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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December  31, 2002

or

Commission file number 1-10515

JMAR Technologies, Inc.

Registrant’s telephone number, including area code:  (760) 602-3292

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

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

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

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

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

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     The aggregate market value of common stock held by non-affiliates of the Registrant as of June 28, 2002 was approximately $45 million. The aggregate market value was based on the closing price on June 28, 2002 for the common stock as quoted on the NASDAQ National Market System, multiplied by the number of shares outstanding on June 28, 2002, excluding the common stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the common stock outstanding at June 28, 2002. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant or that such person is controlled by or under common control with the Registrant.

     Number of shares outstanding of common stock: Common Stock, $.01 Par Value – 23,859,802 shares as of March 25, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

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

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PART I

Item 1. BUSINESS

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

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

BACKGROUND

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

BUSINESS SEGMENT EVOLUTION

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

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

CURRENT BUSINESS SEGMENTS

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

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

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

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

BUSINESS SUMMARY

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

     Lithography is one of the most critical steps, if not the most critical step, in the production of semiconductors. It is a photographic process that uses precision light sources to fabricate intricate computer-generated electronic circuit designs onto semiconductor chips. A typical lithography system consists of an illumination source integrated into a printing apparatus known as a “stepper” or an “aligner”. The combined system is installed in the semiconductor fabrication line. In order to make the smaller circuit feature sizes needed to meet the future needs of the rapidly growing microelectronics industry, next-generation lithography (NGL) systems, employing shorter wavelength illumination sources, will be required.

     JMAR is the originator of Collimated Plasma Lithography (“CPL™”), a compact high-intensity lithography source that addresses the need for next generation lithography.

     CPL™ illumination is provided by a laser produced plasma (“LPP”) X-ray source. JMAR’s LPP X-ray point source utilizes the Company’s patented Britelight™ high-power, picosecond-class, diode-pumped solid state laser technology to generate the X-rays required to print microscopic circuits finer than 100 nanometer feature sizes (one hundred nanometers is about one-one millionth of the thickness of a human hair).

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

     The goal of JMAR’s CPL™ program has been to provide an acceptable alternative to the synchrotron and an alternative to other proposed NGL technologies, such as extreme ultraviolet (“EUV”), for semiconductor manufacturing applications, by developing a proprietary compact point source that is expected to be economically competitive with, and no larger than, conventional optical lithography sources. JMAR’s Source consists of several individual modules, each powered by the Company’s

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patented Britelight™ laser. These modules produce a succession of powerful light pulses having intensities of many hundreds of trillions of watts per square centimeter that are focused into a microwave-oven-size chamber to produce X-rays. The Company believes that once these cost effective X-ray lithography systems become commercially available, they will be well received by the semiconductor industry.

     Semiconductors are manufactured using a variety of substances, with the predominant substrate being silicon. Other substances, often referred to as “compound semiconductors,” are used for certain, specific applications, such as for ultra-high speed communications semiconductors. The compound semiconductor material used most frequently for these high-speed chips is Gallium Arsenide (GaAs). GaAs is used principally for military communications applications, but it also finds applications in the telecommunications industry. Critical circuits on many of these high-speed chips are currently made using very low throughput electron beam (“e-beam”) systems. Although GaAs chip production has not increased as rapidly as expected due to the telecom industry slowdown, the Company believes that since CPL is capable of higher throughput than conventional e-beam writers, it can play a key role in enabling the cost-effective manufacture of these high performance chips when demand picks up.

     Following planned increases in the throughput capability of its CPL sources, JMAR believes they will play a significant role in silicon semiconductor manufacturing in the future. These increases will require significant additional R&D investment by the Company. See “Market” below and “Factors That May Affect Future Results” in the Management’s Discussion and Analysis below.

     JMAR’s advanced lithography source development program has benefited from the investment of in excess of $50 million in Company and government funds over the past decade and an additional approximately $22 million investment in government funds for stepper development prior to JMAR owning the Systems Division. These contracts were issued by the U.S. Army Research Laboratory and are sponsored by the Defense Advanced Research Projects Agency (“DARPA”) of the Department of Defense. In 2002, JMAR received a contract from the Department of the Army supported by the Defense Advanced Research Projects Agency (DARPA) valued at up to $34.5 million. The contract directs JMAR to proceed immediately to deliver “with all diligence” JMAR’s patented x-ray point source CPL system to produce high-performance semiconductor integrated circuits needed to support a wide range of critical military missions. During 2002, the Company received $13 million in funds related to this contract. The Company expects to receive another approximately $5.3 million in funding under this contract in 2003.

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

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

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

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

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

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

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

     EUV Source Development. During 2001, the Company was granted an exclusive license by the University of Central Florida Research Foundation (UCFRF) to make, use and sell products, processes or systems which incorporate patented and other proprietary technology developed by the University of Central Florida to convert laser beams into Extreme Ultraviolet (EUV). JMAR has also developed proprietary technology in this field that is the subject of a pending patent. JMAR is positioned to combine the licensed technology and its own technology with its patented high-power Britelight™ lasers to demonstrate the efficiency of its EUV technology to the semiconductor industry.

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

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

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

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

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

MARKET

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

     Currently, most semiconductors are manufactured using “optical” lithography (meaning using light sources which require optics to focus the light). Semiconductor manufacturers purchase lithography tools from a number of established stepper suppliers. The principal suppliers of optical lithography steppers for high volume semiconductor production are Nikon, Canon and ASML. Additionally, Ultratech Systems and Suss MicroTec participate in niche market segments.

     The silicon semiconductor industry is transitioning its highest performance fab lines to the initial production of circuitry having feature sizes as small as 90 nanometers (critical dimension). The Company understands that, with the exception of JMAR, the primary focus of stepper manufacturers for the near-term will continue to be on the development and marketing of optical lithography steppers including the extension of these technologies using so called immersion techniques. The NGL technologies competing to succeed today’s optical lithography processes for the silicon market are XRL, EUV and electron projection lithography (EPL). X-ray lithography process development has been conducted over more than a decade, by several other organizations, including IBM and several large Japanese semiconductor companies, using synchrotron X-ray sources. JMAR and other proponents of XRL believe that as a result of this effort, XRL is the most advanced and mature technology for the 65 nanometer node and below.

     The Systems Division of JMAR was established several years ago to focus on the XRL stepper market. As of the end of 2002, a total of about 20 X-ray steppers have been sold worldwide for XRL process development, primarily for use with synchrotron X-ray sources. Sixteen of those have been sold by the Systems Division.

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

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

     Each of the NGL approaches has technical issues which need to be addressed before it is adopted for use by the silicon semiconductor industry. The principal roadblocks to the adoption of XRL often cited by critics are the high cost and time required to modify current factory designs to accommodate synchrotron X-ray sources and the difficulties in manufacturing lithography masks having feature sizes of 70 nanometers and below. JMAR’s CPL Source offers a solution to the synchrotron problem and the Company is actively working with IBM on the development of XRL masks. Although the semiconductor industry has recently begun to explore the possibility of extending DUV technology to even lower feature sizes using immersion technologies, there appears to be many technical challenges to be overcome with that approach.

     While the demand for ultra-high speed communications devices has paused in its historically rapid growth, industry followers project a return to prior growth rates in 2004. GaAs, not silicon, is the material of choice for many semiconductor components operating at these ultra-high bandwidths. The market for these devices is expected to grow from about $2.4 billion in 2002 to nearly $4 billion by 2007.

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

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

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

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

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MANUFACTURING

     The Company’s Systems Division manufactures the Company’s CPL steppers and is the integrator of the beta CPL Source in its facility in Vermont. Portions of the CPL development effort have been subcontracted to third party suppliers, who may initially be sole suppliers for the prototype unit, but we anticipate having multiple sources of supply for the components used in our future production systems. In particular, our CPL light source requires a component called a collimator, which collects the X-ray output from our source and directs the X-rays to the wafer. We have received collimators in the past from X-ray Optical Systems, Inc. (“XOS”) and are using one of their current collimators on the CPL system currently being integrated with our stepper. We have engaged XOS to develop a higher-efficiency collimator to be used with our first commercial systems. This higher-efficiency collimator and future improvements are needed to increase the power of our lithography equipment in order to achieve our goal of entering the high volume silicon lithography market by 2005. In addition, the Company purchases laser pump diode arrays, a critical component used in its CPL Source, from Spectra Physics. Although other suppliers manufacture such diode arrays, the Company has found Spectra Physics to best meet our current diode specifications. If we cannot obtain these high-efficiency collimators and specialty diodes when needed then we will need to rely on other alternatives to increase power of our systems, which could involve additional re-engineering and related delays and additional costs which could adversely affect our business.

RESEARCH AND DEVELOPMENT

     Company-funded expenditures for research, development and engineering (“RD&E”) were $854,306, $602,980, $340,227, $467,328 and $717,792 for the years ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively. Total expenditures for RD&E, including funding provided by third party contracts from the U.S. government and other companies were $12,455,160, $7,638,266, $4,151,767, $4,561,538 and $4,367,240 for the years ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively.

     The Company’s Research Division is performing R&D contract work to develop a CPL lithography system based on its advanced solid state laser technology. This work, which has important potential commercial applications, is primarily funded by the Defense Advanced Research Projects Agency (DARPA) of the Department of Defense. Government funding for this technology, however, is very vulnerable to changes in the political environment. For this reason, the Company is exploring strategic alliance discussions with commercial semiconductor and semiconductor equipment manufacturers to enlist their participation in the continuing development and commercialization of this technology.

     Some of the more significant research and development projects the Company has worked on in 2002 include (i) the continued development of collimated plasma lithography systems for the semiconductor industry and (ii) the continued development of a high efficiency EUV generation system for advanced semiconductor lithography. The main R&D emphasis in 2003 will be to further demonstrate JMAR’s CPL source resolution capability and to increase its power in order to increase wafer throughput.

COMPETITION

Advanced X-ray Source Development

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

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Collimated Plasma Lithography Sources and Steppers

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

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

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

Semiconductor Process Integration Services

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

PATENTS AND PROPRIETARY TECHNOLOGY

     During the past several years JMAR’s patent protection efforts have resulted in the issuance of 14 U.S. patents and 4 foreign patents. JMAR currently has filed 9 pending U.S. patent applications, 24 pending foreign applications and several provisional patent applications. The issued patents contain numerous claims covering various types of laser plasma X-ray sources, high-brightness solid state lasers, point-source lithography system technology, advanced collimator technology, improved X-ray source chambers, improved laser amplifiers, internal imaging of semiconductor devices (nanotomography), laser ablation of materials, ultraviolet and extreme ultraviolet (EUV) microlithography systems and key X-ray lithography stepper technology, each of which represents a major opportunity for potential growth for JMAR. The expiration dates of these patents range from 2004 to 2017. JMAR is also a party to an exclusive license with the University of Central Florida covering certain EUV technology. Because the later patents cover many of the fundamental aspects of the earlier patents, with more recent improvements, the more recently issued patents are generally more important than the earlier patents.

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

CUSTOMERS

     For fiscal years 2002, 2001 and 2000, the United States Government accounted for approximately 68%, 71% and 58%, respectively, of total sales. A major portion of the Company’s government contract sales involves research and development aimed at producing commercially-viable products and technology.

EMPLOYEES

     Currently, the Company has approximately 120 full-time employees of which approximately 40 employees are employed by the Company’s JMAR Precision Systems (“JPSI”) subsidiary which is in the process of being sold. The Company is not subject to any collective bargaining agreements and believes that it maintains excellent relations with its employees.

INFORMATION REGARDING INDUSTRY SEGMENTS, SIGNIFICANT CUSTOMERS AND EXPORT SALES

     As a result of the decision to discontinue and sell the Company’s standard semiconductor products business and the Precision Equipment segment, the Company will operate in three segments as follows: Research Division, Systems Division and Microelectronics Division. Financial information relating to the Company’s segments, significant customers and export sales for the three years ended December 31, 2002 is incorporated by reference from Note 14 of Notes to Consolidated Financial Statements.

Item 2. PROPERTIES

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

     The Research Division leases 9,280 square feet located in the Torrey Pines Business Park in the Sorrento Valley region of San Diego, 15 miles north of San Diego International Airport. The Sorrento Valley space is used for the Company’s advanced light technology development activities, including CPL. That lease expires on April 30, 2006.

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

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

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

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

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

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

Item 3. LEGAL PROCEEDINGS

Anorad Lawsuit.

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

JMAR Semiconductor (“JSI”) Liabilities and the All American Lawsuit.

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

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

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Assignment for the Benefit of Creditors.

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

Tyson Foods Lawsuit.

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

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

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

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

Executive Officers of the Company

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

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

DANIEL J. FLEMING, Ph.D., joined JMAR/SAL NanoLithography, Inc. (“JSAL”, now the Systems Division) as President in August 2001 when SAL, Inc. was merged into JSAL. Dr. Fleming was elected Chief Operating Officer of JMAR in February 2003. He had been President, CEO, and a director of SAL. He brings a strong and diverse background in the semiconductor electronics business from more than three decades in the semiconductor industry at IBM Microelectronics, SVG Lithography Systems (SVGL), and SAL. At SVGL he was responsible for the marketing and customer support of semiconductor lithography equipment. His earlier experience at IBM includes executive management of the development and production of world-class chip products and the underlying materials, process technology and production equipment. He has held governance and advisory board positions at SEMATECH, SRC, and university semiconductor research centers. Dr. Fleming received a BEE from Rensselaer Polytechnic Institute and a MS (EE) and Ph.D. (EE) from Syracuse University.

DENNIS E. 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 there included extensive work with public companies and consultation regarding mergers and acquisitions. He was the manager in-charge of the local office merger and acquisition program and was on the Board of Advisors of the Orange County Venture Forum. Mr. Valentine received a Bachelor of Science degree in Business from the University of Southern California in 1978. He is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.

JOSEPH G. MARTINEZ joined the Company in June 1998 as Vice President and General Counsel and has been the Company’s Secretary since August 2000. Mr. Martinez was elected Senior Vice President in August 2001. In September 2001, Mr. Martinez was appointed Acting President of JPSI. Mr. Martinez served as the Company’s Interim Chief Executive Officer from August to October 2002. From 1986 to 1998, Mr. Martinez was employed by Parker, Milliken, Clark, O’Hara & Samuelian, P.C., a Los Angeles-based law firm which had served as the Company’s outside general corporate counsel since the Company’s inception in 1987. From 1993 to 1998, Mr. Martinez was a shareholder of Parker, Milliken and was the principal attorney responsible for representing the Company. From 1984 to 1986, Mr. Martinez was employed by another law firm in Los Angeles. During his tenure at Parker, Milliken, Mr. Martinez specialized in corporate, securities and general business law. In 1984 Mr. Martinez received both a Juris Doctor degree from the University of California, Davis and a Master of Business Administration from U.C. Berkeley (with an emphasis in Finance and Accounting) in a Joint Degree Program. He received his B.A. in Genetics from U.C. Berkeley in 1980. Mr. Martinez has been a member of the California State Bar since 1984. Mr. Martinez is the son of Dr. John S. Martinez, one of the Company’s directors and the former Chairman and Chief Executive Officer.

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

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

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

PART II

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

     The Company’s Common Stock is traded on the Nasdaq National Market tier of the Nasdaq Stock Market (“NASDAQ-NMS”) under the symbol JMAR. The 2002 and 2001 high and low transaction prices for the common stock as reported by NASDAQ-NMS are set forth in the following table.

Common Stock Price

     As of March 17, 2003, there are approximately 12,000 holders of JMAR’s common stock.

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

     Pursuant to the Director Compensation Program adopted by the Company in August, 1997, the Company issued a total of 2,946 shares of Common Stock in December, 2002 to its outside directors as compensation for services as a director. These transactions were exempt under Section 4(2) of the Securities Act of 1933.

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

     In October 2002, the Company’s Board of Directors approved the issuance of 2,000 shares of Common Stock to a consultant of the Company. The shares were issued in a transaction exempt under Section 4(2) of the Securities Act of 1933.

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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data that follows has been extracted from the Company’s Consolidated Financial Statements, which have been audited by the Company’s independent public accountants, Grant Thornton LLP for 2002, 2001 and 2000 and Arthur Andersen LLP for 1999 and 1998. It should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto, which are included elsewhere in this report. The amounts for all years have been adjusted from that previously reported to reflect the operations of JMAR Precision Systems, Inc. and the standard chip business of JMAR Semiconductor, Inc. as discontinued operations.

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

Consolidated Balance Sheet Data – December 31,

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

     Overview

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

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

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

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

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

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

Results of Consolidated Operations

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

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

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

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

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

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

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

     The Company’s research, development and engineering program (RD&E) consists of two types: Customer-Funded RD&E (U.S. government and other companies) and Company-Funded RD&E. Both types of RD&E are expensed when incurred. Customer-Funded RD&E costs incurred, included in “Contract Costs of Sales”, totaled $11,600,854, $7,035,286 and $3,811,540 for the fiscal years ended December 31, 2002, 2001 and 2000, respectively. The increase in Customer-Funded RD&E expenditures for 2002 is related to an increase of approximately $933,880 in the collimated plasma lithography program contract funding provided by the Defense Advanced Research Projects Agency, which is directed toward development of JMAR’s CPL technology for the commercial semiconductor market, and an increase in

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contract costs of $3,631,688 incurred by the Systems Division (approximately $2,346,000 of which is related to the Navair contract) which was acquired in August 2001. The increase in Customer-Funded RD&E expenditures for 2001 compared to 2000 is related to an increase of approximately $2,432,936 in the X-ray lithography program contract funding provided by the Defense Advanced Research Projects Agency, most of which is directed toward development of JMAR’s X-ray lithography source technology for the commercial semiconductor market, and contract costs of $579,434 incurred by JSAL. These increases were offset, in part, by a decrease of $307,438 related to the Company's contract for the development of a unique microcircuit architecture and devices for the replacement of obsolete integrated circuits for the Defense Microelectronics Activity. Company-Funded RD&E costs are shown in “Operating Expenses” and totaled $854,306, $602,980 and $340,227 for the fiscal years ended December 31, 2002, 2001 and 2000, respectively. Hence, total RD&E expenditures for those three years were $12,455,160, $7,638,266 and $4,151,767, respectively. Total RD&E expenditures as a percentage of sales were 67.8%, 59.2% and 45.6% for the years ended December 31, 2002, 2001 and 2000, respectively. These expenditures are primarily related to the continued development of CPL systems for the semiconductor industry and the development of a high efficiency EUV generation system for advanced semiconductor lithography.

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

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

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

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

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

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

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

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

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

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

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

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

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

Results of Segment Operations

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

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

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

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

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

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

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Consolidated Liquidity and Financial Condition

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

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

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

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

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

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

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

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

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

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

     On August 7, 2001, the Company’s wholly owned subsidiary, JMAR/SAL NanoLithography, Inc. (“Subsidiary”) acquired (the “Acquisition”) all of the outstanding equity of Semiconductor Advanced Lithography, Inc. (“SAL”), in a merger of SAL with and into Subsidiary (“Merger”). Consideration for the Merger consisted of an aggregate of 603,051 shares of the Company’s Common Stock, $1.2 million in cash and $1.2 million in notes (the “Notes”). The Notes are convertible into shares of the Company’s Common Stock at a price of $4.302. The Notes are convertible by the holders at any time and the Company can force conversion if the average price, as defined, of the Company’s Common Stock during any ten day trading period exceeds $6.45. Interest on the Notes is payable quarterly, with the entire principal amount due, if not converted, on February 7, 2004. The resale by the holders of the conversion shares is registered, however, the holders have agreed to restrictions on their sale of those JMAR shares to no more than 25% of their JMAR holdings in any quarter and to refrain from selling any shares for 60 days upon notice from JMAR of its intention to negotiate an underwritten public offering.

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

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

Commitments

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

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

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

Critical Accounting Policies and Estimates

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

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

Revenues

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

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

Allowances for Doubtful Accounts

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

Inventory Reserves

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

Goodwill and Intangible Assets

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

Deferred Taxes

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

Litigation Accrual

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

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Warranty Reserve

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

Stock-Based Compensation Plans

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

Factors That May Affect Future Results

     Certain statements contained in this Form 10-K which are not related to historical results, including statements regarding JMAR’s future sales or profit growth, competitive position or products, projects or processes currently under development, the ability of the Company to successfully introduce those products into the commercial marketplace or to apply those products, projects or processes to alternative applications and the availability of future bank or equity investor financing are forward-looking statements that necessarily are based on certain assumptions and are subject to certain risks and uncertainties that could cause actual future performance and results to differ materially from those stated or implied in the forward-looking statements. These risks and uncertainties include the lack of funds to continue development and commercialization of our CPL products in accordance with our proposed schedule of product introductions, due to delays in funding of government contracts and delays in securing, or inability to secure other financing, whether from the public or private debt or equity markets or from commercial lenders or otherwise. Other risks include concentration of sales to certain markets and customers, such as the semiconductor industry, delays in shipments or cancellations of orders, failure of expected orders to materialize, fluctuations in margins, timing of future orders, lack of availability of critical components, customer reorganizations, failure of advanced technology and new intellectual property to perform as predicted, the failure of pending patents to be issued, delays in development, introduction and acceptance of new products, changing business and economic conditions in various geographic regions, technical obsolescence of existing products, technical problems in the development or modification of current products or manufacturing processes, the impact of competitive products and pricing, including the risk that current lithography technologies can continue to economically produce smaller feature sizes or that the EUV LLC is successful in developing an acceptable next generation lithography process that becomes the process of choice for the semiconductor industry or that the semiconductor industry fails to adopt CPL as the lithography alternative, the degree of success of technology transfer (e.g., advanced lithography sources, etc.) to commercial products, availability of working capital to support growth, continued government funding of advanced lithography, successful integration of acquisitions, declining credit markets, the adverse effect of selling JPSI on its operating results, less than expected sales proceeds realized for the sale of JPSI, other competitive factors and temporary cessation of operations at one or more of its division facilities due to natural events such as floods, earthquakes and fires.

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

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

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

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

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

     In the case of our CPL development program, we have subcontracted portions of the development effort to third party suppliers, who may initially be sole suppliers for the prototype unit, but we anticipate having multiple sources of supply for the components used in our future production systems. In particular, our CPL light source requires a component called a collimator, which collects the X-ray output from our CPL source and directs the X-rays to the wafer. We have received collimators in the past from a single supplier and are using one of their current collimators on the CPL system currently integrated with a JSAL stepper. We have engaged that supplier to develop a higher-efficiency collimator in 2003 to be used with our first commercial systems. This higher-efficiency collimator and future improvements are needed to increase the X-ray power of our lithography equipment in order to achieve our goal of entering the high volume silicon lithography market by 2005. If we cannot obtain these high-efficiency collimators when needed then we will need to rely on other alternatives to increase the X-ray power of our systems, which would involve additional re-engineering and related delays and additional costs which could adversely affect our business.

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

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

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

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

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

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

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

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

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

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          The Company’s consolidated financial statements prepared in accordance with Regulation S-X and Report of Independent Public Accountants are set forth at the end of this Report on pages F-1 through F-26.

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

          Not applicable.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

Item 11. EXECUTIVE COMPENSATION

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

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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PART IV

Item 14. CONTROLS AND PROCEDURES

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

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

1.

Financial Statements. Index to Consolidated Financial Statements:

2.

Financial Statement Schedules. The following financial statement schedule of JMAR Technologies, Inc., for the years ended December 31, 2002, 2001 and 2000 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of JMAR Technologies, Inc.

Schedule II. Valuation and Qualifying Accounts

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

(b)  Reports on Form 8-K

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

       Index to Exhibits

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

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
JMAR Technologies, Inc.:

     We have audited the accompanying consolidated balance sheets of JMAR Technologies, Inc. (a Delaware corporation) as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of JMAR Technologies, Inc. as of December 31, 2002 and 2001, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

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

/s/ GRANT THORNTON LLP

Irvine, California
March 27, 2003

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

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

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

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

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

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

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Table of Contents

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