##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549-1004
 FORM 10-Q
 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 JMAR TECHNOLOGIES, INC.
  Delaware
    
    68-0131180(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. employer
identification number)
 (Address, including zip code and telephone number including
   þ o
  o o þ
  o þ




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##### 



INDEX
 Page #PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2006 (unaudited) and December 31, 2005
    
    2Consolidated Statements of Operations (unaudited)  Three months and nine months
ended September 30, 2006 and 2005
    
    3Consolidated Statements of Cash Flows (unaudited)  Nine months ended September 30,
2006 and 2005
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    31Item 4. Controls and Procedures
    
    31PART II. OTHER INFORMATIONItem 1. N/AItem 1A. Risk Factors
    
    32Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    33Item 3. N/AItem 4. N/AItem 5. N/AItem 6. Exhibits
    
    33EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  1




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PART I  FINANCIAL INFORMATION
 JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 As of September 30, 2006 and December 31, 2005
 September 30, 2006
    
    
    December 31, 2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,308,778
    
    
    $
    5,279,691Accounts receivable
    
    
    1,782,599
    
    
    
    1,156,161Inventories
    
    
    521,128
    
    
    
    434,750Net current assets of discontinued operations
    
    
    75,272
    
    
    
    858,549Prepaid expenses and other
    
    
    273,309
    
    
    
    327,603Total current assets
    
    
    4,961,086
    
    
    
    8,056,754Property and equipment, net
    
    
    1,091,897
    
    
    
    1,296,491Intangible assets, net
    
    
    1,770,804
    
    
    
    1,708,038Other assets
    
    
    417,356
    
    
    
    380,768Net non-current assets of discontinued operations
    
    
    18,732
    
    
    
    459,961Goodwill
    
    
    4,415,932
    
    
    
    4,415,932TOTAL ASSETS
    
    $
    12,675,807
    
    
    $
    16,317,944LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,136,777
    
    
    $
    1,092,511Accrued liabilities
    
    
    493,323
    
    
    
    542,998Accrued payroll and related costs
    
    
    571,503
    
    
    
    702,137Billings in excess of costs incurred
    
    
    810,501
    
    
    
    622,465Working
capital line of credit, net
    
    
    2,563,219
    
    
    
    Current portion of notes payable and other liabilities, net
    
    
    214,143
    
    
    
    162,351Net current liabilities of discontinued operations
    
    
    514,029
    
    
    
    757,333Deferred rent
    
    
    181,713
    
    
    
    140,358Total current liabilities
    
    
    6,485,208
    
    
    
    4,020,153Notes payable and other long-term liabilities, net of current portion
    
    
    462,281
    
    
    
    638,659Net non-current notes payable and other long-term liabilities of
discontinued operations, net of current portion
    
    
    89,208
    
    
    
    134,563Redeemable convertible preferred stock, 785,000 shares issued and
outstanding as of September 30, 2006 and December 31, 2005, net of
unamortized discount of $2,589,468 and $880,659, respectively
    
    
    5,260,532
    
    
    
    6,969,341Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
785,000 shares issued and outstanding as of September 30, 2006 and
December 31, 2005 included in redeemable convertible preferred stock
above
    
    
    
    
    
    
    Common stock, $.01 par value; 80,000,000 shares authorized;
39,423,808 shares issued and outstanding as of September 30, 2006
and 38,823,158 shares issued and outstanding as of December 31, 2005
    
    
    394,238
    
    
    
    388,231Additional-paid in capital
    
    
    83,967,471
    
    
    
    79,589,931Accumulated deficit
    
    
    (83,983,131
    )
    
    
    (75,422,934
    )Total stockholders equity
    
    
    378,578
    
    
    
    4,555,228TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    12,675,807
    
    
    $
    16,317,944
  2




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JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months Ended September 30, 2006 and 2005
and Nine Months Ended September 30, 2006 and 2005
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    September
    
    
    September30, 2006
    
    
    30, 2005
    
    
    30,2006
    
    
    30, 2005Revenues
    
    $
    962,101
    
    
    $
    1,478,101
    
    
    $
    3,469,529
    
    
    $
    4,332,657Costs of revenues
    
    
    1,127,410
    
    
    
    962,056
    
    
    
    3,354,335
    
    
    
    2,988,318Gross profit (loss)
    
    
    (165,309
    )
    
    
    516,045
    
    
    
    115,194
    
    
    
    1,344,339Operating expenses:Selling, general and administrative
    
    
    1,414,842
    
    
    
    1,683,058
    
    
    
    4,768,360
    
    
    
    4,530,655Research and development
    
    
    541,363
    
    
    
    891,000
    
    
    
    2,396,872
    
    
    
    2,135,207Asset writedowns
    
    
    
    
    
    
    
    
    
    
    39,067
    
    
    
    99,218Total operating expenses
    
    
    1,956,205
    
    
    
    2,574,058
    
    
    
    7,204,299
    
    
    
    6,765,080Loss from operations
    
    
    (2,121,514
    )
    
    
    (2,058,013
    )
    
    
    (7,089,105
    )
    
    
    (5,420,741
    )Interest and other income
    
    
    1,941
    
    
    
    70,209
    
    
    
    53,061
    
    
    
    151,315Interest and other expense
    
    
    (125,939
    )
    
    
    (60,528
    )
    
    
    (284,231
    )
    
    
    (208,395
    )Loss from continuing operations
    
    
    (2,245,512
    )
    
    
    (2,048,332
    )
    
    
    (7,320,275
    )
    
    
    (5,477,821
    )Loss from operations of discontinued operations
    
    
    (496,276
    )
    
    
    (87,980
    )
    
    
    (270,753
    )
    
    
    (107,736
    )Net loss
    
    
    (2,741,788
    )
    
    
    (2,136,312
    )
    
    
    (7,591,028
    )
    
    
    (5,585,557
    )Deemed preferred stock dividends
    
    
    (314,499
    )
    
    
    (443,951
    )
    
    
    (969,169
    )
    
    
    (1,257,755
    )Loss applicable to common stock
    
    $
    (3,056,287
    )
    
    $
    (2,580,263
    )
    
    $
    (8,560,197
    )
    
    $
    (6,843,312
    )Basic and diluted loss per share:Loss per share from continuing operations
    
    $
    (0.07
    )
    
    $
    (0.07
    )
    
    $
    (0.21
    )
    
    $
    (0.20
    )Loss per share from discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    Basic and diluted loss per share applicable to
common stock
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.22
    )
    
    $
    (0.20
    )Shares used in computation of basic and
diluted loss per share
    
    
    39,402,008
    
    
    
    35,209,761
    
    
    
    39,356,693
    
    
    
    34,734,438
  3




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JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30, 2006 and 2005
(Unaudited)
 2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (7,591,028
    )
    
    $
    (5,585,557
    )Adjustments
to reconcile net loss to net cash
used in operating activities:Depreciation, amortization and debt discount
    
    
    376,540
    
    
    
    395,562Services received in exchange for common stock or options
    
    
    397,927
    
    
    
    77,074Asset write-downs
    
    
    39,067
    
    
    
    99,218Change in assets and liabilities:Accounts receivable
    
    
    (626,438
    )
    
    
    681,135Inventories
    
    
    (86,378
    )
    
    
    (22,385
    )Prepaid expenses and other
    
    
    (217,434
    )
    
    
    459,727Billings in excess of costs incurred
    
    
    188,036
    
    
    
    (356,417
    )Accounts payable and accrued liabilities
    
    
    (100,838
    )
    
    
    8,561Changes in net assets and liabilities of discontinued
operations
    
    
    888,133
    
    
    
    (234,890
    )Net cash used in operating activities
    
    
    (6,732,413
    )
    
    
    (4,477,972
    )Cash flows from investing activities:Capital expenditures of continuing operations
    
    
    (30,840
    )
    
    
    (342,076
    )Investing
activities of discontinued operations
    
    
    (4,056
    )
    
    
    (25,428
    )Additions of intangible assets and other assets of continuing operations
    
    
    (70,011
    )
    
    
    (107,534
    )Net cash used in investing activities
    
    
    (104,907
    )
    
    
    (475,038
    )Cash flows from financing activities:Net proceeds from the issuance of common stock
    
    
    1,334,413
    
    
    
    3,845,924Cash payments of preferred stock dividends
    
    
    (466,916
    )
    
    
    (512,293
    )Preferred stock redemptions
    
    
    
    
    
    
    (233,333
    )Net borrowings under line of credit
    
    
    2,998,910
    
    
    
    Net cash provided by financing activities
    
    
    3,866,407
    
    
    
    3,100,298Net decrease in cash and cash equivalents
    
    
    (2,970,913
    )
    
    
    (1,852,712
    )Cash and cash equivalents, beginning of period
    
    
    5,279,691
    
    
    
    6,555,692Cash and cash equivalents, end of period
    
    $
    2,308,778
    
    
    $
    4,702,980Cash paid for interest
    
    $
    80,132
    
    
    $
    26,057
   4




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JMAR TECHNOLOGIES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 (1) Basis of Presentation and Financial Condition
        5




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
    (2) Recent Accounting Pronouncements
  6




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
   ,
   7




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
   (3) Stock-Based Compensation Plans
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Loss applicable to common stock:
    
    As Reported
    
    $
    (2,580,263
    )
    
    $
    (6,843,312
    )Stock based compensation expense
    
    
    
    
    
    
    (187,884
    )
    
    
    (450,819
    )Proforma
    
    $
    (2,768,147
    )
    
    $
    (7,294,131
    )Basic and diluted loss per share:
    
    As Reported
    
    $
    (0.07
    )
    
    $
    (0.20
    )Stock based compensation expense
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )Proforma
    
    $
    (0.08
    )
    
    $
    (0.21
    )
  8




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
    Wtd. Avg.Remaining
    
    
    AggregateWtd. Avg.
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Life
    
    
    ValueOutstanding at January 1, 2006
    
    
    3,162,610
    
    
    $
    2.11Granted
    
    
    394,095
    
    
    $
    0.75Exercised
    
    
    (65,700
    )
    
    $
    1.09Forfeited
    
    
    (1,088,617
    )
    
    $
    1.29Outstanding at September 30, 2006
    
    
    2,402,388
    
    
    $
    2.71
    
    
    5.1 years
    
    $
    Vested and expected to vest
    
    
    2,379,054
    
    
    $
    2.77
    
    
    5.0 years
    
    $
    Exercisable at September 30, 2006
    
    
    1,703,758
    
    
    $
    2.47
    
    
    3.3 years
    
    $
    
  Weighted-averageShares
    
    
    grant-date fair valueNonvested at December 31, 2005
    
    
    815,657
    
    
    $
    1.21Granted
    
    
    394,095
    
    
    $
    0.48Vested
    
    
    (219,456
    )
    
    $
    1.27Forfeited
    
    
    (291,666
    )
    
    $
    1.00Non-vested at September 30, 2006
    
    
    698,630
    
    
    $
    0.90
  9




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  (4) Accounts Receivable
  September 30, 2006
    
    
    December 31, 2005(Unaudited)Billed
    
    $
    2,096,331
    
    
    $
    847,191Unbilled
    
    
    114,335
    
    
    
    308,9702,210,666
    
    
    
    1,156,161Less-allowance for doubtful accounts
    
    
    (428,067
    )
    
    
    $
    1,782,599
    
    
    $
    1,156,161
  (5) Inventories
  September 30, 2006
    
    
    December 31, 2005(Unaudited)Raw materials, components and sub-assemblies
    
    $
    458,610
    
    
    $
    362,539Work-in-process
    
    
    929
    
    
    
    77,692Finished goods and demonstration units
    
    
    264,718
    
    
    
    162,519724,257
    
    
    
    602,750Less-reserve
for excess and obsolete inventory
    
    
    (203,129
    )
    
    
    (168,000
    )$
    521,128
    
    
    $
    434,750
 (6) Property and Equipment
  September 30, 2006
    
    
    December 31, 2005(Unaudited)Equipment and machinery
    
    $
    2,621,145
    
    
    $
    2,627,176Software
    
    
    599,752
    
    
    
    590,446Furniture and fixtures
    
    
    280,279
    
    
    
    241,090Leasehold improvements
    
    
    652,402
    
    
    
    643,0484,153,578
    
    
    
    4,101,760Less-accumulated depreciation
    
    
    (3,061,681
    )
    
    
    (2,805,269
    )$
    1,091,897
    
    
    $
    1,296,491
 10




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  (7) Segment Information
  Research Division/Vermont Operations
    Sensor Products Group
 TM
  11




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  SensorResearch
    
    Vermont
    
    ProductsDivision
    
    Operations
    
    Group
    
    Corporate
    
    TotalNine Months Ended September 30,
2006:Revenues
    
    $
    1,350,101
    
    
    $
    2,056,142
    
    
    $
    63,286
    
    
    $
    
    
    
    $
    3,469,529Operating loss
    
    
    (1,313,657
    )
    
    
    (1,470,059
    )
    
    
    (3,146,838
    )
    
    
    (1,158,551
    )
    
    
    (7,089,105
    )Asset writedowns
    
    
    (34,420
    )
    
    
    
    
    
    
    (4,647
    )
    
    
    
    
    
    
    (39,067
    )Total assets
    
    
    1,278,461
    
    
    
    6,113,402
    
    
    
    1,657,294
    
    
    
    3,532,646
    
    
    
    12,581,803Goodwill
    
    
    
    
    
    
    4,415,932
    
    
    
    
    
    
    
    
    
    
    
    4,415,932Capital expenditures
    
    
    
    
    
    
    1,242
    
    
    
    12,360
    
    
    
    17,238
    
    
    
    30,840Depreciation & amortization
    
    
    72,603
    
    
    
    22,157
    
    
    
    23,019
    
    
    
    280,148
    
    
    
    397,927Three Months Ended September 30,
2006:Revenues
    
    
    484,359
    
    
    
    437,857
    
    
    
    39,885
    
    
    
    
    
    
    
    962,101Operating loss
    
    
    (165,898
    )
    
    
    (796,672
    )
    
    
    (933,415
    )
    
    
    (225,529
    )
    
    
    (2,121,514
    )Capital expenditures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation & amortization
    
    
    23,256
    
    
    
    7,709
    
    
    
    11,068
    
    
    
    116,179
    
    
    
    158,212Nine Months Ended September 30,
2005:Revenues
    
    
    1,537,060
    
    
    
    2,795,597
    
    
    
    
    
    
    
    
    
    
    
    4,332,657Operating loss
    
    
    (1,657,674
    )
    
    
    (626,684
    )
    
    
    (2,048,335
    )
    
    
    (1,088,048
    )
    
    
    (5,420,741
    )Asset writedowns
    
    
    (99,218
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99,218
    )Depreciation & amortization
    
    
    69,671
    
    
    
    27,200
    
    
    
    6,785
    
    
    
    291,906
    
    
    
    395,562Total assets
    
    
    1,774,719
    
    
    
    5,395,667
    
    
    
    1,638,202
    
    
    
    6,051,172
    
    
    
    14,859,760Goodwill
    
    
    
    
    
    
    4,415,932
    
    
    
    
    
    
    
    
    
    
    
    4,415,932Capital expenditures
    
    
    28,880
    
    
    
    51,439
    
    
    
    23,326
    
    
    
    238,431
    
    
    
    342,076Three Months Ended September 30,
2005:Revenues
    
    
    396,728
    
    
    
    1,081,373
    
    
    
    
    
    
    
    
    
    
    
    1,478,101Operating loss
    
    
    (673,134
    )
    
    
    (161,407
    )
    
    
    (869,267
    )
    
    
    (354,205
    )
    
    
    (2,058,013
    )Depreciation & amortization
    
    
    25,842
    
    
    
    12,880
    
    
    
    3,251
    
    
    
    100,046
    
    
    
    142,019Capital expenditures
    
    
    19,605
    
    
    
    1,218
    
    
    
    11,049
    
    
    
    134,805
    
    
    
    166,677
   (8) Line of Credit and Notes Payable
  12




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
    (9) Equity Transactions
     13




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
      GrossAmountOutstandingat
    
    
    Scheduled RedemptionsSeptemberDescription
    
    30, 2006
    
    
    2007
    
    
    2008
    
    
    TotalSeries G Preferred
    
    $
    1,456,020
    
    
    $
    306,042
    
    
    $
    1,149,978
    
    
    $
    1,456,020Series I Preferred
    
    $
    6,393,980
    
    
    
    610,890
    
    
    
    5,783,090
    
    
    
    6,393,980$
    916,932
    
    
    $
    6,933,068
    
    
    $
    7,850,000
 14




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
   Net Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net BalanceDecember 31,
    
    
    Discount
    
    
    Exchange for
    
    
    Amendment
    
    
    at SeptemberSeries
    
    2005
    
    
    Amortization
    
    
    Series I
    
    
    Fair Value
    
    
    30,2006F
    
    $
    1,747,948
    
    
    $
    49,515
    
    
    $
    (1,797,463
    )
    
    $
    
    
    
    $
    G
    
    
    1,754,615
    
    
    
    72,519
    
    
    
    (465,210
    )
    
    
    
    
    
    
    1,361,924H
    
    
    3,466,778
    
    
    
    105,744
    
    
    
    (3,572,522
    )
    
    
    
    
    
    
    I
    
    
    
    
    
    
    273,444
    
    
    
    5,835,195
    
    
    
    2,210,031
    
    
    
    3,898,608$
    6,969,341
    
    
    $
    501,222
    
    
    $
    
    
    
    $
    2,210,031
    
    
    $
    5,260,532
  Net Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net BalanceDecember 31,
    
    
    Amendment Fair
    
    
    Discount
    
    
    
    
    
    
    at SeptemberSeries
    
    2004
    
    
    Value
    
    
    Amortization
    
    
    Redemptions
    
    
    30,2005E
    
    $
    752,306
    
    
    $
    79,390
    
    
    $
    274,738
    
    
    $
    83,333
    
    
    $
    864,321F
    
    
    1,812,092
    
    
    
    215,717
    
    
    
    139,558
    
    
    
    37,500
    
    
    
    1,698,433G
    
    
    1,844,699
    
    
    
    234,696
    
    
    
    134,139
    
    
    
    37,500
    
    
    
    1,706,642H
    
    
    3,678,177
    
    
    
    537,000
    
    
    
    294,857
    
    
    
    75,000
    
    
    
    3,361,034$
    8,087,274
    
    
    $
    1,066,803
    
    
    $
    843,292
    
    
    $
    233,333
    
    
    $
    7,630,430
   15




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
        (10) Earnings Per Share
  (11) Intangible Assets
  16




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
 September 30, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Intangible
    
    
    Carrying
    
    
    Accumulated
    
    
    IntangibleAmount
    
    
    Amortization
    
    
    Assets
    
    
    Amount
    
    
    Amortization
    
    
    AssetsPatents
    
    $
    1,039,440
    
    
    $
    506,132
    
    
    $
    533,308
    
    
    $
    968,768
    
    
    $
    498,626
    
    
    $
    470,142Licenses
    
    
    1,256,925
    
    
    
    19,429
    
    
    
    1,237,496
    
    
    
    1,256,925
    
    
    
    19,029
    
    
    
    1,237,896$
    1,770,804
    
    
    
    
    
    
    
    
    
    
    $
    1,708,038
  e.
  For the Year Ended
    
    
    Estimated AmortizationDecember 31,
    
    
    Expense2006
    
    
    $
    15,9402007
    
    
    
    94,5222008
    
    
    
    183,6272009
    
    
    
    530,7262010
    
    
    
    646,7602011
    
    
    
    52,040Beyond
    
    
    
    247,189$
    1,770,804
 Discontinued Operations
   17




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
     September 30, 2006
    
    
    December 31, 2005Current Assets:Cash
    
    $
    314
    
    
    $
    211,098Accounts receivable
    
    
    74,958
    
    
    
    484,208Inventories
    
    
    
    
    
    
    1,155Prepaid expenses and other
    
    
    
    
    
    
    162,088$
    75,272
    
    
    $
    858,549Non-Current Assets:Property and equipment, net
    
    $
    18,732
    
    
    $
    459,961Current Liabilities:Lease accrual/deferred rent
    
    $
    173,038
    
    
    $
    60,650Accounts payable
    
    
    252,793
    
    
    
    300,761Accrued payroll and related costs
    
    
    8,196
    
    
    
    212,058Accrued liabilities
    
    
    80,002
    
    
    
    31,654Billings in excess of costs incurred
    
    
    
    
    
    
    152,210$
    514,029
    
    
    $
    757,333Non-Current Liabilities:Lease accrual/deferred rent
    
    $
    89,208
    
    
    $
    134,563
  Three Months Ended
    
Nine
Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    

    September 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    30,892
    
    
    $
    855,731
    
    
    $
    2,968,019
    
    
    $
    2,583,186Costs of
revenues
    
    
    56,784
    
    
    
    671,145
    
    
    
    2,436,432
    
    
    
    1,994,779Gross profit (loss)
    
    
    (25,892
    )
    
    
    184,586
    
    
    
    531,587
    
    
    
    588,407Selling,
general and administrative
    
    
    76,180
    
    
    
    176,795
    
    
    
    276,366
    
    
    
    445,212Research and development
    
    
    
    
    
    
    95,704
    
    
    
    122,403
    
    
    
    248,974Asset
writedowns
    
    
    127,911
    
    
    
    
    
    
    
    127,911
    
    
    
    Lease reserves
    
    
    262,246
    
    
    
    
    
    
    
    262,246
    
    
    
    Interest and
other expense
    
    
    4,047
    
    
    
    67
    
    
    
    13,414
    
    
    
    1,957Loss from
operations of discontinued operations
    
    $
    (496,276
    )
    
    $
    (87,980
    )
    
    $
    (270,753
    )
    
    $
    (107,736
    )
 18




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS
 Item 2.
 Overview
   TM
 TM
 Sources of Revenue
 Contract Research and Development, Technical Support, and Production Programs
    19




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##### Table of Contents



Standard Products
 TM
 TM
  TM
  20




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##### Table of Contents



New Products Under Development
   Results of Operations
 Revenues
 Three Months Ended
    
    
    Nine Months EndedSeptember
    
    
    September
    
    
    September
    
    
    September30, 2006
    
    
        30, 2006
    
    
        30, 2006
    
    
        30, 2005Research Division
    
    $
    484,359
    
    
    $
    396,728
    
    
    $
    1,350,101
    
    
    $
    1,537,060Vermont Operations
    
    
    437,857
    
    
    
    1,081,373
    
    
    
    2,056,142
    
    
    
    2,795,597Sensor Products Group
    
    
    39,885
    
    
    
    
    
    
    
    63,286
    
    
    
    $
    962,101
    
    
    $
    1,478,101
    
    
    $
    3,469,529
    
    
    $
    4,332,657
  Losses
 21




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##### Table of Contents



Gross Margins
 Selling, General and Administrative (SG&A).
 Research, Development and Engineering Program (RD&E).
 
    
    Customer-funded RD&E costs incurred, primarily related to the DARPA Contract and the
NAVAIR Contract, are included in Costs of Revenues, and totaled $870,002 and $620,873 for
the three months ended September 30, 2006 and 2005, respectively, and $2,724,528 and
$1,972,401 for the nine-month periods ended September 30, 2006 and 2005, respectively. The
increase in customer-funded RD&E expenditures for the three and nine months ended September
30, 2006 primarily consists of an increase of $298,864 and $956,909, respectively, related
to the NAVAIR Contract.
    
    Company-funded RD&E costs associated with product development are shown in Operating
Expenses and totaled $541,363 and $891,000 for the three months ended September 30, 2006
and 2005, respectively, and $2,396,872 and $2,135,207 for the nine months ended September
30, 2006 and 2005, respectively.
 22




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##### Table of Contents









Interest and Other Expense.




Preferred Stock Dividends.


Liquidity and Financial Condition


General.


23




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##### Table of Contents







Sale of Common Stock






Issuances of Preferred Stock.




24



---



##### Table of Contents



Working Capital Line.
   25




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##### Table of Contents



Letter
of Credit
 Cash
Used in Operations
 Cash
Used in Investing Activities
 Cash
Provided by Financing Activities
 Stockholders
Equity.
 26




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##### Table of Contents



Commitments
  2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalLeases
    
    $
    176,826
    
    
    $
    715,412
    
    
    $
    530,495
    
    
    $
    373,797
    
    
    $
    371,233
    
    
    $
    715,514
    
    
    $
    2,883,277Deferred
compensation
    
    
    72,176
    
    
    
    275,297
    
    
    
    185,955
    
    
    
    56,003
    
    
    
    
    
    
    
    
    
    
    
    589,431$
    249,002
    
    
    $
    990,709
    
    
    $
    716,450
    
    
    $
    429,800
    
    
    $
    371,233
    
    
    $
    715,514
    
    
    $
    3,472,708
  Preferred Stock Redemption Obligations
  GrossAmountOutstandingat September
    
    
    Scheduled RedemptionsDescription
    
    30, 2006
    
    
    2007
    
    
    2008
    
    
    TotalSeries G Preferred
    
    $
    1,456,020
    
    
    $
    306,042
    
    
    $
    1,149,978
    
    
    $
    1,456,020Series I Preferred
    
    $
    6,393,980
    
    
    
    610,890
    
    
    
    5,783,090
    
    
    
    6,393,980$
    916,932
    
    
    $
    6,933,068
    
    
    $
    7,850,000
 Line of Credit
  License Agreements
  27




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Net Operating Loss Carryforward
  28




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##### Table of Contents



Critical Accounting Policies and Estimates
   Revenues
  Goodwill and Intangible Assets
   29




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##### Table of Contents



Beneficial Conversion Feature and Warrant Valuation
   Allowances for Doubtful Accounts
  Deferred Taxes
  30




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##### Table of Contents



Stock-Based Compensation Expense
   
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
   31




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  Our cash requirements are
significant and the failure to raise additional capital will have a
significant adverse effect on the Companys financial condition
and its operations.
  The failure to maintain shareholders equity above $2.5 million or market capitalization of $35
million or to sustain a minimum share price of $1.00 per share could result in delisting of our
shares on the NASDAQ Stock Market.
  32




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##### Table of Contents



A substantial portion of our current revenue depends on sales to a few customers.
  Recent management changes could create uncertainty among our customers, employees and shareholders.
  
 Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 (a)(i)
    
    In July 2006, the Company granted
warrants to purchase 50,000 shares to Dian Griesel, President of The
Investor Relations Group, as compensation for investor and public
relations services. This transaction was exempt under
Section 4(2) of the Securities Act of 1933.(a)(ii)
    
    In July 2006, the Company issued
8,956 shares of common stock to its four outside Board members in
payment of $1,500 of the $3,000 quarterly retainer for each of the
outside Board members. In August 2006, the Company issued 8,164
shares of common stock to its four outside Board members in payment
of $1,000 in meeting fees. These transactions were exempt under Section 4(2) of the Securities Act of 1933.
 
 Item 6.
Exhibits.
 Exhibit 10.1
    
    Award dated August 4, 2006 between JMAR Technologies, Inc.s System Division and the Naval Air Systems Command.Exhibit 10.2
    
    Phase II SBIR Contract dated September 8, 2006 between JMAR Technologies, Inc.s Research Division and the U.S.
Army Small Business Innovation Research.Exhibit 10.3
    
    Employment Agreement dated September 21, 2006 between JMAR Technologies, Inc. and C. Neil Beer.Exhibit 31.1
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act 2002.Exhibit 31.2
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 33




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##### Table of Contents



JMAR TECHNOLOGIES, INC.November 13, 2006
    
    By:
    

/s/
C. Neil BeerC. Neil Beer, Chief Executive Officerand Authorized OfficerBy:
    
    /s/ Dennis E. ValentineDennis E. Valentine, Chief Accounting Officer
 34