1999         192,500               0          52,000                  0
Officer                                 1998         200,592          87,474          77,960                  0

E. Fred Schiele,
President and Chief Operating           2000         182,500               0          47,994                  0
Officer of JMAR and President           1999         177,500               0          28,000                  0
of JPSI                                 1998           6,827(4)       20,000         150,000                  0


Marvin W. Sepe,                         2000         160,000               0          21,238                  0
President of JSI                        1999         140,000          28,667               0                  0
                                        1998         125,000          13,500               0                  0

Joseph G. Martinez,
Vice President, General Counsel         2000         143,000               0          25,000                  0
                                        1999         135,000               0          13,500                  0
                                        1998          69,578(5)       11,677          50,000                  0

Richard M. Foster,                      2000         125,000          14,000          15,000                  0
President of JRI                        1999         125,000          12,000               0                  0
                                        1998          95,846          26,000               0                  0


</TABLE>


                                       29
<PAGE>   30

--------

(1)     Excludes perquisites and other personal benefits, the aggregate annual
        amount of which for each Named Officer was less than the lesser of
        $50,000 or 10% of the total salary and bonus reported.

(2)     The Company did not grant any restricted stock or stock appreciation
        rights or make any long term incentive plan payments during the fiscal
        years ended December 31, 2000, 1999 and 1998.

(3)     Includes bonus payments under the Management Incentive Bonus Plan (see
        page 32) earned by the Named Officers in the year indicated for services
        rendered in such year, but which were paid in the following year.

(4)     Compensation is for one month.

(5)     Compensation is for seven months.

(6)     Includes $38,500 in fees paid to Jamar Enterprises, an affiliate of Dr.
        Martinez, for his services as Chairman of the Board for JPSI, JSI and
        JRI.

(7)     Loan forgiveness income.  See "Certain Relationships and Related
        Transactions" below.

OPTION GRANTS IN THE LAST FISCAL YEAR

        The following table sets forth each grant of stock options and warrants
made during the fiscal year ended December 31, 2000 to each of the Named
Officers. Pursuant to Securities and Exchange Commission rules, the table also
shows the value of the options at the end of the terms if the stock price were
to appreciate annually by 5% and 10%, respectively. The assumed values may not
reflect actual value at the times indicated.



<TABLE>
<CAPTION>
                                           PERCENTAGE                                                   POTENTIAL REALIZABLE
                             SHARES         OF TOTAL                                                      VALUE AT ASSUMED
                           UNDERLYING        OPTIONS                                                    ANNUAL RATES OF STOCK
                            OPTIONS        GRANTED TO                                                   PRICE APPRECIATION FOR
                            GRANTED         EMPLOYEES      EXERCISE                                          OPTION TERM
                            (SHARES)        IN FISCAL      PRICE PER            EXPIRATION            --------------------------
NAME                         (1)(7)           YEAR           SHARE                DATE (2)               5%                10%
----                       ----------      -----------     ---------          ---------------         --------          --------
<S>                        <C>             <C>             <C>                <C>                     <C>               <C>
John S. Martinez           50,000 (3)         8.27            $4.56           January 1, 2010         $143,500          $363,500
                           10,000 (4)         1.65            $6.50           August 11, 2011           46,200           120,500


E. Fred Schiele            30,000 (6)         4.96            $9.50           March 25, 2005            64,800           140,700
                           10,000 (3)         1.65            $4.56           January 1, 2010           28,700            72,700
                            7,994 (8)         1.32            $5.56           April 14, 2010            27,979            70,827

Joseph G. Martinez         10,000 (5)         1.65            $9.50           February 18, 2010         59,700           151,400
                           15,000 (3)         2.48            $4.56           January 1, 2010           43,050           109,050

Richard M. Foster          15,000 (5)         2.48            $9.50           February 18, 2010         89,550           227,100

Marvin W. Sepe             20,000 (5)         3.31            $9.50           February 18, 2010        119,400           302,800
                            1,238 (8)          .20            $5.94           April 29, 2010             4,630            11,724

</TABLE>


----------

(1)     Such options were granted under the Company's 1991 or 1999 Stock Option
        Plan or the JPSI Warrant Plan (collectively "Options"). The exercise
        price of the options reported above was equal to the fair market value
        of the Company's common stock at the date of grant. The terms of each
        such option are determined by the Board of Directors. The exercise price
        and tax withholding obligations related to exercise may be paid by
        delivery of already owned shares, subject to certain conditions.

(2)     Options which are unvested at the time of termination of optionee's
        employment expire at that time. Vested options also expire if not
        exercised within 60 days after termination of optionee's employment



                                       30
<PAGE>   31

        or one year following death of optionee if not exercised by optionee's
        personal representative. Vested options issued to directors expire one
        year following resignation as a director.

(3)     These options are incentive stock options. They became exercisable on
        January 1, 2001.

(4)     These options are non-qualified stock options. They become exercisable
        and vest one-third each year commencing on the first year after their
        grant.

(5)     These options are incentive stock options. They become exercisable and
        vest one-third each year commencing on the first year after their grant.

(6)     These are warrants. They become exercisable and vest one-third each year
        commencing on the first year after their grant.

(7)     These options contain a Reload Option feature whereby if the optionee
        exercises the option in whole or in part using shares of Common Stock
        owned by the optionee for at least six months, the Company shall grant
        to the optionee a new option to purchase that number of shares equal to
        the shares transferred to the Company in payment of the exercise price
        of the option. In addition, if the optionee exercises the option in
        whole or in part with cash, the Company shall grant to the optionee a
        new option to purchase that number of shares equal to the amount of cash
        paid divided by the market value of the Common Stock on the date of
        exercise. In both cases, these Reload Options will have an exercise
        price equal to the market price on the date of grant of the Reload
        Option and are not exercisable until one year following the date of
        grant.

(8)     These options are incentive stock options. They became exercisable and
        vest one year after their grant.

AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION
VALUES

        The following table sets forth for each of the Named Officers (i) the
shares acquired and the value realized on each exercise of stock options, if
any, by said officers during the fiscal year ended December 31, 2000; (ii) the
number of shares of common stock underlying employment-related options and
warrants outstanding at December 31, 2000; and (iii) the value of such options
and warrants which are "in-the-money":

<TABLE>
<CAPTION>

                                                                         SHARES UNDERLYING             VALUE OF
                                                                            UNEXERCISED               UNEXERCISED
                                                                            OPTIONS AND          IN-THE-MONEY OPTIONS
                                                                            WARRANTS AT             AND WARRANTS AT
                                      SHARES                             DECEMBER 31, 2000       DECEMBER 31, 2000 (1)
                                     ACQUIRED                            -----------------       ---------------------
                                       ON               VALUE               EXERCISABLE/              EXERCISABLE/
NAME                                 EXERCISE          REALIZED            UNEXERCISABLE             UNEXERCISABLE
----                                 --------          --------          -----------------       ---------------------
<S>                                  <C>               <C>               <C>                     <C>
John S. Martinez                           0           $      0           589,203/156,533          $419,287/$71,202

E. Fred Schiele                       33,333            100,385            69,466/123,195           $28,045/$49,080

Joseph G. Martinez                         0                  0             34,684/53,817           $25,686/$25,753

Richard M. Foster                          0                  0             45,000/15,000                $30,000/$0

Marvin W. Sepe                         2,450              7,197             97,550/21,238                $24,388/$0
</TABLE>

--------

(1)     Options are "in-the-money" if the fair market value of the underlying
        common stock exceeds the exercise price of the option or warrant at
        December 31, 2000. The fair market value of a share of common stock at
        December 31, 2000 was $3.25 per share as quoted on the NASDAQ Stock
        Market at the close of trading.


                                       31
<PAGE>   32

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        During fiscal year 2000, executive compensation was set by the Board of
Directors acting as the Compensation Committee. The Compensation Committee
included Dr. Martinez, the Company's Chief Executive Officer, however, the
compensation of Dr. Martinez was set by the Compensation Committee members
without the participation by Dr. Martinez. Except for Dr. Martinez, each member
of the Compensation Committee is neither an officer nor an employee of the
Company.

EMPLOYMENT AND CONSULTING AGREEMENTS

        Pursuant to Dr. Martinez's employment agreement, the Company agreed to
retain him as Chief Executive Officer of the Company and to pay him an annual
salary of not less than $175,000 plus expenses and normal employee insurance
benefits and a $600 per month auto lease allowance. The Employment Agreement is
automatically renewable on an annual basis unless either party chooses to
terminate it no later than 60 days before the end of the year. If the employment
agreement is terminated by the Company without cause, Dr. Martinez would become
entitled to receive as severance pay an amount equal to 36 months pay.

        Pursuant to Mr. Schiele's employment agreement, the Company retained him
as President and Chief Operating Officer of the Company and agreed to pay him an
annual salary of not less than $177,500 plus expenses and normal employee
insurance benefits and a $600 per month auto allowance. If the employment
agreement is terminated by the Company without cause, Mr. Schiele would become
entitled to receive as severance pay an amount equal to 12 month's pay.

INCENTIVE PLANS

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

        In 1993, JMAR established a Management Incentive Bonus Plan (the "MIBP")
based on profits generated, as well as non-financial goals and stock performance
each year. Under the MIBP, an executive's annual performance bonus award
generally depends on two performance factors: The overall financial performance
of the Company and the performance of the business unit for which the executive
is accountable, along with the executive's individual performance. The
performance objectives of the Company and the business unit are derived from the
Company's Board-approved annual business plan, which includes specific financial
performance targets relating to revenue and profits for the fiscal year. MIBP
cash bonuses were paid in fiscal years 1997 and 1998 to those employees deemed
to have made the greatest contributions toward the Company's ability to generate
those profits. Because the Company was not profitable in 2000, no cash bonuses
were paid to the Company's CEO, its President or the other members of its
Corporate Staff. A cash bonus of $14,000 was paid to Mr. Foster in connection
with his services as President of JMAR Research, for achieving the profitability
and other goals of that division. Pursuant to the MIBP, options were awarded to
the Named Executive Officers in fiscal years 1998, 1999 and 2000. (See "Summary
Compensation Table" above).

        In March 1998, the Board of Directors approved a resolution requiring
that starting with 1997, a substantial portion of each Management Incentive
Bonus earned by its senior officers be used (the "MIBP Stock Ownership
Requirement") by such officers to: 1) buy JMAR common shares in the Public
Market; and/or 2) exercise existing stock options or warrants, including payment
of income taxes (if any) resulting from such option or warrant exercises. The
long term goal is for each senior officer designated in the Beneficial Ownership
table in this Report to own JMAR shares having a market value of a minimum of
one times his annual salary. Once any such designated employee achieves that
goal they will no longer be required to allocate a specific portion of their
bonus to the purchase of additional JMAR shares unless their share holdings fall
below that level. The Company believes that this policy will provide additional
incentives to the Company's senior officers to maximize the Company's profits
and share price over the long term. Pursuant to the MIBP Stock Ownership
Requirement, in 2000 Mr. Marvin Sepe purchased 2,450 shares related to his 1999
bonus.


                                       32
<PAGE>   33

        In addition, notwithstanding his already substantial ownership of JMAR
shares, in 2000 Dr. Martinez made open market purchases of an additional 17,000
shares of JMAR Common Stock.

DIRECTORS' FEES

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

        In addition, the directors are eligible to participate in the Company's
Stock Option Plans on the same basis as key employees of the Company and grants
of options will be made by the Board of Directors on a case-by-case basis on
such terms as the Board in its discretion may provide. It has been the Company's
policy to make an annual grant of options to the directors. During the fiscal
year ended December 31, 2000, a grant of options to purchase 10,000 shares of
Common Stock was received by Messrs. Martinez, Banister, Beer, Ressler and
Blackman in their capacity as directors.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

        The following lists all persons known by the Company to be the
beneficial owner of more than 5 percent of the Company's Common Stock as of
March 22, 2001. A person is deemed to be the beneficial owner of JMAR Common
Stock, whether or not such person has any economic interest therein, if such
person directly or indirectly has (or shares with others) voting or investment
power with respect to the JMAR shares or has the right to acquire such
beneficial ownership within sixty days.

<TABLE>
<CAPTION>
                                                       NUMBER OF SHARES
NAME AND ADDRESS                                      BENEFICIALLY OWNED                                    PERCENT OF TOTAL
----------------                                      ------------------                                    ----------------
<S>                                                   <C>                                                   <C>
John S. Martinez                                         1,747,707 (1)                                            7.4%
5800 Armada Drive
Carlsbad, CA  92008
</TABLE>


(1)     Includes: (a) 464,965 shares owned of record by the John S. Martinez
        Separate Property Trust, of which Dr. Martinez as trustee, has sole
        voting and investment power; and (b) 1,282,742 shares of Common Stock
        which are issuable upon exercise of currently exercisable warrants and
        stock options.


SECURITY OWNERSHIP OF MANAGEMENT

        The following table sets forth the beneficial ownership of Common Stock
of the Company as of March 22, 2001 by each director, the "Named Officers" (as
defined in "Executive Compensation" on page 29 above) and by all directors and
executive officers as a group. The Company has also provided the beneficial
ownership for certain other executive officers who are not "Named Officers".
Except as otherwise noted, the following stockholders have sole voting and
investment power with respect to the shares. Information with respect to
beneficial ownership is based on information furnished to the Company by each
stockholder included in the table.



                                       33
<PAGE>   34

<TABLE>
<CAPTION>
                                                                                  PERCENTAGE OF
                                                         NUMBER OF SHARES OF      OUTSTANDING
                                                            COMMON STOCK          COMMON STOCK
BENEFICIAL OWNER                                         BENEFICIALLY OWNED     BENEFICIALLY OWNED
----------------                                         ------------------     ------------------
<S>                                                      <C>                    <C>
John S. Martinez (1)                                         1,747,707                7.4%

Marvin W. Sepe (2)                                             277,084                1.2%

Dennis E. Valentine (3)                                        215,976                (12)

E. Fred Schiele (4)                                            108,593                (12)

Richard M. Foster (5)                                          107,781                (12)

James H. Banister, Jr. (6)                                     101,036                (12)

Vernon H. Blackman (7)                                          64,511                (12)

Joseph G. Martinez (8)                                          60,872                (12)

Barry Ressler (9)                                               41,100                (12)

C. Neil Beer (10)                                               40,920                (12)

John H. Carosella                                               10,000                (12)

All executive officers and directors as a group (11
persons) (11)                                                2,775,580               11.4%
</TABLE>

--------

(1)     See footnote (1) to preceding table.

(2)     Includes 270,760 shares which are issuable upon exercise of currently
        exercisable stock options and warrants.

(3)     Includes 185,784 shares which are issuable upon exercise of currently
        exercisable stock options and warrants.

(4)     Includes 100,260 shares which are issuable upon exercise of currently
        exercisable stock options and warrants.

(5)     Includes 55,134 shares which are issuable upon exercise of currently
        exercisable stock options and warrants.

(6)     Includes 63,652 shares which are issuable upon exercise of currently
        exercisable stock options and warrants.

(7)     Includes 46,668 shares which are issuable upon exercise of currently
        exercisable stock options and warrants.

(8)     Includes 54,367 shares which are issuable upon exercise of currently
        exercisable stock options.

(9)     Includes 31,667 shares which are issuable upon exercise of currently
        exercisable stock options.

(10)    Includes 36,676 shares which are issuable upon exercise of currently
        exercisable stock options and warrants.

(11)    Includes 2,127,710 shares which are issuable upon exercise of currently
        exercisable stock options and warrants.

(12)    Less than one percent.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        On March 29, 1993, the Company loaned Dr. Martinez $59,000 with interest
at 6% per annum to assist Dr. Martinez in paying certain income taxes that he
personally incurred in connection with a transaction that he undertook in
support of the Company. The loan amount, including accrued interest,


                                       34
<PAGE>   35

was $88,344 on December 31, 1999. In February 2000, in recognition of his
contributions to the Company, the Board of Directors of the Company agreed to
forgive the loan.

                                     PART IV

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

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

        1.      Financial Statements. Index to Consolidated Financial
                Statements:

<TABLE>
<S>                                                                                                                        <C>
                 Report of Independent Public Accountants...............................................................    F-2
                 Consolidated Balance Sheets as of December 31, 2000 and 1999...........................................    F-3
                 Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31,
                    2000, 1999 and 1998.................................................................................    F-4
                 Consolidated Statements of Stockholders' Equity for the Years Ended
                    December 31, 2000, 1999 and 1998....................................................................    F-5
                 Consolidated Statements of Cash Flows for the Years Ended December 31,
                    2000, 1999 and 1998.................................................................................    F-6
                 Notes to Consolidated Financial Statements ............................................................    F-7
</TABLE>

        2.      Financial Statement Schedules. The following financial statement
                schedule of JMAR Technologies, Inc., for the years ended
                December 31, 2000, 1999 and 1998 is filed as part of this Report
                and should be read in conjunction with the Consolidated
                Financial Statements of JMAR Technologies, Inc.


                 Schedule II. Valuation and Qualifying Accounts

        Financial Statement Schedules not listed above have been omitted because
        they are not applicable or are not required or the information required
        to be set forth therein is included in the Consolidated Financial
        Statements or Notes thereto.

        3.      Exhibits. The Exhibits required to be filed with this Report are
                listed in Item 14(c) below.

(b)     Reports on Form 8-K

        There were no reports filed on Form 8-K during the three months ended
December 31, 2000.


                                       35
<PAGE>   36

                                INDEX TO EXHIBITS

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

<TABLE>
<S>             <C>
EXHIBIT NO.             DESCRIPTION
-----------             -----------
 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(12)        Amendment to Bylaws adopted June 25, 2000.

 4.1(3)         Form of Common Stock Certificate.

 4.2(9)         Rights Agreement, dated as of February 12, 1999 between JMAR
                Technologies, Inc. and American Securities Trust & Transfer,
                Inc., including the Certificate of Designations, the form of
                Rights Certificate and the Summary of Rights attached thereto as
                Exhibits A, B and C, respectively.

10.1(7)         Amended and Restated Employment Agreement between the Company
                and John S. Martinez, dated May 1, 1996. (+)

10.2(1)         The Company's 1988 Stock Option Plan. (+)

10.3(6)         The Company's 1991 Stock Option Plan, as amended. (+)

10.4(7)         Management Anti-Dilution Incentive Plan, as amended. (+)

10.5(11)        The Company's 1999 Stock Option Plan. (+)

10.6(7)         Management Incentive Plan Agreement for JMAR Precision Systems,
                Inc., as amended. (+)

10.7(10)        Employment Agreement between the Company and E. Fred Schiele,
                dated November 13, 1998. (+)

10.8(12)        Employment Agreement between the Company and John H. Carosella,
                dated April 20, 2000. (+)

21.1            Subsidiaries of the Company include JMAR Research, Inc. (a
                California corporation), JMAR Precision Systems, Inc. (a
                California corporation) and JMAR Semiconductor, Inc. (a
                California corporation).

23.1            Consent of Independent Public Accountants.
</TABLE>

--------
(+)     These contracts are management compensation contracts required to be
        separately identified pursuant to Item 14(c) of Form 10-K.


                                       36
<PAGE>   37

(1)     Incorporated by reference to the exhibit filed with the Company's
        Registration Statement on Form S-1 (No. 33-32446) filed on December 5,
        1989 and amended on January 30, 1990, March 30, 1990 and April 23, 1990,
        which Registration Statement became effective May 11, 1990.

(2)     Incorporated by reference to the exhibit filed with the Company's Form
        10-K for the year ended December 31, 1991.

(3)     Incorporated by reference to the exhibit filed with the Company's
        Registration Statement on Form S-1 (No. 33-47390) filed on April 22,
        1992 and amended November 23, 1992, January 11, 1993, January 27, 1993,
        February 9, 1993, February 11, 1993, February 12, 1993 and declared
        effective on February 16, 1993.

(4)     Incorporated by reference to the exhibit filed with the Company's Form
        10-K for the year ended December 31, 1993.

(5)     Incorporated by reference to the exhibit filed with the Company's Form
        10-K for the year ended December 31, 1994.

(6)     Incorporated by reference to the exhibit filed with the Company's Proxy
        Statement for the 1996 Annual Meeting of Shareholders.

(7)     Incorporated by reference to the exhibit filed with the Company's Form
        10-K for the year ended December 31, 1996.

(8)     Incorporated by reference to the exhibit filed with the Company's Form
        8-K dated June 17, 1998.

(9)     Incorporated by reference to the exhibit filed with the Company's Form
        8-A dated March 8, 1999.

(10)    Incorporated by reference to the exhibit filed with the Company's Form
        10-K for the year ended December 31, 1998.

(11)    Incorporated by reference to the exhibit filed with the Company's Proxy
        Statement for the 1999 Annual Meeting of Shareholders.

(12)    Incorporated by reference to the exhibit filed with the Company's Form
        10-Q for the quarter ended June 30, 2000.


                                       37
<PAGE>   38

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                                                                                <C>
Report of Independent Public Accountants........................................................   F-2

Consolidated Balance Sheets as of December 31, 2000 and 1999....................................   F-3

Consolidated Statements of Operations and Comprehensive Income for the
Years Ended December 31, 2000, 1999 and 1998....................................................   F-4

Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2000, 1999 and 1998.............................................................................   F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
1999 and 1998...................................................................................   F-6

Notes to Consolidated Financial Statements......................................................   F-7
</TABLE>


                                       F-1

<PAGE>   39




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To JMAR Technologies, Inc.:

        We have audited the accompanying consolidated balance sheets of JMAR
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations and
comprehensive income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of JMAR Technologies,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

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



                                             /s/ ARTHUR ANDERSEN LLP

San Diego, California
March 6, 2001


                                      F-2
<PAGE>   40

                             JMAR TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2000 AND 1999



                                     ASSETS
<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                               -----------------------------------
                                                                                                   2000                   1999
                                                                                               ------------           ------------
<S>                                                                                            <C>                    <C>
Current Assets:
     Cash and cash equivalents ...........................................................     $  9,856,768           $  2,323,127
     Accounts receivable, net ............................................................        6,904,638              7,079,435
     Notes and other receivables .........................................................           57,383                 32,551
     Inventories .........................................................................        6,310,628              6,253,336
     Marketable securities available for sale ............................................        2,657,418                     --
     Prepaid expenses and other ..........................................................        1,163,543                901,688
                                                                                               ------------           ------------
          Total current assets ...........................................................       26,950,378             16,590,137
Property and equipment, net ..............................................................        3,291,477              2,330,663
Other assets, net ........................................................................        3,649,218              1,355,041
Goodwill, net ............................................................................          300,501                397,927
                                                                                               ------------           ------------

         TOTAL ASSETS ....................................................................     $ 34,191,574           $ 20,673,768
                                                                                               ============           ============

                                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable ....................................................................     $  2,223,642           $  2,456,928
     Accrued liabilities .................................................................          888,490                593,283
     Accrued payroll and related costs ...................................................        1,003,687                875,693
     Line of credit ......................................................................        1,100,000              4,990,000
     Notes payable .......................................................................          191,178                205,490
                                                                                               ------------           ------------
          Total current liabilities ......................................................        5,406,997              9,121,394
                                                                                               ------------           ------------
Notes payable and other long-term liabilities, net of current portion ....................          339,908                642,913
                                                                                               ------------           ------------
Commitments and contingencies
Stockholders' equity:
     Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and
         outstanding as of December 31, 2000 and 1999 ....................................               --                     --
     Common stock, $.01 par value; 40,000,000 shares authorized; Issued and
         outstanding 22,224,650 shares as of December 31, 2000 and
        18,074,836 shares as of December 31, 1999 ........................................          222,247                180,748
     Additional paid-in capital ..........................................................       52,628,372             36,499,238
     Accumulated other comprehensive income ..............................................        2,589,340                     --
     Accumulated deficit .................................................................      (26,995,290)           (25,770,525)
                                                                                               ------------           ------------
          Total stockholders' equity .....................................................       28,444,669             10,909,461
                                                                                               ------------           ------------

         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................     $ 34,191,574           $ 20,673,768
                                                                                               ============           ============
</TABLE>

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


                                      F-3
<PAGE>   41

                             JMAR TECHNOLOGIES, INC.
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998



<TABLE>
<CAPTION>
                                                                                        Year ended December 31,
                                                                      ----------------------------------------------------------
                                                                          2000                   1999                   1998
                                                                      ------------           ------------           ------------
<S>                                                                   <C>                    <C>                    <C>
Product sales ...................................................     $ 10,512,243           $ 10,315,686           $ 16,340,637
Contract sales ..................................................        9,114,357             14,452,054              8,220,197
                                                                      ------------           ------------           ------------
          Total revenues ........................................       19,626,600             24,767,740             24,560,834
                                                                      ------------           ------------           ------------
Product costs of sales ..........................................        6,895,717              6,696,863              9,789,606
Contract costs of sales .........................................        6,807,660             11,018,883              5,583,337
                                                                      ------------           ------------           ------------

          Total costs of sales ..................................       13,703,377             17,715,746             15,372,943
                                                                      ------------           ------------           ------------
          Gross profit ..........................................        5,923,223              7,051,994              9,187,891
                                                                      ------------           ------------           ------------
Operating Expenses:
     Selling, general and administrative ........................        7,170,142              6,916,804              6,153,100
     Research, development and engineering ......................        2,299,635              2,105,294              2,026,482
     Asset writedowns and non-recurring items ...................               --                175,000                100,000
                                                                      ------------           ------------           ------------
          Total operating expenses ..............................        9,469,777              9,197,098              8,279,582
                                                                      ------------           ------------           ------------
Income (loss) from operations ...................................       (3,546,554)            (2,145,104)               908,309
Other income (expense), net .....................................        2,133,552                111,833                (27,612)
Interest income .................................................          324,550                 25,205                 89,575
Interest expense ................................................         (136,313)              (240,928)              (181,227)
                                                                      ------------           ------------           ------------
Income (loss) before income taxes ...............................       (1,224,765)            (2,248,994)               789,045
Income tax provision ............................................               --                     --                (32,204)
                                                                      ------------           ------------           ------------
Net income (loss) ...............................................       (1,224,765)            (2,248,994)               756,841
Other comprehensive income:
     Unrealized gain on marketable securities ...................        2,589,340                     --                     --
                                                                      ------------           ------------           ------------
Comprehensive income (loss) .....................................     $  1,364,575           $ (2,248,994)          $    756,841
                                                                      ============           ============           ============
Net income (loss) per share:
     Basic ......................................................     $       (.06)          $       (.12)          $        .04
                                                                      ============           ============           ============
     Diluted ....................................................     $       (.06)          $       (.12)          $        .04
                                                                      ============           ============           ============
Shares used in computation of net income (loss) per share:
     Basic ......................................................       21,468,763             18,045,914             18,046,860
                                                                      ============           ============           ============
     Diluted ....................................................       21,468,763             18,045,914             19,112,634
                                                                      ============           ============           ============
</TABLE>

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



                                      F-4
<PAGE>   42

                             JMAR TECHNOLOGIES, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                         Common Stock     Preferred Stock    Additional                     Other          Total
                                    --------------------  ---------------     Paid-in    Accumulated   Comprehensive  Stockholders'
                                      Shares     Amount   Shares   Amount     Capital      Deficit         Income         Equity
                                    ----------  --------  ------   ------  ------------  ------------  -------------  -------------
<S>                                 <C>         <C>       <C>      <C>     <C>           <C>           <C>            <C>
Balance, December 31, 1997 ........ 17,890,952  $178,910    --     $  --   $ 36,587,674  $(24,278,372)  $          -   $ 12,488,212
Stock issued upon exercise of
   warrants and options ...........    213,812     2,138    --        --        161,546            --             --        163,684
Issuance of stock for services ....     44,184       442    --        --         21,099            --             --         21,541
Issuance of stock related to
   acquisition of minority
   interest of JSI ................     24,045       240    --        --         36,864            --             --         37,104
Repurchases of stock ..............   (184,300)   (1,843)   --        --       (347,360)           --             --       (349,203)
Issuance of stock related to
   acquisition of Continuum
   Engineering ....................     92,160       922    --        --        134,078            --             --        135,000
Net income ........................         --        --    --        --             --       756,841             --        756,841
                                    ----------  --------  ----     -----   ------------  ------------   ------------   ------------
Balance, December 31, 1998 ........ 18,080,853   180,809    --        --     36,593,901   (23,521,531)            --     13,253,179
Stock issued upon exercise of
   warrants and options ...........     38,464       384    --        --         18,066            --             --         18,450
Issuance of stock for services ....      6,948        69    --        --          7,731            --             --          7,800
Repurchase of stock ...............    (68,600)     (686)   --        --       (133,953)           --             --       (134,639)
Issuance of stock related to
   acquisition of Continuum
   Engineering ....................     12,171       122    --        --          3,263            --             --          3,385
Issuance of stock related to
   acquisition of minority interest
   of JSI .........................      5,000        50    --        --         10,230            --             --         10,280
Net loss ..........................         --        --    --        --             --    (2,248,994)            --     (2,248,994)
                                    ----------  --------  ----     -----   ------------  ------------   ------------   ------------
Balance, December 31, 1999 ........ 18,074,836   180,748    --        --     36,499,238   (25,770,525)            --     10,909,461
Stock issued upon exercise of
    warrants and options ..........  4,151,824    41,519    --        --     16,142,801            --             --     16,184,320
Issuance of stock for services ....      1,628        16    --        --          5,984            --             --          6,000
Issuance of stock related to
    acquisition of Continuum
    Engineering ...................      5,062        51    --        --          5,818            --             --          5,869
Repurchase of stock ...............     (8,700)      (87)   --        --        (25,469)           --             --        (25,556)
Unrealized gain on marketable
    securities ....................         --        --    --        --             --            --      2,589,340      2,589,340
Net loss ..........................         --        --    --        --             --    (1,224,765)            --     (1,224,765)
                                    ----------  --------  ----     -----   ------------  ------------   ------------   ------------
Balance, December 31, 2000 ........ 22,224,650  $222,247    --     $  --   $ 52,628,372  $(26,995,290)  $  2,589,340   $ 28,444,669
                                    ==========  ========  ====     =====   ============  ============   ============   ============
</TABLE>


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



                                      F-5
<PAGE>   43

                             JMAR TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                                             Year ended December 31,
                                                                                --------------------------------------------------
                                                                                    2000               1999               1998
                                                                                ------------       ------------       ------------
<S>                                                                             <C>                <C>                <C>
Cash flows from operating activities:
     Net income (loss) .......................................................  $ (1,224,765)      $ (2,248,994)      $    756,841
     Adjustments to reconcile net income (loss) to net cash
       used in operating activities:
         Depreciation and amortization .......................................     1,225,035          1,034,675            812,724
         Services received in exchange for
            common stock or warrants .........................................         6,000              7,800             21,541
         Asset writedowns and non-recurring items ............................            --                 --            100,000
         Gain on sale of marketable securities ...............................    (2,184,476)                --                 --
         Change in assets and liabilities, net of
         effects from acquisitions, asset writedowns and non-recurring items:
            (Increase) decrease in:
            Accounts receivable, net .........................................       174,797            687,526         (3,409,102)
            Inventories ......................................................       (57,292)          (404,400)        (1,133,215)
            Prepaid expenses and other .......................................      (319,238)           (73,024)           (68,696)
            Other assets .....................................................      (179,252)         1,155,819           (140,846)
            Increase (decrease) in:
            Accounts payable and accrued liabilities .........................       189,915         (2,526,413)         3,471,358
                                                                                ------------       ------------       ------------
     Net cash provided by (used in) operating activities .....................    (2,369,276)        (2,367,011)           410,605
                                                                                ------------       ------------       ------------
Cash flows from investing activities:
     Capitalization of software development ..................................    (2,325,075)          (342,383)          (451,185)
     Proceeds from sale of marketable securities .............................     2,224,337                 --                 --
     Investment in marketable securities .....................................      (107,939)                --                 --
     Patent costs ............................................................      (110,273)          (155,712)           (60,628)
     Capital expenditures ....................................................    (1,772,228)        (1,186,661)          (803,498)
     Increase in notes and other receivables .................................            --            (13,938)            (4,834)
     Payments received on notes receivable ...................................        42,648                 --             13,422
     Acquisition costs, net of cash acquired .................................            --            (12,228)            37,103
                                                                                ------------       ------------       ------------
          Net cash used in investing activities ..............................    (2,048,530)        (1,710,922)        (1,269,620)
                                                                                ------------       ------------       ------------
Cash flows from financing activities:
     Net  borrowings (payments) under line of credit .........................    (3,890,000)         2,890,000          1,625,000
     Net payments of notes payable and other long-term liabilities ...........      (317,317)          (220,934)          (376,400)
     Repurchases of stock ....................................................       (25,556)          (134,639)          (349,203)
     Net proceeds from the exercise of options and  warrants .................    16,184,320             18,450            163,684
                                                                                ------------       ------------       ------------
         Net cash provided by financing
            activities .......................................................    11,951,447          2,552,877          1,063,081
                                                                                ------------       ------------       ------------
Net increase (decrease) in cash and cash equivalents .........................     7,533,641         (1,525,056)           204,066
Cash and cash equivalents, beginning of
  period .....................................................................     2,323,127          3,848,183          3,644,117
                                                                                ------------       ------------       ------------
Cash and cash equivalents, end of period .....................................  $  9,856,768       $  2,323,127       $  3,848,183
                                                                                ============       ============       ============
</TABLE>

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: On December 7, 1998, the Company
acquired 100% of the outstanding common stock of Continuum Engineering, Inc. As
consideration for the acquisition, the Company issued an aggregate of 92,160
shares of its common stock and an additional 12,171 and 5,062 earn-out shares
issued in 1999 and 2000, respectively (See Note 3). In April 2000, the Company
entered into a series of agreements with Bede plc (Bede), including a loan with
various equity rights. In November 2000, the Company exercised its equity rights
into 1,935,500 shares of Bede. In December 2000, the Company sold 890,000 shares
of Bede for net proceeds of approximately $2.2 million. Based on a current
market value and prevailing foreign exchange rate, the remaining 1,045,500
shares of Bede resulted in an unrealized gain of $2,589,340 as of December 31,
2000.

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


                                      F-6
<PAGE>   44

                             JMAR TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999


1.      DESCRIPTION OF THE COMPANY

        The accompanying consolidated financial statements include the accounts
of JMAR Technologies, Inc. (formerly JMAR Industries, Inc.) (the "Company" or
"JMAR") and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

        The Company develops, manufactures and markets precision measurement,
yield enhancement and light-based manufacturing systems, provides high
performance integrated circuits for the broadband communications market and
develops advanced lithography sources for production of future higher
performance semiconductors.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        a.      Cash and Cash Equivalents


               The Company defines cash and cash equivalents to include cash on
hand and cash invested in short-term securities that have original maturities of
less than 90 days.

        b.      Fair Value of Financial Instruments

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

        c.      Pervasiveness of Estimates

               The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

        d.      Inventories

               Inventories are carried at the lower of cost on the first-in,
first-out basis or market and are comprised of materials, direct labor and
applicable manufacturing overhead.

        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.


                                      F-7
<PAGE>   45

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


               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 Assets

               Goodwill is amortized by systematic charges to income over the
periods estimated to be benefited, generally five to ten years. The Company
periodically reevaluates the original assumptions and rationale utilized in the
establishment of the carrying value and estimated lives of these assets.
Management believes that there has been no impairment of goodwill as reflected
in the Company's consolidated financial statements as of December 31, 2000.
Accumulated amortization of goodwill was $742,980 and $663,037 at December 31,
2000 and 1999, respectively. Patent costs are amortized over ten years, and
other assets, including capitalized software development costs, are amortized
over not more than five years. Included in other assets is capitalized software
development costs of $3,803,166 and $1,485,431 as of December 31, 2000 and 1999,
respectively. Accumulated amortization of other assets was $1,111,498 and
$781,968 at December 31, 2000 and 1999, respectively. SFAS No. 86, "Accounting
for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed,"
specifies the accounting for the costs of internally developed or purchased
computer software. The Company charges all costs incurred in creating a computer
software product as research and development expense when incurred until
technological feasibility has been established.

        h.      Long-Lived Assets

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


                                      F-8
<PAGE>   46

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

        i.      Marketable Securities

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

        j.      Revenues

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

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

        k.      Earnings Per Share

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

        l.      Stock Options

               The Company has adopted the disclosure only requirement of SFAS
No. 123, "Accounting for Stock-Based Compensation" (see Note 12).

        m.      Comprehensive Income

               SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses). This statement requires that an
enterprise: (a) classify items of other comprehensive income by their nature in
a financial statement; and (b) display the accumulated balance of other
comprehensive income separately from stockholders' equity in the equity section
of a balance sheet. For the year ended December 31, 2000, the Company had an
unrealized gain on marketable securities of $2,589,340, resulting in
comprehensive income for 2000 of $1,364,575. For the year ended December 31,
1999, the Company did not have any elements of comprehensive income, and
therefore, there was no difference in the Company's net income or loss and
comprehensive income or loss for that year.

        n.      Reclassifications

               Certain reclassifications have been made to the prior-year
financial statements to conform with the 2000 presentation.


                                      F-9
<PAGE>   47

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

        o.      Recent Accounting Pronouncement

               In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"). This interpretation clarifies the application of APB
Opinion No. 25 ("APB 25") for certain issues related to stock based compensation
including the definition of employee for the purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a non-compensating plan,
the accounting consequences of modifications to the terms of a previously fixed
stock option award, and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 became effective July, 1, 2000, but
covers certain events that occurred either after December 15, 1998 or January
12, 2000. The Company has applied to the interpretations set forth in FIN 44 for
the recognition of certain stock based compensation during the year ended
December 31, 2000.

3.      ACQUISITION

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

               In 1999 and 2000, the Company issued 12,171 and 5,062 earn-out
shares, respectively, of Common Stock to the sole shareholder of CEI, accounted
for as additional purchase price. The earn-out related to the CEI acquisition
continues through December 31, 2001. Included in the Consolidated Balance Sheet
at December 31, 2000 is goodwill, net of amortization, of $140,514 related to
this acquisition.

4.      INVENTORIES

               At December 31, 2000 and 1999, inventories consisted of the
following:

<TABLE>
<CAPTION>
                                                     2000            1999
                                                  ----------      ----------
<S>                                               <C>             <C>
Raw materials, components and sub-assemblies      $4,622,923      $4,096,529
Work-in-process ............................       1,655,989       1,711,753
Finished goods .............................          31,716         445,054
                                                  ----------      ----------
                                                  $6,310,628      $6,253,336
                                                  ==========      ==========
</TABLE>


                                      F-10
<PAGE>   48

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

5.      ACCOUNTS RECEIVABLE

               At December 31, 2000 and 1999, accounts receivable consisted of
the following:

<TABLE>
<CAPTION>
                                            2000              1999
                                        -----------       -----------
<S>                                     <C>               <C>
Trade ............................      $ 3,397,174       $ 3,198,806
Trade -- unbilled ................          178,146           692,218
U.S. Government -- billed ........        1,129,758         1,074,641
U.S. Government -- unbilled ......        2,254,996         2,184,963
                                        -----------       -----------
                                          6,960,074         7,150,628
Less-Reserve for doubtful accounts          (55,436)          (71,193)
                                        -----------       -----------
                                        $ 6,904,638       $ 7,079,435
                                        ===========       ===========
</TABLE>

               All unbilled receivables at December 31, 2000 and 1999, are
expected to be billed and collected within one year. Payment to the Company, for
performance on certain U.S. Government contracts, is subject to progress payment
audits by the Defense Contract Audit Agency and are recorded at the amounts
expected to be realized.

6.      PROPERTY AND EQUIPMENT

               At December 31, 2000 and 1999, property and equipment consisted
of the following:

<TABLE>
<CAPTION>
                                       2000              1999
                                   -----------       -----------
<S>                                <C>               <C>
Equipment and machinery .....      $ 6,255,944       $ 5,310,573
Furniture and fixtures ......          792,350           609,130
Leasehold improvements ......          342,818           130,062
                                   -----------       -----------
                                     7,391,112         6,049,765
Less-Accumulated depreciation       (4,099,635)       (3,719,102)
                                   -----------       -----------
                                   $ 3,291,477       $ 2,330,663
                                   ===========       ===========
</TABLE>

7.      COMMITMENTS AND CONTINGENCIES

               The Company leases office facilities under operating leases.
Minimum future rental payments as of December 31, 2000, are as follows:

<TABLE>
<CAPTION>
                   Operating Leases
                   ----------------
<S>                <C>
2001.............      $840,325
2002.............       796,733
2003.............       564,401
2004.............       585,391
2005.............       606,070
                     -----------
                     $3,392,920
                     ===========
</TABLE>

               Related rent expense was $563,800, $491,159 and $380,748 for the
years ended December 31, 2000, 1999 and 1998, respectively.


                                      F-11
<PAGE>   49

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

               In February 2000, the Company retained Auerbach, Pollack &
Richardson, Inc. ("Auerbach") as warrant solicitation agent in connection with
the exercise of the Company's publicly traded warrants in March 2000. A dispute
later arose between the Company and Auerbach regarding the exercisability
provisions of Warrants the Company had previously issued to Auerbach as
compensation for its services as warrant solicitation agent. This resulted in
the filing of a lawsuit by the Company against Auerbach seeking a determination
that the Auerbach Warrants are not presently exercisable. In February 2001, JMAR
and Auerbach settled the dispute with JMAR agreeing to issue an additional
85,653 warrants at an exercise price of $5.25 per share.

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

8.      LINE OF CREDIT AND NOTES PAYABLE

               Line of credit and notes payable as of December 31, 2000 and
1999, were as follows:

<TABLE>
<CAPTION>
                                                                                         2000              1999
                                                                                      -----------       -----------
<S>                                                                                   <C>               <C>
Working capital line of credit in the amount of $5,000,000 with Comerica Bank -
California. Advances bear interest at prime rate (9.5% and 8.5% at December 31,
2000 and 1999, respectively). The line is renewable at the Bank's option yearly
on June 1st and interest on the line is payable monthly. Advances are secured by
all assets of the Company. The bank agreements contain covenants, among other
items, relating to income levels and financial ratios...........................      $ 1,100,000       $ 4,990,000


Note payable, due in monthly principal installments of $10,417 plus interest
through October 2000, interest at prime plus 1.25%, secured by
all assets of the Company ......................................................               --            84,362

Note payable, due in monthly principal installments of $10,417 plus interest at
prime plus .5% through May 2002, secured by all assets
of the Company .................................................................          197,917           322,913


Note payable, due in monthly principal installments plus interest at prime
starting June, 2000 through June 2005, secured by certain assets of the
Company ........................................................................          315,000           350,000

Other notes payable ............................................................           18,169             1,128
                                                                                      -----------       -----------
                                                                                        1,631,086         5,748,403

Less: Current portion ..........................................................       (1,291,178)       (5,195,490)
                                                                                      -----------       -----------
                                                                                      $   339,908       $   552,913
</TABLE>

               The weighted average interest rate on the loan with Comerica
Bank-California was 8.62% and 7.38% for 2000 and 1999, respectively. The maximum
amount outstanding was $4,990,000 for both years and the average amount
outstanding was $1,120,000 and $2,290,417 during 2000 and 1999, respectively.


                                      F-12
<PAGE>   50

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

               Interest paid for the years ended December 31, 2000, 1999 and
1998 was $123,943, $219,518 and $160,966, respectively.

               Future principal payments on notes payable as of December 31,
2000 are as follows:

<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S>                          <C>
2001....................     $191,178
2002....................      164,908
2003....................       70,000
2004....................       70,000
2005....................       35,000
                             --------
                             $531,086
                             ========
</TABLE>

9.      RELATED PARTY TRANSACTIONS

               In February 2000, the Board of Directors of the Company agreed to
forgive an interest bearing loan in the amount of $88,344 made to Dr. Martinez
in 1993.

10.     INCOME TAXES

               The provision for federal and state income taxes for the year
ended December 31, 1998 is for alternative minimum taxes. The Company paid taxes
of $32,204 in 1998.

               At December 31, 2000, the Company had Federal net operating loss
carryforwards as follows:

<TABLE>
<CAPTION>
EXPIRES
-------
<S>                         <C>
2004................        $1,184,000
2005................         2,840,000
2006................           961,000
2007................         4,546,000
2008................         6,932,000
2009................         6,860,000
2010................         2,265,000
2011................           585,000
2014................         1,566,000
2015................         1,192,000
                           -----------
Total...............       $28,931,000
                           ===========
</TABLE>

               The Company has approximately $2,454,000 of temporary differences
that will offset future taxable income subject to the change in ownership
limitations discussed below.


                                      F-13
<PAGE>   51

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

               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
$813,000 apply to approximately $3,724,000 of Company and acquired company loss
carryforwards. Approximately $25,207,000 of the net operating loss carryforwards
are not subject to annual limitations.

               The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are presented below:

<TABLE>
<CAPTION>
DEFERRED TAX ASSETS:
                                                        2000               1999
                                                    ------------       ------------
<S>                                                 <C>                <C>
Net operating loss carryforwards .............      $  9,837,000       $  9,431,000
Losses from equity and other investments .....           492,000            492,000
Other ........................................           342,000            209,000
                                                    ------------       ------------
            Total gross deferred tax assets...        10,671,000         10,132,000
            Less valuation reserve ...........       (10,151,000)        (9,612,000)
                                                    ------------       ------------
            Net deferred tax asset ...........      $    520,000       $    520,000
                                                    ============       ============
</TABLE>

               The valuation reserve as of December 31, 2000 represents deferred
tax assets which management believes, based on the Company's history of
operating losses, may not be realized in future periods. The net deferred tax
asset of $520,000 is included in prepaid expenses and other current assets on
the accompanying Consolidated Balance Sheet.

               The effective income tax rate for the year ended December 31,
2000, 1999 and 1998 varied from the statutory federal income tax rate as
follows:

<TABLE>
<CAPTION>
                                               2000       1999       1998
                                               ----       ----       ----
<S>                                             <C>        <C>         <C>
Statutory federal income tax rate ........      (34)%      (34)%       34%
State income tax .........................       (6)        (6)         6
Permanent differences ....................        1          1          2
Benefit recorded due to net operating loss
  carryforward position ..................       39         39        (38)
                                                ---        ---        ---
                                                 --         --          4%
                                                ===        ===        ===
</TABLE>

11.     STOCKHOLDERS' EQUITY

               During the year ended December 31, 1998, the Company received net
proceeds of approximately $164,000 from the exercise of warrants and options
into approximately 214,000 shares of common stock.


                                      F-14
<PAGE>   52

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

               During the year ended December 31, 1999, the Company received net
proceeds of approximately $18,450 from the exercise of warrants and options into
approximately 38,464 shares of common stock.

               During the year ended December 31, 2000, the Company received net
proceeds of approximately $16.2 million from the exercise of warrants and
options into approximately 4,152,000 shares of common stock.

12.     STOCK-BASED COMPENSATION PLANS

               The Company has six stock option or warrant plans, the 1988 Stock
Option Plan (the "1988 Plan"), the 1991 Stock Option Plan (the "1991 Plan"), the
1999 Stock Option Plan (the "1999 Plan"), the Management Anti-Dilution Plan (the
"Anti-Dilution Plan"), an incentive plan which provides for the issuance of
warrants to JRI employees (the "JRI Plan"), and an incentive plan which provides
for the issuance of warrants to JPSI employees (the "JPSI Plan"). The Company
accounts for these plans under APB Opinion No. 25, under which no compensation
cost has been recognized. Had compensation cost for these plans been determined
consistent with SFAS No. 123 the Company's net (loss) income and (loss) earnings
per share would have been the following pro forma amounts:

<TABLE>
<CAPTION>
                                                   2000                  1999                 1998
                                               -----------           -----------            --------
<S>                    <C>                     <C>                   <C>                    <C>
Net income (loss):     As Reported             $(1,224,765)          $(2,248,994)           $756,841
                       Pro Forma                (2,914,864)           (2,488,380)            403,764

Basic EPS:             As Reported                    (.06)                 (.12)                .04
                       Pro Forma                      (.13)                 (.14)                .02

Diluted EPS:           As Reported                    (.06)                 (.12)                .04
                       Pro Forma                      (.13)                 (.14)                .02
</TABLE>

               The Company was authorized to grant options or warrants to its
employees (including directors) and consultants for up to 120,000 shares under
the 1988 Plan, 1,480,000 shares under the 1991 Plan, 900,000 shares under the
1999 Plan, 806,637 shares under the Anti-Dilution Plan, 100,000 shares under the
JRI Plan, and 450,000 shares under the JPSI Plan. As of December 31, 2000, the
Company has granted options for 99,168 shares under the 1988 Plan, 1,467,005
options under the 1991 Plan, 228,936 options under the 1999 Plan, 424,246
warrants under the Anti-Dilution Plan, no warrants under the JRI Plan, and
440,000 warrants under the JPSI Plan. In addition, 65,000 non-qualified options
have been granted to two employees outside of the above plans. Under all Plans
the option or warrant exercise price is equal to or more than the stock's market
price on date of grant.

               A summary of the status of the total number of stock options or
warrants pursuant to all five of the above "plans" as of December 31, 1998, 1999
and 2000 and changes during the years then ended is presented in the table and
narrative below:


                                      F-15
<PAGE>   53

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

<TABLE>
<CAPTION>
                                            2000                          1999                          1998
                                    ---------------------       ----------------------       ------------------------
                                                 WTD AVG                       WTD AVG                        WTD AVG
                                     SHARES      EX PRICE         SHARES      EX PRICE        SHARES         EX PRICE
                                    --------     --------       ---------     --------       ---------       --------
<S>                                <C>           <C>            <C>           <C>            <C>             <C>
Outstanding at beg. of year        2,008,351       $2.70        1,920,605       $2.66        1,589,752       $   2.54
Granted ...................          604,461        7.12          289,797        2.25          521,067           2.78
Exercised .................         (325,603)       2.67           (9,500)       0.82          (95,214)          0.90
Forfeited .................         (101,276)       2.51         (192,551)       2.67          (95,000)          3.18
                                   ---------                    ---------                    ---------
Outstanding at end of year         2,185,933        3.85        2,008,351        2.61        1,920,605           2.66
                                   ---------                    ---------                    ---------
Exercisable at end of year         1,249,173                      729,479                      533,294
Weighted average fair value
   of options or warrants
   granted ................             7.12                         2.25                         2.78
</TABLE>

               821,926 of the 2,185,933 options and warrants outstanding at
December 31, 2000 have exercise prices between $.53 and $2.94 with a weighted
average exercise price of $2.21 and a weighted average remaining contractual
life of 6.9 years. 549,962 of these options and warrants are exercisable.
718,879 of the options and warrants outstanding at December 31, 2000 have an
exercise price of $3.00 with a weighted average exercise price of $3.00 and a
weighted average remaining contractual life of 2.8 years. 662,212 of these
options and warrants are exercisable. 149,667 of the options and warrants at
December 31, 2000 have exercise prices between $3.13 and $4.56 with a weighted
average exercise price of $4.27 and a weighted average remaining contractual
life of 8.3 years. 36,999 of these options and warrants are exercisable. 270,232
of the options and warrants outstanding at December 31, 2000 have exercise
prices between $5.19 and $7.46 with a weighted average exercise price of $6.37
and a weighted average remaining contractual life of 6.7 years. None of these
options and warrants are exercisable. 225,229 of the options and warrants
outstanding at December 31, 2000 have exercise prices between $7.79 and $17.63
with a weighted average exercise price of $9.25 and a weighted average remaining
contractual life of 9.4 years. None of these options and warrants are
exercisable.

               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 1998, 1999 and 2000:
risk-free interest rate of approximately 6 percent; expected dividend yields of
0 percent and expected lives of 6 years. For grants in 1998 and 1999, the
expected volatility used was 75 percent. For grants in 2000, the expected
volatility used was 112 percent.

13.     EARNINGS PER SHARE

               The Company complies with SFAS No. 128, "Earnings per Share".
Basic earnings per common share was computed by dividing net (loss) income by
the weighted average number of shares of common stock outstanding during the
year. Diluted (loss) earnings per common share for the years ended December 31,
2000, 1999 and 1998, was computed by dividing net (loss) income by the sum of
the weighted average number of shares of common stock (21,468,763, 18,045,914
and 18,046,860 for 2000, 1999 and 1998, respectively) plus dilutive employee
stock options and warrants (130,260 for 1998) and other dilutive warrants and
options (935,514 for 1998). For the years ended December 31, 2000 and 1999,
dilutive employee stock options and warrants are not included in the calculation
of loss per share as their effect would be antidilutive.


                                      F-16
<PAGE>   54

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

14.     SEGMENT INFORMATION

               In 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which required the Company
to report operating information by segment. In the Company's Form 10-K for the
year ended December 31, 1998, three segments were reported. These three segments
were the Precision Systems Segment, the Contract Research and Development
Segment and the Semiconductor Products and Processes Segment.

               During 1999, the Company combined the Precision Systems and
Contract Research and Development Segments to form the Microelectronics
Equipment Segment. The Company's two Segments offer varying products and
services that are affected by different economic conditions. Further, the
Segments reflect the manner in which the Company now views the operating
segments.

               Microelectronics Equipment Segment: This segment includes the
manufacture, marketing and sale of the Company's measurement and inspection
systems, positioning and motion control systems and biotech processing systems.
This segment also includes the development of the Company's microtechnology
emerging products, including: next generation X-ray lithography sources and
other non-lithography X-ray systems for inspecting tomorrow's high-performance
semiconductors; ultra-precision laser machining systems; and other leading-edge
products based on its patented laser technology.

               Semiconductor Products and Processes Segment: Using advanced
design and engineering tools and established foundry relationships with
semiconductor producers, this "fabless" supplier of semiconductors focuses on
high performance integrated circuits for the rapidly growing broadband
communications market, the development and delivery of high-performance
custom microcircuits for a wide range of commercial, medical and military
electronics uses. This segment also provides high value services related to the
upgrade and enhancement of a CMOS integrated circuit fabrication facility and
related wafer processing technology for the low-volume and prototype manufacture
of electronic circuits used in operational military systems.

               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 2000, 1999 and 1998 was as
follows:

<TABLE>
<CAPTION>
                                            SEMICONDUCTOR
                         MICROELECTRONICS    PRODUCTS &
                           EQUIPMENT          PROCESSES         CORPORATE           TOTAL
                         ----------------   -------------      ----------      -------------
<S>                      <C>                 <C>               <C>             <C>
2000:
Revenues                  $ 15,776,093       $ 3,850,507       $       --      $ 19,626,600
Operating (loss)            (2,849,160)         (697,394)              --        (3,546,554)
Total assets                15,582,937         8,810,992        9,797,645        34,191,574
Capital expenditures           240,316         1,218,101          313,811         1,772,228
Depreciation and
   amortization                837,570           364,185           23,280         1,225,035
</TABLE>


                                      F-17
<PAGE>   55

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

<TABLE>
<CAPTION>
                                                SEMICONDUCTOR
                            MICROELECTRONICS      PRODUCTS &
                               EQUIPMENT          PROCESSES      CORPORATE         TOTAL
                            ----------------    -------------    ---------      ----------
<S>                         <C>                 <C>              <C>            <C>
1999:
   Revenues                  $16,464,982         $8,302,758     $       --     $24,767,740
   Operating income
      (loss)                  (2,459,721)           314,617             --      (2,145,104)
   Total assets               14,782,832          3,592,933      2,298,003      20,673,768
   Capital expenditures          531,872            646,429          8,360       1,186,661
   Depreciation and
      amortization               744,622            271,630         18,423       1,034,675
1998:
   Revenues                   21,608,708          2,952,126             --      24,560,834
   Operating income              771,343            136,966             --         908,309
   Intersegment cost
      reimbursement              688,144                 --             --         688,144
   Total assets               13,592,972          4,895,127      4,386,734      22,874,833
   Capital expenditures          664,229            113,492         25,777         803,498
   Depreciation and
      amortization               631,617            124,258         56,849         812,724
</TABLE>

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

               Within the Microelectronics Equipment segment, the Measurement
and Inspection Systems product line accounted for 21 percent, 19 percent and 44
percent of the Company's revenues in 2000, 1999 and 1998, respectively. In
addition, the Lithography Systems for Bio-Medical Applications product line
accounted for 18 percent, 13 percent and 3 percent of the Company's revenues in
2000, 1999 and 1998, respectively. Within the Semiconductor Products and
Processes segment, the Technology Services product line accounted for 18
percent, 33 percent and 8 percent of the Company's revenues in 2000, 1999 and
1998, respectively.

SIGNIFICANT CUSTOMERS

               Sales to the United States Government aggregated $8,780,205,
$14,284,957 and $8,220,197 in 2000, 1999 and 1998, respectively. Accounts
receivable from the United States Government at December 31, 2000 and 1999 was
$3,384,754 and $3,259,604, respectively. Within the Microelectronics Equipment
segment, sales to one customer totaled $1,095,257, $2,555,500 and $7,279,778 in
2000, 1999 and 1998, respectively. Accounts receivable from this customer at
December 31, 2000 and 1999 was $7,087 and $598,969, respectively. In addition,
in 2000 and 1999, sales to another customer totaled $3,206,912 and $3,324,580,
respectively. Accounts receivable from this customer at December 31, 2000 and
1999 was $1,162,441 and $1,319,922, respectively.

EXPORT SALES

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


                                      F-18
<PAGE>   56

<TABLE>
<CAPTION>
                       2000             1999             1998
                   -----------      -----------      -----------
<S>                <C>              <C>              <C>
United States      $18,244,147      $21,954,053      $16,605,291
Mexico                 838,435          770,623        4,723,499
Malaysia               323,349          843,399        1,801,438
Costa Rica                  --           11,809          522,015
Others                 220,669        1,187,856          908,591
                   -----------      -----------      -----------
   Total           $19,626,600      $24,767,740      $24,560,834
                   ===========      ===========      ===========
</TABLE>

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

15.     QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

               The following is a summary of unaudited quarterly results for the
years ended December 31, 2000 and 1999.


<TABLE>
<CAPTION>

                                                                             NET INCOME
YEAR ENDED                                                                     (LOSS)
DECEMBER 31, 2000         REVENUES       GROSS PROFIT    NET INCOME (LOSS)   PER SHARE
-----------------         --------       ------------    ---------------     ---------
<S>                      <C>             <C>             <C>                 <C>
December 31              $5,890,485       $1,456,766        $581,654          $0.03
September 30              3,769,493        1,029,543      (1,027,793)         (0.05)
June 30                   5,167,577        1,790,487        (198,030)         (0.01)
March 31                  4,799,045        1,646,427        (580,596)         (0.03)
</TABLE>


<TABLE>
<CAPTION>


YEAR ENDED                                                                                        NET LOSS
DECEMBER 31, 1999              REVENUES          GROSS PROFIT            NET LOSS                 PER SHARE
-----------------              --------          ------------         ---------------             ---------
<S>                           <C>                <C>                  <C>                         <C>
December 31                   $6,625,794          $1,810,461            $(952,739)                 $(0.05)
September 30                   4,677,464           1,610,233             (438,897)                  (0.02)
June 30                        6,769,017           1,968,411             (263,953)                  (0.01)
March 31                       6,695,465           1,662,889             (593,405)                  (0.03)
</TABLE>


                                      F-19
<PAGE>   57

                                   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  26, 2001                   By:  /s/ John S. Martinez
                                        ----------------------------------------
                                             John S. Martinez
                                             Chairman of the Board and
                                             Chief Executive Officer

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

<TABLE>
<CAPTION>

        SIGNATURE                                            TITLE                         DATE
        ---------                                            -----                         ----
<S>                                                 <C>                                    <C>
/s/ John S. Martinez                                Chairman of the                        March 26, 2001
----------------------------------------            Board, Chief
John S. Martinez                                    Executive Officer
                                                    and Director


/s/ Dennis E. Valentine                             Chief Financial                        March 26, 2001
----------------------------------------            Officer and Chief
Dennis E. Valentine                                 Accounting Officer



/s/ James H. Banister, Jr.                          Director                               March 26, 2001
----------------------------------------
James H. Banister, Jr.


/s/ C. Neil Beer                                    Director                               March 26, 2001
----------------------------------------
C. Neil Beer


/s/ Vernon H. Blackman                              Director                               March 26, 2001
----------------------------------------
Vernon H. Blackman


/s/ Barry Ressler                                   Director                               March 26, 2001
----------------------------------------
Barry Ressler
</TABLE>


                                      F-20
<PAGE>   58

                             JMAR TECHNOLOGIES, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998



<TABLE>
<CAPTION>
                                                                                Additions
                                                                          ----------------------
                                                                          Charged to
                                                        Balance at        Costs and                                     Balance at
Description                                          Beginning of Year     Expenses        Other       Deductions       End of Year
-----------                                          -----------------    ----------       -----       ----------       -----------
<S>                                                  <C>                  <C>              <C>         <C>              <C>
For the year ended December 31, 2000:

  Warranty reserve ..................................   $      --         $  72,734       $     --      $      --       $  72,734

  Reserve for inventory excess and obsolescence .....     570,157           250,000        483,269       (310,966)        992,460

  Allowance for doubtful accounts ...................      71,193            39,889             --        (55,646)         55,436


For the year ended December 31, 1999:

  Warranty reserve ..................................   $      --          $     --       $     --      $      --       $      --

  Reserve for inventory excess and obsolescence ....      181,157           389,000             --             --         570,157

  Allowance for doubtful accounts ...................      43,370            27,823             --             --          71,193

For the year ended December 31, 1998:

  Warranty reserve ..................................   $  27,071          $     --       $     --      $ (27,071)      $      --

  Reserve for inventory excess and obsolescence ....      181,157                --             --             --         181,157

  Allowance for doubtful accounts ...................      35,547            27,823             --        (20,000)         43,370

</TABLE>




                                       S-1