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




For
the Quarter Ended June 30, 2008




Commission
File Number 1-10515




JMAR
TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)


Delaware
              ____________________________
              (State
      or other jurisdiction of
              incorporation
      or organization)
            
            68-0131180
              ____________________________
              (I.R.S.
      employer
              identification
      number)




10905
Technology Place


San
Diego, CA 92127


(858) 946-6800


(Address,
including zip code and telephone number including


area code
of registrant’s principal executive office)




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, and (2) has been subject to such
filing requirements for at least the past 90 days.


Yes þ          No
o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act.


Large
      accelerated filer o
              Accelerated
      filer o
              Non-accelerated
      filer o
              Smaller
      reporting company þ




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


Yes o          No
þ




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date (June 30, 2008).


Common
Stock, $.01 par value: 57,132,144 shares









INDEX


(Page
      #PART
      I.
            
            FINANCIAL
      INFORMATIONItem 1.
            
            Financial
      Statements:Consolidated
      Balance Sheets — June 30, 2008 (unaudited) and December 31,
      2007
            2Consolidated
      Statements of Operations (unaudited) — Three and Six months ended June 30,
      2008 and 2007
            3Consolidated
      Statements of Cash Flows (unaudited) — Six months ended June 30, 2008 and
      2007
            4Notes
      to Consolidated Financial Statements (unaudited)
            5Item 2.
            
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            14Item 3.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            22Item 4.
            
            Controls
      and Procedures
            22PART
      II.
            
            OTHER
      INFORMATIONItem 1.
            
            N/AItem 1A.
            
            Risk
      Factors
            23Item 2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            24Item 3.
            
            N/AItem 4.
            
            Submission
      of Matters to a Vote of Security Holders
            24Item 5.
            
            N/AItem 6.
            
            Exhibits
            24










PART I — FINANCIAL INFORMATION




JMAR TECHNOLOGIES,
INC.
 CONSOLIDATED
BALANCE SHEETS
 As
of June 30, 2008 and December 31, 2007




ASSETS
              
              June 30,
                2008
              
              
              December
                31,
      2007(unaudited)Current
      Assets:Cash
      and cash equivalents
              
              $
              22,925
              
              
              $
              174,879Accounts
      receivable
              
              
              20,621
              
              
              
              44,544Unbilled
      receivables
              
              
              17,249
              
              
              
              21,180Inventories,
      net
              
              
              411,975
              
              
              
              308,029Net
      current assets of discontinuted operations
              
              
              -
              
              
              
              479,342Prepaid
      expenses and other
              
              
              117,543
              
              
              
              160,610Total
      current assets
              
              
              590,313
              
              
              
              1,188,584Property
      and equipment, net
              
              
              561,023
              
              
              
              683,249Intangible
      assets, net
              
              
              1,674,318
              
              
              
              1,641,913Restricted
      cash
              
              
              1,699,923
              
              
              
              4,251,252Other
      assets
              
              
              218,810
              
              
              
              217,302TOTAL
      ASSETS
              
              $
              4,744,387
              
              
              $
              7,982,300LIABILITIES AND
      STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              418,116
              
              
              $
              534,586Accrued
      liabilities
              
              
              708,255
              
              
              
              427,600Accrued
      payroll and related costs
              
              
              194,544
              
              
              
              218,562Working
      capital line of credit, net
              
              
              551,085
              
              
              
              508,725Current
      portion of notes payable and other liabilities, net
              
              
              153,771
              
              
              
              103,375Net
      current liabilities of discontinued operations
              
              
              704,333
              
              
              
              708,716Deferred
      rent
              
              
              49,429
              
              
              
              49,429Derivative
      liabilities
              
              
              28,057,206
              
              
              
              5,022,378Total
      current liabilities
              
              
              30,836,739
              
              
              
              7,573,371Term
      notes, net of debt discounts
              
              
              3,528,648
              
              
              
              1,505,208Notes
      payable and other long-term liabilities, net of current
      portion
              
              
              165,012
              
              
              
              250,887Notes
      payable and other long-term liabilities of discontinuedoperations,
      net of current portion
              
              
              89,209
              
              
              
              89,209Total
      liabilities
              
              
              34,619,608
              
              
              
              9,418,675Redeemable
      convertible preferred stock: 738,329 sharesissued
      and outstanding at June 30, 2008 and738,329
      at December 31, 2007, net of unamortized discount of$1,411,618
      and $1,709,606, respectively.
              
              
              6,272,634
              
              
              
              5,974,644Commitments
      and contingenciesStockholders'
      equity deficit:Preferred
      stock: $.01 par value; 5,000,000 shares authorized;738,329
      shares issued and outstanding at June 30, 2008and
      738,329 at December 31, 2007 included in redeemableconvertible
      preferred stock above.Common
      stock: $.01 par value; 380,000,000 shares authorized;57,132,144
      shares issued and outstanding at June 30,2008,
      and 53,839,559 shares issued and outstanding atDecember 31,
      2007.
              
              
              571,323
              
              
              
              538,395Additional
      paid-in-capital
              
              
              85,220,362
              
              
              
              85,191,382Committed
      common stock
              
              
              3,131
              
              
              
              -Accumulated
      deficit
              
              
              (121,942,671
              )
              
              
              (93,140,796
              )Total
      stockholders' deficit
              
              
              (36,147,855
              )
              
              
              (7,411,019
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
              
              $
              4,744,387
              
              
              $
              7,982,300
  The
accompanying notes to these consolidated financial statements are an integral
part of these consolidated statements.




2


JMAR
TECHNOLOGIES, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


For
the Three Months and Six Months Ended June 30, 2008 and 2007


(Unaudited)




Three
      Months Ended
              
              
              
              Six
      Months EndedJune
      30, 2008
              
              
              
              June
      30, 2007
              
              
              
              June
      30, 2008
              
              
              
              June
      30, 2007Revenues
              
              $
              29,608
              
              
              $
              196,564
              
              
              $
              212,961
              
              
              $
              339,796Costs
      of revenues
              
              
              24,861
              
              
              
              111,875
              
              
              
              220,577
              
              
              
              226,338Gross
      profit (loss)
              
              
              4,747
              
              
              
              84,689
              
              
              
              (7,616
              )
              
              
              113,458Operating
      expenses:Selling,
      general and administrative
              
              
              1,088,080
              
              
              
              896,668
              
              
              
              2,128,844
              
              
              
              1,806,865Research
      and development
              
              
              442,484
              
              
              
              104,878
              
              
              
              944,590
              
              
              
              416,178Impairment
      of long-lived assets
              
              
              -
              
              
              
              117
              
              
              
              -
              
              
              
              125,117Total
      operating expenses
              
              
              1,530,564
              
              
              
              1,001,663
              
              
              
              3,073,434
              
              
              
              2,348,160Operating
      loss from  continuing operations
              
              
              (1,525,817
              )
              
              
              (916,974
              )
              
              
              (3,081,050
              )
              
              
              (2,234,702
              )Interest
      and other income
              
              
              15,741
              
              
              
              30,014
              
              
              
              61,352
              
              
              
              48,544Interest
      and other expense
              
              
              (1,255,260
              )
              
              
              (1,314,732
              )
              
              
              (2,518,553
              )
              
              
              (1,447,740
              )Change
      in fair value of derivative liability
              
              
              (12,464,004
              )
              
              
              683,797
              
              
              
              (22,732,405
              )
              
              
              683,797Other
      income
              
              
              -
              
              
              
              530,459
              
              
              
              -
              
              
              
              530,459Loss
      from continuing operations
              
              
              (15,229,340
              )
              
              
              (987,436
              )
              
              
              (28,270,656
              )
              
              
              (2,419,642
              )Income
      from discontinued operations
              
              
              -
              
              
              
              528,994
              
              
              
              -
              
              
              
              685,382Net
      loss
              
              
              (15,229,340
              )
              
              
              (458,442
              )
              
              
              (28,270,656
              )
              
              
              (1,734,260
              )Deemed
      preferred stock dividends
              
              
              (255,582
              )
              
              
              (515,482
              )
              
              
              (531,219
              )
              
              
              (826,383
              )Loss
      applicable to common stock
              
              $
              (15,484,922
              )
              
              
              (973,924
              )
              
              $
              (28,801,875
              )
              
              $
              (2,560,643
              )Loss
      per share from continuing operations
              
              $
              (0.28
              )
              
              $
              (0.03
              )
              
              $
              (0.53
              )
              
              $
              (0.08
              )Gain
      per share from discontinued operations
              
              
              -
              
              
              
              0.01
              
              
              
              -
              
              
              
              0.02Basic
      and diluted loss per share applicable tocommon
      stock
              
              $
              (0.28
              )
              
              $
              (0.02
              )
              
              $
              (0.53
              )
              
              $
              (0.06
              )Shares
      used in computation of basic anddiluted
      loss per share
              
              
              55,592,892
              
              
              
              43,439,061
              
              
              
              54,287,372
              
              
              
              42,179,577





Notes to
these consolidated financial statements are an integral part of these
consolidated statements






3




JMAR
TECHNOLOGIES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


For
the Six Months Ended June 30, 2008 and 2007


(Unaudited)




2008
                
                
                2007Cash flows from operating
      activitiesNet
      Loss
                
                $
                (28,270,656
                )
                
                $
                (1,734,260
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                131,590
                
                
                
                150,209Change
      in fair value of derivative liability
                
                
                22,732,405
                
                
                
                (683,797
                )Amortization
      of debt discount and beneficial conversion feature
                
                
                2,065,800
                
                
                
                1,236,810Stock
      based compensation expense
                
                
                42,783
                
                
                
                85,248Services
      received in exchange for common stock
                
                
                237,188
                
                
                
                140,815Services
      received in exchange for committed common stock
                
                
                3,131
                
                
                
                71,800Impairment
      of long lived assets
                
                
                -
                
                
                
                125,117(Increase)
      decrease in:Accounts
      receivable and unbilled receivables
                
                
                27,855
                
                
                
                276,681Inventories
                
                
                (103,947
                )
                
                
                (76,666
                )Prepaid
      expenses and other
                
                
                41,558
                
                
                
                44,502Accounts
      payable
                
                
                (116,470
                )
                
                
                377,598Accrued
      liabilities
                
                
                266,665
                
                
                
                (73,631
                )Unearned
      revenue
                
                
                -
                
                
                
                (156,030
                )Deferred
      compensation
                
                
                (10,765
                )
                
                
                (50,623
                )Deferred
      rent
                
                
                (24,715
                )
                
                
                (24,714
                )Net
      cash used from continuing operations
                
                
                (2,977,578
                )
                
                
                (290,941
                )Changes
      in net assets and liabilities of discontinued operations
                
                
                474,959
                
                
                
                (418,542
                )Net
      cash used in operating activities
                
                
                (2,502,619
                )
                
                
                (709,483
                )Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                (8,858
                )
                
                
                -Proceeds
      from the disposition of property and equipment
                
                
                2,548
                
                
                
                8,292Purchases
      of intangible assets from continuing operations
                
                
                (35,459
                )
                
                
                (39,917
                )Payments
      received on notes receivable
                
                
                -
                
                
                
                11,687Net
      cash provided by (used in) investing activities
                
                
                (41,769
                )
                
                
                (19,938
                )Cash
      flows from financing activities:Net
      (repayments) on term notes and line of credit
                
                
                —
                
                
                
                11,333Net
      proceeds from the issuance of common stock
                
                
                84,360
                
                
                
                384,182Decrease
      in restricted cash
                
                
                2,551,329
                
                
                
                —Cash
      payment of preferred stock dividends
                
                
                (243,255
                )
                
                
                (270,244
                )Net
      cash provided by (used in) financing activities
                
                
                2,392,434
                
                
                
                125,271Net (decrease) in
      cash and cash equivalents
                
                
                (151,954
                )
                
                
                (604,150
                )Cash
      and cash equivalents, beginning of period
                
                
                174,879
                
                
                
                686,832Cash
      and cash equivalents, end of period
                
                $
                22,925
                
                
                $
                82,682Cash
      paid for interest
                
                
                448,058
                
                
                
                128,192
 Supplemental
      Disclosure of Non Cash Investing and Financing Activities:The
      six months ended June 30, 2008:Deemed
      preferred stock dividends
                  
                  
                  297,990Warrant
      issued to IRI
                  
                  
                  302,423The
      six months ended June 30,  2007:Repayment
      of deferred compensation proceeds from cash surrender value of life
      insurance
                  
                  
                  
                  
                  
                  123,459Company
      converted previously existing series G & I Preferred Stock into
      3,500,000 sharesof
      common stock in the current quarter.   (See footnote
      9)
                  
                  
                  
                  
                  
                  
                  373,892In
      conjunction with the exchange of preferred stock to common stock, the
      Company
                  
                  
                  
                  
                  
                  
                  206,108recognized
      the excess fair value of the common stock over the carrying amount of
      thepreferred
      stock as a deemed dividend.  (See footnote 9)Deemed
      preferred stock dividends
                  
                  
                  
                  
                  
                  
                  350,035Issuance
      of Series J Preferred Stock (see footnote 9)
                  
                  
                  
                  
                  
                  
                  408,800Establishment
      of derivative liability in conjunction with the issuance of Series J
      PreferredStock
      (see footnote 8)
                  
                  
                  
                  
                  
                  
                  1,244,530


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


4


JMAR
TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




(1)
            
            Basis
      of Presentation and Financial
Condition




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




JMAR
Technologies, Inc. is a late-stage technology company with expertise in the
development and commercialization of custom lasers and laser-based detection
technologies for nano-scale imaging, chemical and biological analysis, and
fabrication. The Company is leveraging more than a decade of laser and photonics
research in developing a portfolio of products with market applications in high
interest areas such as defense, homeland security, hazardous materials and
contaminant detection, while continuing to carry out research and development.
JMAR’s current product lines consist of  the  BioSentry®
system, an on-line real-time monitoring system for detecting and classifying
harmful microorganisms in water, and the BriteLightTM laser, a stand-alone laser
product as well as the light source for x-ray microscopy,




JMAR’s
continued pursuit of cutting-edge products includes our ongoing program funded
by the Army Research Laboratory (ARL) for the development and demonstration of a
double pulse (DP) plasma laser. The exceptional beam quality realized in
this product will enable the use of stand-off laser-induced breakdown
spectroscopy (LIBS) in applications requiring the identification of foreign
substances on an object. The light emissions resulting from the plasma generated
on the targeted object are analyzed by an optical spectrometer which provides
the identification of trace substances such as explosives, metals and drugs. The
DP laser technology is based on the continued evolution of JMAR’s patented
BriteLightTM laser.




Because
of the national priority assigned to such critical security needs and the
funding support of Laurus Capital Management, LLC (“Laurus”), JMAR contracted
with D&K Engineering to accelerate the transition from laboratory prototype
to a man-portable “shoebox size” double pulse laser product. This project is
being expanded to include the integration of analytic components for
system-level LIBS, such as laser-induced fluorescence (LIF) and Raman
applications. Laurus currently owns 9.9% of JMAR common stock, limited to that
percentage by written agreement, and a substantial position in JMAR warrants
resulting from an equity requirement of the $7.5 million financing received last
September.




“BioSentry®”
is a registered trademark and “BriteLightTM”
is a trademark for which JMAR has common law rights. The Company has adopted a
tag line for use with its logo on presentation materials, “Advanced Laser &
Sensing Solutions”.




JMAR was
incorporated in the state of Delaware in 1987.




The
accompanying consolidated financial statements as of and for the three months
and six months ended June 30, 2008 and 2007 have been prepared by the Company
and are unaudited. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments of a normal recurring nature that are necessary for a fair
presentation of the results of operations and cash flows for the interim periods
presented. Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to such rules and
regulations.




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, these interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company’s Form 10-K for
the year ended December 31, 2007. Amounts related to disclosures of
December 31, 2007 balances within these interim statements were derived
from that Form 10-K. The results of operations for the three months and six
months ended June 30, 2008 are not necessarily indicative of the results to be
expected for the full year.




The
accompanying consolidated financial statements have been prepared by the Company
on a going concern basis, which contemplates the realization of amounts and
satisfaction of obligations in the normal course of business. The Company
incurred net losses of $28,270,656, $1,623,906 and $13,106,681 for the six
months ended June 30, 2008 and for the years ended December 31, 2007 and
2006, respectively, and losses are expected for the foreseeable future. Our
revenues from continuing operations declined to $212,961 from $339,796 for the
six months ended June 30, 2008 and 2007, respectively. We had negative operating
cash flow from operations for the six months ended June 30, 2008 and for the
years ended December 31, 2007 and 2006 of $2,502,619, $3,682,771 and
$6,019,946, respectively.  Our cash requirements have been and will
continue to be significant. JMAR’s operations will continue to use cash in 2008
for 1) marketing; 2) product development efforts; 3) corporate costs, primarily
related to the cost of being a public company; 4) interest and preferred stock
dividends and 5) other working capital needs. We believe that with the financing
provided by the $7.5 million Term Note, subject to periodic reviews with Laurus,
JMAR has adequate resources to fund its operations through late September, 2008.
Based on discussions with Laurus, the Company anticipates receiving additional
financing for a significant period beyond September 2008.





The
Company will require drawdowns through this period under the $7.5 million Term
Note to continue the marketing and development of emerging new products and for
working capital requirements. There are no assurances that funds will be
available under the $7.5 million Term Note, due to Laurus’ requirement to
approve every drawdown.  The Company is continuing to pursue other
opportunities to raise additional funds in the future. Management believes, but
cannot assure, that the Company will be able to raise additional funds through
equity or other financings to fund future operations.  This belief is
derived from the Company’s historical access to equity and debt markets. See
further discussion in “Risk Factors - Item 1A.






5







Management
believes that the Company’s losses in recent years have resulted from a
combination of insufficient contract revenue generated earnings to support the
Company’s new product development and commercialization work, the lead time
necessary to begin generating significant revenue from those new products, and
the substantial administrative cost of being a public company. There can be no
assurance that the Company’s revenues will grow or that the Company will
successfully implement its plans. Additionally, there can be no assurance that
additional suitable financing will be available on acceptable terms, on a timely
basis, or at all.




(2)
            
            Recent
      Accounting Pronouncements




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which provides a single definition of fair value, a framework for measuring fair
value, and expanded disclosures concerning fair value. Previously, different
definitions of fair value were contained in various accounting pronouncements
creating inconsistencies in measurement and disclosures. SFAS No. 157
applies under those previously issued pronouncements that prescribe fair value
as the relevant measure of value, except Statement No. 123(R) and related
interpretations and pronouncements that require or permit measurement similar to
fair value but are not intended to measure fair value. This pronouncement is
effective for fiscal years beginning after November 15, 2007. The adoption
of SFAS No. 157 did not have a material impact on the Company’s consolidated
financial statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Assets and Liabilities – Including an Amendment of FASB
Statement No. 115. This standard permits an entity to choose to
measure many financial instruments and certain other items at fair value. Most
of the provisions in SFAS No. 159 are elective; however, the amendment to
SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities,applies to all
entities with available-for-sale and trading securities. The fair value option
established by SFAS No. 159 permits all entities to choose to measure
eligible items at fair value at specified election dates. A business entity will
report unrealized gains and losses on items for which the fair value option has
been elected in earnings (or another performance indicator if the business
entity does not report earnings) at each subsequent reporting date. The fair
value option: (a) may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method;
(b) is irrevocable (unless a new election date occurs); and (c) is
applied only to entire instruments and not to portions of instruments. SFAS
No. 159 is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. The adoption of SFAS No. 159 did
not have a material impact on the Company’s consolidated financial
statements.




In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (SFAS 141(R)). The objective of SFAS 141 (R) is to improve
reporting by creating greater consistency in the accounting and financial
reporting of business combinations, resulting in more complete, comparable and
relevant information for investors and other users of financial statements. SFAS
141 (R) requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. SFAS 141 (R) includes both core principles and pertinent
application guidance, eliminating the need for numerous EITF issues and other
interpretative guidance, thereby reducing the complexity of existing GAAP. SFAS
141 (R) is effective as of the start of fiscal years beginning after
December 15, 2008. Early adoption is not allowed. We are in the process of
evaluating this standard and have not yet determined the impact that the
adoption of SFAS 141 (R) will have on our financial position, results of
operations or cash flows.




In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests
in Consolidated Financial Statements (SFAS 160). SFAS 160 improves the
relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report non-controlling
(minority) interests in subsidiaries in the same way—as equity in the
consolidated financial statements. Moreover, SFAS 160 eliminates the diversity
that currently exists in accounting for transactions between an entity and
non-controlling interests by requiring they be treated as equity transactions.
SFAS 160 is effective as of the start of fiscal years beginning after
December 15, 2008. Early adoption is not allowed. We are in the process of
evaluating this standard and have not yet determined the impact that the
adoption of SFAS 160 will have on our financial position, results of operations
or cash flows.





In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities—an Amendment of FASB Statement 133" ("SFAS
No. 161"). SFAS No. 161 requires companies with derivative instruments
to disclose information that should enable financial-statement users to
understand how and why a company uses derivative instruments, how derivative
instruments and related hedged items are accounted for under SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" and how
derivative instruments and related hedged items affect a company's financial
position, financial performance and cash. SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008. The
Company is currently evaluating the impact of this pronouncement on its
consolidated financial statements, if any.





In April
2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful
Life of Intangible Assets (“FAS 142-3”) that amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. The intent of FAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair
value of the asset under FASB Statement No. 141, Business Combinations, and
other U.S. generally accepted accounting principles. FAS 142-3 is effective for
fiscal years and interim periods beginning after December 15, 2008. The Company
is currently evaluating the impact of this pronouncement on its consolidated
financial statements, if any.




In May 2008, FASB issued SFAS No. 162,
“The Hierarchy of Generally Accepted Accounting Principles”whichidentifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411,The
Meaning ofPresent Fairly
in Conformity With Generally Accepted Accounting Principles. We do not expect
adoption of SFAS 162 to have a material impact on the Company’s financial
statements.




6




(3)
            
            Stock-Based
      Compensation Plans




The
Company has six stock — based compensation plans, the 2006 Equity Incentive Plan
(2006 Plan), the 1991 Stock Option Plan (1991 Plan), the 1999 Stock Option Plan
(1999 Plan), the Management Anti-Dilution Plan (Anti-Dilution Plan) and two
incentive plans which provided for the issuance of options to Research Division
employees (Research Division Plans). The 2006 Plan and the 1999 Plan
were shareholder-approved and are the only plans of the six stock plans
from which additional options may be granted.  On June 25, 2007, the Board
of Directors unanimously approved an increase in the authorized shares of the
2006 Plan to 20,000,000 shares, subject to a shareholder-approved increase in
authorized shares of the Company. On February 20, 2008, shareholders
approved an increase in the Company’s authorized shares to 380,000,000 shares.
The 1999 Plan authorizes the grant of options to purchase up to 1,900,000 shares
of the Company’s common stock. The Company is also a party to a non-plan option
agreement with one individual. Prior to January 1, 2006, the Company
accounted for these plans under APB Opinion No. 25, using the intrinsic
value method, under which no compensation cost has been recognized for issuance
to employees.




Effective
January 1, 2006, the Company adopted SFAS No. 123(R), using the
modified prospective transition method.




Included
in the Consolidated Statements of Operations for the three and six months ended
June 30, 2008 and 2007 are compensation charges as follows
(unaudited):




Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Compensation
            
            $
            23,319
            
            
            $
            35,709
            
            
            $
            42,783
            
            
            $
            85,248Selling,
      general, & administrative
            
            
            22,738
            
            
            
            33,521
            
            
            
            40,460
            
            
            
            78,981Research
      and development
            
            $
            581
            
            
            $
            2,188
            
            
            $
            2,323
            
            
            $
            6,267








The
Company recognizes stock-based compensation costs on a straight-line basis over
the requisite service period of the award, which is generally the option vesting
term. The Company has a 100% valuation allowance recorded against its deferred
tax assets, therefore the stock-based compensation has no tax effect on the
Consolidated Statements of Operations.




The
weighted-average grant date fair value of options granted during the three and
six months ended June 30, 2008 and 2007 was $.0, $0.10, $0.11 and $0.11,
respectively. There were no options exercised in the three and six month periods
ended June 30, 2008. The unrecognized stock based compensation expense for the
six months ended June 30, 2008 and 2007 is $128,311, and $190,843 with a
weighted average remaining vesting period of 1.36 and .92 years,
respectively.





The fair
value of each option grant is estimated on the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions
used for grants during 2008: risk-free interest rate of 1.84 percent in
2008 based on the U.S. Treasury yields in effect at the time of grant; expected
dividend yields of 0 percent as the Company has not, and does not intend
to, issue dividends; and expected lives of 3 to 7 1/2 years based upon the
historical life of options. For grants in 2008, the expected volatility used was
199 percent, based on the Company’s historical stock price fluctuations for
a period matching the expected life of the options. Forfeiture rates are
calculated on a historical basis with the option grants organized into three
pools (directors, officers and employees). The forfeiture rates used for 2008
were 2.7 percent for directors, 3.6 percent for officers and
9.3 percent for employees. Grants pursuant to the 2006 and 1999 Plans
generally have requisite service periods of 3 to 10 years with contractual lives
of 10 to 11 years.





A summary
of option activity under all of the above plans as of June 30, 2008 and 2007,
and changes during the six months then ended is presented in the table below
(unaudited):





2008
            
            
            2007Wtd.
      Avg.
            
            
            
            
            
            
            
            
            
            
            
            Wtd.
      Avg.Wtd.
      Avg.
            
            
            Remaining
            
            
            Aggregate
            
            
            
            
            
            Wtd.
      Avg.
            
            
            Remaining
            
            
            AggregateExercise
            
            
            Contractual
            
            
            Intrinsic
            
            
            
            
            
            Exercise
            
            
            Contractual
            
            
            IntrinsicShares
            
            
            Price
            
            
            Life
      (yrs)
            
            
            Value
            
            
            Shares
            
            
            Price
            
            
            Life
      (yrs)
            
            
            ValueOutstanding
      at beginning of period
            
            
            1,382,714
            
            
            $
            2.25
            
            
            
            3.8
            
            
            $
            —
            
            
            
            2,329,054
            
            
            $
            2.71
            
            
            
            6.5
            
            
            $
            —Granted
            
            
            1,000,000
            
            
            $
            0.10
            
            
            
            9.7
            
            
            
            —
            
            
            
            50,000
            
            
            
            0.22
            
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Forfeited
            
            
            (198,044
            )
            
            $
            2.55
            
            
            
            2.5
            
            
            
            —
            
            
            
            (1,370,552
            )
            
            
            2.90
            
            
            —
            
            
            
            —Outstanding
      at end of period
            
            
            2,184,670
            
            
            $
            1.24
            
            
            
            6.3
            
            
            
            —
            
            
            
            1,008,502
            
            
            
            1.42
            
            
            6.7
            
            
            
            —Vested
      and Expected to Vest
            
            
            2,179,670
            
            
            $
            1.24
            
            
            6.3
            
            
            
            —
            
            
            
            990,673
            
            
            
            1.44
            
            
            3.9
            
            
            
            —Exercisable
      at end of period
            
            
            1,064,670
            
            
            $
            2.37
            
            
            3.0
            
            
            $
            —
            
            
            
            621,833
            
            
            $
            1.82
            
            
            6.2
            
            
            $
            —




7




A summary
of the options outstanding as of June 30, 2008, the range of exercise prices,
the weighted-average exercise price, the weighted-average remaining contractual
life, the amount of options currently exercisable and the weighted-average
exercise price of options currently exercisable is as follows:




Options
      Outstanding
            
            
            Options
      ExercisableWeighted-Average
            
            
            Weighted-
            
            
            
            
            
            Weighted-Range
      of
            
            
            Number
            
            
            Remaining
            
            
            Average
            
            
            Number
            
            
            AverageExercise
              Prices
            
            
            Outstanding
              at
      6/30/08
            
            
            Contractual
              Life
            
            
            Exercise
              Price
            
            
            Exercisable
              at
      6/30/08
            
            
            Exercise
              Price$
            0.10
      to $0.87
            
            
            
            1,334,833
            
            
            9.2
      Years
            
            $
            0.26
            
            
            
            214,833
            
            
            $
            0.72$
            1.21
      to $1.75
            
            
            
            231,667
            
            
            4.8
      Years
            
            
            1.49
            
            
            
            231,667
            
            
            
            1.49$
            1.94
      to $2.43
            
            
            
            90,750
            
            
            2.0
      Years
            
            
            2.12
            
            
            
            90,750
            
            
            
            2.12$
            3.00
      to $3.83
            
            
            
            447,420
            
            
            0.3
      Years
            
            
            3.13
            
            
            
            447,420
            
            
            
            3.13$
            4.56
      to $6.50
            
            
            
            80,000
            
            
            0.5
      Years
            
            
            5.29
            
            
            
            80,000
            
            
            
            5.292,184,670
            
            
            
            
            
            
            
            
            
            
            
            1,064,670




A summary of the status of the
Company’s non-vested options at June 30, 2008, and changes during the six months
ended June 30, 2008, is presented below:




Shares
            
            
            
            Grant-datefair
      valueNon-vested
      at December 31, 2007
            236,679
            
            
            $
            1.10Granted
            1,000,000
            
            
            $
            0.10Vested
            (116,679)
            
            
            $
            0.81Forfeited
            —
            
            
            $
            —Non-vested
      at June 30, 2008
            1,120,000
            
            
            $
            0.24





(4)
            
            Accounts
      Receivable




At June 30, 2008 and December 31,
2007, accounts receivable consisted of the following:


June
      30, 2008
              (unaudited)
            
            
            December
      31,
              2007Billed
            
            $
            20,621
            
            
            $
            44,544Unbilled
            
            
            17,249
            
            
            
            21,18037,870
            
            
            
            65,724Less-allowance
      for doubtful accounts
            
            
            --
            
            
            
            --$
            37,870
            
            
            $
            65,724




All
unbilled receivables at June 30, 2008 are expected to be billed and collected
within one year. The unbilled receivables at June 30, 2008 relate to the normal
billing cycle and timing of billings. In addition, included in Other assets on
the accompanying Consolidated Balance Sheet are withheld fees, $166,977 of which
are from the Company’s contract from the U.S. Defense Advanced Research Projects
Agency (DARPA) and $25,811 from the Company’s Small Business Innovation Research
(SBIR) contract, both of which it expects to receive upon completion of the
contracts and final audit from the U.S. Defense Contracting Audit Agency
(DCAA).




8




(5)
            
            Inventories




Inventories
are carried at the lower of cost (on the first-in, first-out basis) or market
and are comprised of materials, direct labor and applicable manufacturing
overhead. At June 30, 2008 and December 31, 2007, inventories consisted of
the following:




June
      30,
              2008
              (unaudited)
            
            
            December31,
              2007Raw
      materials, components and sub-assemblies
            
            $
            135,025
            
            
            $
            55,494Work-in-process
            
            
            148,040
            
            
            
            85,486Finished
      goods
            
            
            149,033
            
            
            
            177,110432,098
            
            
            
            318,090Less-reserve
      for excess and obsolete inventory
            
            
            (20,123
            )
            
            
            (10,061
            )$
            411,975
            
            
            $
            308,029




As of
June 30, 2008 the Company had three BioSentry units off site that are being used
on a test basis.


(6)
            
            Property
      and Equipment




At June
30, 2008 and December 31, 2007, property and equipment consisted of the
following:




June
      30,
              2008
              (unaudited)
            
            
            December31,
              2007Equipment
      and machinery
            
            $
            594,940
            
            
            $
            588,748Software
            
            
            329,921
            
            
            
            329,291Furniture
      and fixtures
            
            
            197,859
            
            
            
            198,372Leasehold
      improvements
            
            
            607,767
            
            
            
            607,7671,730,487
            
            
            
            1,724,178Less-accumulated
      depreciation
            
            
            (1,169,464
            )
            
            
            (1,040,929
            )$
            561,023
            
            
            $
            683,249




Included
in leasehold improvements is $346,000 of gross proceeds for lease incentives the
Company received from its landlord. These lease incentives were recorded as
deferred rent to be amortized on a straight-line basis to rent expense over the
life of the lease. Of the net remaining deferred rent of $214,190, $164,761 is
included in “notes payable and other long-term liabilities” and the balance of
$49,429 is included in “deferred rent” in current liabilities on the
accompanying Consolidated Balance Sheet.




(7)
            
            Segment
      Information




Business
Segments




JMAR
conducts its operations in two business segments; the Research Division and the
Sensor Products Group.




Research
Division




The
Research Division carries out research and development involving JMAR’s patented
high brightness, short pulse, diode pumped solid state lasers and laser-produced
plasma (LPP) technology.





Sensor Products
Group




This
segment’s first product is the BioSentry sensor, a continuous, on-line,
real-time monitoring system for detecting and classifying harmful microorganisms
in water. BioSentry is targeted toward a number of applications across multiple
markets, including homeland security, beverage industries, highly visible
buildings such as government embassies, pharmaceutical companies, municipal and
private water utilities and the rapidly growing number of water amusement
parks.





The
accounting policies of the reportable segments are the same as those described
in Note 2 of the Company’s consolidated financial statements included in the
Form 10-K for the year ended December 31, 2007. The Company evaluates the
performance of its operating segments primarily based on revenues and operating
income. Corporate costs are generally allocated to the segments based on a three
factor formula (revenues, payroll and certain assets).




9




Segment
information for the three and six months ended June 30, 2008 and 2007 is as
follows (excluding discontinued operations) (unaudited):




Research
              
              
              Sensor
      ProductsDivision
              
              
              Group
              
              
              Corporate
              
              
              Total6
      months ended June 30, 2008:Revenue
              
              $
              138,434
              
              
              $
              74,527
              
              
              $
              -
              
              
              $
              212,961Asset
      writedowns and special items
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
      income (loss)
              
              
              (1,710,502
              )
              
              
              (1,186,071
              )
              
              
              (184,477
              )
              
              
              (3,081,050
              )Total
      assets
              
              
              752,444
              
              
              
              1,650,918
              
              
              
              2,341,025
              
              
              
              4,744,387Capital
      expenditures
              
              
              3,833
              
              
              
              -
              
              
              
              5,025
              
              
              
              8,858Depreciation
      and amortization
              
              
              34,110
              
              
              
              6,389
              
              
              
              91,091
              
              
              
              131,5903
      months ended June 30, 2008:Revenue
              
              $
              21,935
              
              
              $
              7,673
              
              
              $
              -
              
              
              $
              29,608Asset
      writedowns and special items
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
      income (loss)
              
              
              (879,302
              )
              
              
              (551,858
              )
              
              
              (94,657
              )
              
              
              (1,525,817
              )Capital
      expenditures
              
              
              1,714
              
              
              
              -
              
              
              
              2,990
              
              
              
              4,704Depreciation
      and amortization
              
              
              17,092
              
              
              
              1,887
              
              
              
              46,720
              
              
              
              65,6996
      months ended June 30, 2007:Revenue
              
              $
              207,849
              
              
              $
              131,947
              
              
              $
              -
              
              
              $
              339,796Asset
      writedowns and special items
              
              
              (117
              )
              
              
              (125,000
              )
              
              
              -
              
              
              
              (125,117
              )Operating
      income (loss)
              
              
              (424,540
              )
              
              
              (1,001,013
              )
              
              
              (809,149
              )
              
              
              (2,234,702
              )Total
      assets
              
              
              922,159
              
              
              
              1,647,505
              
              
              
              1,762,471
              
              
              
              4,332,135Capital
      expenditures
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Depreciation
      and amortization
              
              
              38,315
              
              
              
              15,862
              
              
              
              96,032
              
              
              
              150,2093
      months ended June 30, 2007:Revenue
              
              $
              107,135
              
              
              $
              89,429
              
              
              $
              -
              
              
              $
              196,564Asset
      writedowns and special items
              
              
              (117
              )
              
              
              -
              
              
              
              -
              
              
              
              (117
              )Operating
      income (loss)
              
              
              (121,203
              )
              
              
              (339,224
              )
              
              
              (456,547
              )
              
              
              (916,974
              )Capital
      expenditures
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Depreciation
      and amortization
              
              
              18,264
              
              
              
              5,103
              
              
              
              47,758
              
              
              
              71,125




Sales to
the United States Government totaled $ 20,234, $87,635, $65,534 and $188,349 for
the three and six months ended June 30, 2008 and 2007,
respectively.




(8)
            
            Derivative
      Liability




Statement
of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for
Derivative Instruments and Hedging Activities” requires measurement of certain
derivative instruments at their fair value for accounting purposes. In
determining the appropriate value, we use the Black Scholes Option Pricing
Formula (“Black Scholes model”) where applicable. Derivative liabilities are
adjusted to reflect fair value at each period end, with any increase or decrease
in the fair value being recorded in consolidated statements of operations as
adjustments to fair value of derivatives.




The
following defines our derivatives:




Warrants Attached to
Debt




As of
June 30, 2008, the 5,209,561 warrants, net of 2,388,189 warrants exercised on
August 31, 2007, and 119,000,000 warrants issued in conjunction with the
$750,000 Note and the $7.5 million Term Note payable to Laurus,
respectively, are being accounted for as a liability pursuant to the
provisions of SFAS No. 133 and EITF No. 00-19. The Company granted the
warrant holders certain registration rights. In accordance with SFAS
No. 133, the warrants are valued at each reporting period. Changes in fair
value are recorded as an adjustment to fair value of derivative liability in the
statement of operations. The outstanding warrants were fair valued on
April 13, 2007 and September 11, 2007 and determined to have a fair value
of $1,747,481 and $13,090,000 respectively. In accordance with SFAS
No. 133, the Company revalued the warrants on June 30, 2008 and as a result
of the revaluation, the Company recorded a change in fair value of derivative
liability of $11,178,860 and $21,115,625 for the three and six months ended June
30, 2008 in the consolidated statement of operations.




The
warrants were valued based on the Black Scholes pricing model using the
following assumptions: risk-free interest rate of 3.99% based on estimated
yields of 10-year U.S. Treasury Securities; expected dividend yield of
0 percent; expected life of 8.75 and 9.17 years; and expected
volatility of 107% and 106%. The volatility is based on JMAR’s historical stock
prices for the past 8.75 and 9.17 years, consistent with the expected life
of the warrants.







10


Conversion Feature
Derivatives
  Pursuant
to an agreement committed to on June 28, 2007, but entered into on July 5, 2007,
which provides for the issuance from time to time of new shares of Series J
Preferred Stock, a portion of the outstanding shares of Series G and
Series I Preferred Stock will be amended with each sale and issuance of
Series J Preferred Stock, as follows: A stated amount of Series G and
I Preferred Stock equal to 200% of the stated amount of the Series J
Preferred Stock that is issued will be amended to reduce its conversion price to
a price equal to the average of the volume weighted average price for the five
trading days prior to the issuance of the new Series J shares. Pursuant to
SFAS No. 133 and EITF No. 00-19, the Company recorded a derivative
liability for the maximum number of common shares eligible for exchange. The
shares were determined to have a fair value of $173,600 based on the market
price of the shares on the date of the transaction.  In accordance
with SFAS No. 133, the Company revalued the shares on June 30, 2008; as a
result of the revaluation, there was a change of $720,000 in the fair value of
the derivative liability.




Warrants Issued to
Non-employee




As the
result of the award of 2,400,000 warrants to the Company’s investor relations
consulting firm on March 24, 2008, the Company classified these warrants as
warrant derivatives pursuant to SFAS No. 133 and EITF No. 00-19.
Accordingly the Company recorded a derivative liability of $302,423 on
June 28, 2008 for the maximum number of common shares eligible for
exchange.





The
warrants were valued based on the Black Scholes pricing model using the
following assumptions: risk-free interest rate of 2.63% based on estimated
yields of 3 year U.S. Treasury Securities; expected dividend yield of
0 percent; expected life of 1.75 years; and expected volatility of 138%.
The volatility is based on JMAR’s historical stock prices for the
past 1.75 years, consistent with the expected remaining life of the
warrants





As part
of the transaction entered into on June 28, 2007 the Company was required to
revise the accounting treatment of previously and subsequently issued warrants
to non-employees as warrant derivatives..  Pursuant to SFAS
No. 133 and EITF No. 00-19, the Company recorded a derivative
liability of $318,870 for the maximum number of common shares eligible for
exchange, valued based on the Black Scholes model on June 28, 2007, for
7,728,528 shares issuable under previously issued warrants. In accordance with
SFAS No. 133, the Company revalued the shares on June 30, 2008 and as a
result of this revaluation, there was a change of $472,894 in the fair value of
the derivative liability.




The
warrants were valued based on the Black Scholes pricing model using the
following assumptions: risk-free interest rate of 2.91% based on estimated
yields of 3 year U.S. Treasury Securities; expected dividend yield of
0 percent; expected average life of 2.99 years; and expected
volatility of 120%. The volatility is based on JMAR’s historical stock prices
for the past 2.99 years, consistent with the expected remaining life
of the warrants.




(9)
            
            Equity
      Transactions


a.
Laurus Preferred Stock and Warrants





If not
previously converted, the Series G, I and J Preferred Stock, as amended,
must be redeemed by the Company as follows:




Gross
      AmountOutstanding
      at
            
            
            Scheduled
      RedemptionsDescription
            
            June
      30, 2008
            
            
            2008
            
            
            2009
            
            
            TotalSeries G
      Preferred
            
            $
            1,177,800
            
            
            $
            —
            
            
            $
            1,177,800
            
            
            $
            1,177,800Series I
      Preferred
            
            
            5,797,651
            
            
            
            —
            
            
            
            5,797,651
            
            
            
            5,797,651Series
      J Preferred
            
            
            708,800
            
            
            
            —
            
            
            
            708,800
            
            
            
            708,800Total
            
            $
            7,684,251
            
            
            
            —
            
            
            $
            7,684,251
            
            
            $
            7,684,251




In
connection with all of the above financing transactions with Laurus, the Company
issued warrants to Laurus to purchase a total of 127,048,956 shares of common
stock at prices ranging from $.01 to $5.00. As of June 30, 2008 all of the
preferred stock and warrants held by Laurus are convertible or exercisable into
approximately 147.1 million shares.





All of
the preferred stock and warrants (Securities) held by Laurus contain provisions
that restrict the right of Laurus to convert or exercise its JMAR Securities in
order to limit its percentage beneficial ownership. If Laurus were to waive
these beneficial ownership limitations the Securities would be convertible for
or exercisable into more than 9.99% of the outstanding shares of the Company’s
common stock commencing 75 days after notice of such waiver. However,
Laurus has not requested such a waiver. Laurus has also agreed that none of the
Securities shall be converted or exercised to the extent that conversion or
exercise of the Securities would result in Laurus beneficially owning more than
19.9% of the shares of the Company’s common stock (as of various issuance dates
of the Securities) unless and until the Company obtains stockholder approval of
such excess. Excluded from such calculation are all shares issued to Laurus upon
conversion of convertible preferred stock or exercise of warrants but no longer
owned by Laurus.






11


Included
in the loss applicable to common shareholders in the accompanying Consolidated
Statements of Operations for the six months ended June 30, 2008 and 2007 are
preferred stock dividends of $531,219, and $826,383, respectively. These amounts
for the six months ended June 30, 2008 and 2007 consist of two elements: 1)
$233,229, and $322,285, respectively, of preferred stock dividends paid or
payable in cash and 2) $297,990 and $504,098, respectively, related to the
discount representing the beneficial conversion feature of the redeemable
convertible preferred stock which is the fair value of warrants issued in
connection with the preferred stock and the difference between the fair value of
the preferred stock immediately prior to and after certain prior amendments to
the Preferred Stock.
 
 Subject
to the contractual limitation on total beneficial ownership by Laurus to 9.99%
of our common stock, the Series G, I and J Preferred Stock are convertible
into a total of 20,065,472 shares of Common Stock.




(10)
            
            Earnings
      Per Share




The
Company accounts for earnings per share in accordance with SFAS No. 128,
“Earnings per Share”. Basic earnings per common share were computed by dividing
loss applicable to common stock by the weighted average number of shares of
common stock outstanding during the year. For the three and six months ended
June 30, 2008 and 2007, the denominator in the diluted loss per share
computation was the same as the denominator for basic loss per share due to
antidilutive effects of the Company’s warrants, stock options, convertible debt
and convertible preferred stock. At June 30, 2008 and 2007 the Company had
shares issuable under outstanding warrants, stock options and convertible
preferred stock of 156,956,844 and 43,113,407, respectively, all of which are
antidilutive and were excluded from the computation of diluted loss per share
due to the Company’s losses.




(11)
            
            Discontinued
      Operations





The
income from operations of discontinued operations of $0, $0,$528,994 and $685,382 for the three and six months ended June 30, 2008 and
2007, respectively, is related to the closure of the Vermont Operations as of
September 30, 2007. On November 7, 2007 the Company executed an Asset Purchase
Agreement (the "Agreement") with Applied Research Associates, Inc. (ARA) of
Randolph, Vermont to sell to ARA certain assets of the Vermont Operations
including; rights to the Vermont Operations’ current proposal to NAVAIR; the
x-ray stepper and optical microscope hardware; and the intellectual property,
including four patents, related to x-ray lithography. Under the Agreement, ARA
was responsible for all lease payments and certain other facility operating
costs of the Vermont Operations’ building under a sublease from the Company for
the remainder of the lease term from October 16, 2007 through its termination on
March 30, 2008. In January 2008, JMAR received payment for
the sale of the Vermont Operations, including reimbursement of certain
building lease payments and operating costs for total proceeds of
$218,607.





At June
30, 2008 and December 31, 2007, net assets and liabilities of the
discontinued operations consisted of the following:





June
      30, 2008
              (unaudited)
            
            
            December 31,
              2007Current
      Assets:Cash
            
            $
            —
            
            
            $
            178Accounts
      receivable
            
            
            —
            
            
            
            479,164$
            —
            
            
            $
            479,342Current
      Liabilities:Accounts
      payable
            
            $
            461,289
            
            $
            
            465,672Accrued
      liabilities
            
            
            243,044
            
            
            
            243,044$
            704,333
            
            
            $
            708,716Non-Current
      Liabilities:Lease
      accrual/deferred rent
            
            $
            89,209
            
            
            $
            89,209





The gain
from operations of discontinued operations of the Vermont Operations for the
three and six months ended June 30, 2008 and 2007 consisted of the
following (unaudited):





Three
      Months Ended
              June
      30, 2008
            
            
            Three
      Months Ended
              June
      30, 2007
            
            
            Six
      Months Ended
              June
      30, 2008
            
            
            Six
      Months Ended
              June
      30, 2007Revenues
            
            $
            —
            
            
            $
            1,016,762
            
            
            $
            —
            
            
            $
            1,985,864Cost
      of revenues
            
            
            —
            
            
            
            364,582
            
            
            
            —
            
            
            
            1,100,163Gross
      profit
            
            
            —
            
            
            
            652,180
            
            
            
            —
            
            
            
            885,701Selling,
      general and administrative
            
            
            —
            
            
            
            95,577
            
            
            
            —
            
            
            
            172,509Research
      and development
            
            
            —
            
            
            
            692
            
            
            
            —
            
            
            
            714Total
      operating expenses
            
            
            —
            
            
            
            96,269
            
            
            
            —
            
            
            
            173,223Income
      from operations
            
            
            —
            
            
            
            555,911
            
            
            
            —
            
            
            
            712,478Interest
      and other expense - net
            
            
            —
            
            
            
            26,917
            
            
            
            —
            
            
            
            27,096Provision
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Income
      from operations of discontinued operations
            
            $
            —
            
            
            $
            528,994
            
            
            $
            —
            
            
            $
            685,382






12


(12)
            
            Income
      Taxes




The
Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109,” (“FIN 48”), on January 1,
2007. As a result of the implementation of FIN 48, the Company made a
comprehensive review of its portfolio of uncertain tax positions in accordance
with recognition standards established by FIN 48. In this regard, an uncertain
tax position represents the Company’s expected treatment of a tax position taken
in a filed tax return, or planned to be taken in a future tax return, that has
not been reflected in measuring income tax expense for financial reporting
purposes. As a result of this review, the Company concluded that at this time
there are no uncertain tax positions. As a result of applying the provisions of
FIN 48, there was no cumulative effect on retained earnings.





The
Company is subject to US federal income tax as well as income tax in multiple
states. At December 31, 2007, the Company had Federal net operating loss
carryforwards of approximately $60.2 million that expire from 2008 to 2027. The
Company has a capital loss carryforward of approximately $17 million which
expires after December 31, 2008.  In addition, the Company has
approximately $4,018,000 of temporary differences that are available to offset
future taxable income. Also, the Company has approximately $24.6 million of
state net operating loss carryforwards that expire from 2011 to
2017.





As of
June 30, 2008, the Company does not expect any material changes to unrecognized
tax positions within the next twelve months.





SFAS No.
109, “Accounting for Income
Taxes,” establishes financial accounting and reporting standards for the
effect of income taxes. The objectives of accounting for income taxes are to
recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entity’s financial statements or tax returns.
Judgment is required in assessing the future tax consequences of events that
have been recognized in our financial statements or tax returns. Fluctuations in
the actual outcome of these future tax consequences could materially impact our
financial position or our results of operations.







Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations




Overview




JMAR
Technologies, Inc. is a late-stage technology company with expertise in the
development and commercialization of custom lasers and laser-based
detection technologies for nano-scale imaging, chemical and biological
analysis, and fabrication. The Company is leveraging more than a decade of laser
and photonics research in developing a portfolio of products with market
applications in high interest areas such as defense, homeland security,
hazardous materials and contaminant detection, while continuing to carry out
research and development. JMAR’s current product lines consist
of  the  BioSentry® system, an on-line real-time monitoring
system for detecting and classifying harmful microorganisms in water, and the
BriteLightTM laser, a stand-alone laser product, as well as the light source for
x-ray microscopy,




JMAR’s
pursuit of cutting-edge products includes our ongoing program, the double pulse
(DP) plasma laser, funded by the Army Research Laboratory (ARL) for
development and demonstration of the technology. The exceptional beam quality
already demonstrated will enable stand-off laser-induced breakdown spectroscopy
(LIBS) applications. Light emissions from the plasma generated on targeted
substances such as explosives and drugs are detected and analyzed by an
optical spectrometer to provide identification of the target material. The DP
laser is based on a redesign of JMAR’s patented BriteLightTM laser, a stand-alone
product, as well as the light source for x-ray microscopy.




Over the
past 15 years, our research and development programs received in excess of $100
million in funding under DARPA and ARL contracts, which for DARPA ended in 2006,
and which for ARL the funding support continues today for very different and
unique technology development projects. In the six months ended June 30, 2008
and 2007, approximately 31% and 55%, respectively, of our revenue was derived as
the prime contractor or subcontractor for a government contract.





The
Department of Defense’s (DOD) overall budget, and our participation therein, is
subject to increases and decreases based upon a number of factors, including
general budgetary constraints, shifting priorities of the specific governmental
agency which sponsors the funding and our own performance under our contracts
with the Government. We do not expect to receive funding from government sources
in the future in excess of $2-3 million per year. The Company is relying on the
sale of its new products in 2008 and beyond, together with strategic alliances,
to support continued product development and successful business
operations.





JMAR
conducts its operations in two business segments; the Research Division and the
Sensor Products Group.




Research
Division




The
Research Division carries out research and development involving JMAR’s patented
high brightness, short pulse, diode pumped solid state lasers and laser-produced
plasma (LPP) technology. A major portion of the Research Division’s R&D
funding has been obtained through contracts from the DARPA and more
recently by the U.S. Army Research Laboratories (ARL). JMAR is continuing to
enhance its product offering by extending its core technologies to include
spectroscopy engineering and Raman sensing as key elements of a robust solution
for substance detection and identification.  In addition, the design
and development of several custom lasers has been proposed for unique commercial
and defense applications. As prototype products are developed, and if the
projected number of sales warrant, they will be considered for transfer to a
third party contract engineering firm for product manufacturing.





13




JMAR’s
diode pumped modular solid state (DPSS) BriteLight laser, developed
specifically to enable the efficient production of soft x-rays through laser
produced plasma, is marketed by JMAR as a standard product for advanced laser
applications.




The
patented DPSS BriteLight Laser system provides a high-performance laser source
for researchers and engineers in academic, military and manufacturing settings
requiring either a single specialized laser or a versatile laser source that can
be used for a multitude of applications, including spectrochemical analysis,
nano-scale fabrication, microscopy and soft x-ray source generation. This system
was developed as the foundation for JMAR’s collimated plasma lithography
(CPL) x-ray source.




Redesigned
BriteLight technology is the basis for JMAR’s entry into laser-induced breakdown
spectroscopy (LIBS) for remote detection of CBRNE (chemical, biological,
radiological, nuclear, explosive) substances in military settings, on roadways
and at checkpoints, against suspects in the field, for site exploitation, crime
scenes, and for detecting the smallest possible traces of  CBRNE
elements. This line of business is presently supported by the U.S. Army and by
internal research and development (IR&D) funds and is being expanded to
examine the combination of fluorescence and Raman capabilities with DP-LIBS to
provide verification of detected elements.




During
the three and six months ended June 30, 2008, and 2007, the Research Division
accounted for approximately 74.1%, 54.5%, 65% and 61.2%, respectively of
the Company’s revenues.





Sensor Products
Group




This
segment’s first product is the BioSentry sensor, a continuous, on-line,
real-time monitoring system for detecting and classifying harmful microorganisms
in water. The Company has recently built a portable version designed to accept
and assess water samples. BioSentry is targeted toward a number of applications
across multiple markets, including homeland security, beverage industries,
highly visible buildings such as government embassies, pharmaceutical companies,
municipal and private water utilities and the rapidly growing number of water
amusement parks.





The U.S.
Environmental Protection Agency (EPA) purchased a unit for evaluation of
BioSentry in homeland security applications at the National Homeland Security
Research Center in Cincinnati, Ohio. The program was carried out in 2007, using
a pilot-scale water distribution system at the test and evaluation facility.
Tests were performed to determine the detection capabilities of BioSentry and
other similar products against intentional introduction of pathogens into a
water distribution system. Several pathogen surrogates were used simulating
lethal microbes.  The EPA presented these results at the April AWWA
Water Security Congress 2008 which indicated that the tests showed BioSentry
able to detect bacterial pathogens up to 25 times better than any other product
tested.




In
January 2008, a trial BioSentry system was delivered to Pfizer, Inc. to
determine its efficacy for real-time detection and classification of waterborne
microorganisms in the production of high purity water used in the pharmaceutical
manufacturing process.  The objective is to augment traditional “grab
sample”/laboratory analysis that can take up to five days before results are
obtained. Their suitability assessment should be completed in the near
term.




In
February 2008 JMAR delivered two BioSentry systems under a purchase order from
Aquatec, a Swiss distributor of water control systems, which potentially could
lead to several larger purchases because municipal water districts can be liable
to their users for contamination problems. In addition, the Company is engaged
in discussion with a large international commercial company regarding their
potential as a consumer and distributor of BioSentry products.




During
the three and six months ended June 30, 2008, and 2007, the Sensor Products
Group accounted for approximately 25.9% , 45.5%,  35 %
and  38.8%, respectively, of the Company’s revenues.






14




In
September 2007, the Company negotiated a $7,500,000 Term Note with Laurus (the
“$7.5 million Term Note”). The draw-downs under the Laurus $7.5 million Term
Note have enabled the Company to continue the development of its emerging new
products and for working capital requirements in 2007 and 2008.




Pursuant
to the $7.5 million Term Note Securities Purchase Agreement, the Company agreed
that by mid-October 2007 it would discontinue all business operations and sell
the assets associated with the Vermont Operations to one or more third parties
and transfer any remaining assets to the Company’s San Diego location. As a
result, the Vermont Operations were discontinued as of September 30,
2007.




On
November 7, 2007, the Company executed an Asset Purchase Agreement (the
"Agreement") with Applied Research Associates, Inc. (ARA) of Randolph, Vermont
to purchase certain assets of the Vermont Operations including; rights to the
Vermont Operations’ proposal to NAVAIR; the x-ray stepper and optical microscope
hardware; and the intellectual property, including four patents, related to
x-ray lithography. Under the Agreement, ARA was responsible for all lease
payments of the Vermont Operations’ building under a sublease from the Company
for the remainder of the lease term from October 16, 2007 through its
termination on June 30, 2008 and for certain costs of the building and
office operation until closing of the transaction. In January 2008,
JMAR received payment for the sale of the Vermont Operations,
including reimbursement of certain building lease payments and operating costs
for total proceeds of $218,607.




Accordingly,
the Company has reflected the Vermont Operations as discontinued operations for
all periods included in this Form 10-Q.




Management
believes that with the financing provided by the $7.5 million Term Note it
has, subject to periodic reviews with Laurus, adequate resources to fund its
operations through late September, 2008. Based on discussions with Laurus, the
Company anticipates receiving additional financing for a significant period
beyond September 2008.





The
Company will require drawdowns under the Note to continue the development of
some of its emerging new products and for working capital requirements until
this time. There are no assurances that funds will be available under the Note,
due to Laurus’ requirement to approve every drawdown.  The Company is
continuing to pursue other opportunities to raise additional funds in the
future. Management believes, but cannot assure, that the Company will be able to
raise additional funds through equity or other financings to fund future
operations.  This belief is derived from the Company’s historical
access to equity and debt markets.




Sources
of Revenue




Contract Research and
Development, Technical Support, and Production Programs




The
majority of JMAR’s revenues has been derived as the prime contractor or
subcontractor for government contracts. These contracts have generated
intellectual property owned by the Company in areas in which JMAR believes there
are significant commercial applications.




Standard
Products




The
Company is engaged in discussion with a large international commercial company
regarding their potential as a consumer and distributor of BioSentry products.
JMAR has placed a small number of units with commercial and government
customers, including a beverage company, several water utilities and federal
agencies. Additional product development was recently completed to take full
advantage of the potential markets for the BioSentry system. Because of the
interest received at recent trade shows and the mounting number of inquiries on
the product price and availability, JMAR is promoting a greater awareness of the
product and augmenting its marketing and sales staff.




JMAR’s
diode pumped solid state BriteLight Laser, developed specifically to enable the
efficient production of soft x-rays using laser produced plasma, is now marketed
by JMAR as a standard product for advanced laser applications. Commercial
BriteLight units are presently operating in Japan, Korea and at the Lawrence
Livermore National Laboratory. In addition, we anticipate the adoption of
BriteLight as the x-ray source for compact microscopy applications. JMAR is
conducting manufacturing engineering analysis to reduce production costs and to
expand the addressable market for this high performance laser.




New Products Under
Development




JMAR’s
pursuit of cutting-edge products includes our ongoing development of the double
pulse (DP) plasma laser, funded by the Army Research Laboratory (ARL) for
development and demonstration. The exceptional beam quality already demonstrated
will enable stand-off laser-induced breakdown spectroscopy
(LIBS) applications. Light emissions from the plasma generated on targeted
substances such as explosives and drugs are detected and analyzed by an
optical spectrometer to provide identification of the target material. The DP
laser is based on a redesign of JMAR’s patented BriteLightTM laser.




Due to
the support of our financing source, Laurus Funds, JMAR contracted with D&K
Engineering to accelerate the transition from laboratory prototype to a portable
double pulse laser product. This project has been further expanded to include
the integration of analytic components for system-level LIBS with laser-induced
fluorescence (LIF) and Raman applications designed to detect and identify
biological contaminants and chemicals used in explosives, metals, drugs, and
other substances of critical national security interest. To maximize its
resources for this critically important product development, JMAR has submitted
a phase III proposal for continued government funding.






15




As JMAR
seeks to add commercial revenues to our predominately government contract
revenue base, we face a series of challenges, including technical and market
risks and uncertainties associated with the development of new technologies and
new products. Our product development efforts will require substantial continued
investment by JMAR and we expect to face challenges in transitioning each of our
new products from the proof of concept to commercial introduction and market
acceptance.  See “Risk Factors” in Part I, Item 1A of our
Form 10-K for the year ended December 31, 2007 for more information on the
risks and uncertainties faced by JMAR.





Results
of Operations




Revenues. Total revenues from
continuing operations for the three months ended June 30, 2008 and 2007
were $29,608, and $196,564, respectively. Revenues for the six months ended
June 30, 2008 and 2007 were $212,961 and $339,796, respectively. The
majority of the Company’s revenues for all of these periods were contract
revenues. Revenues for the three and six months ended June 30, 2008 and
2007 were as follows (unaudited):





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,
            
            
            June
      30,
            
            
            June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Research
      Division
            
            $
            21,935
            
            
            $
            107,135
            
            
            $
            138,434
            
            
            $
            207,849Sensor
      Products Group
            
            
            7,673
            
            
            
            89,429
            
            
            
            74,527
            
            
            
            131,947$
            29,608
            
            
            $
            196,564
            
            
            $
            212,961
            
            
            $
            339,796





The
decrease in revenues for the three and six months ended June 30, 2008
compared to the three and six months ended June 30, 2007, was due primarily
to a reduction in revenue from the SBIR Contract. The revenue from the SBIR
Contract fell by $67,400 and $122,815,during the three and six
month periods ended June 30, 2008, respectively. In addition to these
decreases, there was a decrease of revenue for the Sensor Products Group of
$81,756 and $57,420, respectively.  Partially offsetting these
decreases was an increase of $51,700 of Britelight sales from the six month
period ended June 30, 2008 compared to the six month period ended June 30,
2007.  As discussed above in “Sources of Revenue”, the Company reflects the
Vermont Division as a discontinued operation.





Losses.The net loss for the
three months ended June 30, 2008 and 2007 was $(15,229,340) and $(458,442),
respectively and for the six months ended June 30, 2008 and 2007, the net loss
was $(28,270,656) and $(1,734,260), respectively. The loss from continuing
operations for the three months ended June 30, 2008 and 2007 was $(15,229,340)
and $(987,436), respectively, and for the six months ended June 30, 2008 and
2007 the loss from continuing operations was $(28,270,656) and $(2,419,642),
respectively. The $14,770,898  increase in the net loss for the three
months ended June 30, 2008 as compared to June 30, 2007 is principally due to a
change in the fair value of derivative liability of $13,147,801, a reduction in
the income from discontinued operations of $528,994, a reduction in other income
of $530,459, an increase in the costs invested in product development (see
further discussion below) of $337,606, and an increase in selling, general and
administrative expenses of $191,412, offset by a reduction in total interest
expense of $59,472. The $26,536,396 increase in the net loss for the six months
ended June 30, 2008 as compared to June 30, 2007 is principally due to a change
in the fair value of derivative liability of $23,416,202, plus an increase in
interest and other expense of $1,070,813,a reduction in the income from
discontinued operations of $685,382, a reduction in other income of $530,459, an
increase in the costs invested in product development (see further discussion
below) of $528,412, and an increase in selling, general and administrative
expenses of $321,979, offset by a reduction in asset write-downs of
$125,117.





Gross Margins. Gross margins
for the three months ended June 30, 2008 and 2007 were 16 % and 43.1 %,
respectively. Gross margins for the six months ended June 30, 2008 and 2007
were (3.6 %) and 33.4%, respectively. The Company’s margins were lower in the
three months ended June 30, 2008 compared to the three months ended June 30,
2007 due to laser commercial sales in 2007 that were more profitable than
government revenue in 2008, as well as a transfer sale at cost to our
manufacturing partner in 2008. The Company’s margins were lower in the first six
months of 2008 as compared to the first six months of 2007 due to a loss on the
sale of a laser product in the first quarter of 2008. The Company is investing
in new product development activities that it believes will lead to increased
sales and higher margin products in the future.




Selling, General and Administrative
(SG&A).SG&A expenses were $ 1,088,080 and $ 896,668 for the
three months ended June 30, 2008 and 2007, respectively, and $2,128,844 and
$1,806,865 for the six months ended June 30, 2008 and 2007, respectively. The
increase in SG&A expenses for the three months ended June 30, 2008 compared
to 2007 was primarily attributable to an increase in consulting fees of $99,447,
and recruitment and relocation costs of $40,385 for new employees in 2008 as
compared to 2007. The increase in SG&A expenses for the six months ended
June 30, 2008 compared to 2007 was principally due to an increase in consulting
fees of $95,924, an increase of accounting fees of $121,416 and an increase in
recruitment fees and relocation cost of $126,936 for new employees in 2008 as
compared to 2007.





Research, Development and
Engineering Program (RD&E). The Company’s RD&E consists of two
types: customer-funded RD&E (U.S. government) and Company-funded RD&E.
Both types of RD&E costs are expensed when incurred.





●
            Customer-funded
      RD&E costs incurred,  primarily related to the SBIR
      Contract, are included in “Costs of Revenues”, and totaled $17,188 and
      $77, 206 for the three months ended June 30, 2008 and 2007,
      respectively, and $57,029  and $169,649 for the six month
      periods ended June 30, 2008 and 2007, respectively. The decrease in
      customer-funded RD&E expenditures for the three and six months ended
      June 30, 2008, primarily consists of a decrease of $60,018 and $112,620
      related to the SBIR Contract.





●
            Company-funded
      RD&E costs associated with product development are shown in “Operating
      Expenses” and totaled $442,484 and $104,878 for the three months ended
      June 30, 2008 and 2007, respectively, and $944,590 and $416,178 for
      the six months ended June 30, 2008 and 2007, respectively. The
      increase in 2008 is primarily due to increased product development
      expenditures related to the DP-LIBS and UV
  laser.




16




Total
RD&E expenditures for the three month periods were $459,672 and $ 182,084
for 2008 and 2007, respectively, and $1,001,619 and $585,827 for the six month
periods in 2008 and 2007, respectively. Total RD&E expenditures as a
percentage of revenues were 1,553% and 93% for the three months ended
June 30, 2008 and 2007, respectively, and 470% and 172% for the six
months ended June 30, 2008 and 2007, respectively. The RD&E
expenditures as a percentage of revenues have been historically higher than that
for a commercially oriented company because much of the Company’s revenues have
been R&D contract revenues.


In
addition, the Company’s revenues have been declining.




Discontinued Operations. The
income from operations of discontinued operations was $0 and $528,994 for the
three months ended June 30, 2008 and 2007 and $0 and $685,382 for the six
months ended June 30, 2008 and 2007, respectively. The income from operations of
discontinued operations is related to the Vermont Operations, which was
discontinued as of September 30, 2007.




On
November 7, 2007, the Company executed an Asset Purchase Agreement (the
"Agreement") with Applied Research Associates, Inc. (ARA) of Randolph, Vermont
to sell to ARA certain assets of the Vermont Operations including; rights to the
Vermont Operations’ current proposal to NAVAIR; the x-ray stepper and optical
microscope hardware; and the intellectual property, including four patents,
related to x-ray lithography. Under the Agreement, ARA was responsible for all
lease payments and certain other facility operating costs of the Vermont
Operations’ building under a sublease from the Company for the remainder of the
lease term from October 16, 2007 through its termination on June 30, 2008. In
January 2008, JMAR received payment for the sale of the Vermont
Operations, including reimbursement of certain building lease payments and
operating costs for total proceeds of $218,607.




The
Company has reflected the Vermont Operations as discontinued operations for all
periods included in this Form 10-Q.




Interest and Other Expense.
Interest and other expense for the three months ended June 30, 2008 and 2007 was
$1,255,260 and $1,314,732, respectively, and for the six months ended June 30,
2008 and 2007 was $2,518,553 and $1,447,740, respectively. Interest expense was
lower for the three months ended June 30, 2008 compared to 2007 due to reduction
of $51,438 of beneficial conversion feature interest due to a change to a longer
term in August 2007 of the Working Capital Line to August
2009.  Interest expense was higher for the six months ended June 30,
2008 compared to 2007 due to an increase in cash interest expense of $250,105
due to the utilization of the Company’s Working Capital Line and borrowings
under the $750,000 and the $7.5 million Term Notes. In addition, there was an
increase in the non-cash interest expense of $905,189 due to amortization of
debt discount. Included in non-cash interest expense for the three months ended
June 30, 2008 is $21,180 related to the beneficial conversion feature and fair
value of warrants issued in connection with the Working Capital Line, and the
$750,000 and $7.5 million Term Notes described below. These amounts were charged
to expense using the effective yield method over the period from the issuance
date to the earlier of the maturity date of the debt or the conversion dates.
The amounts of $2,065,530 and $1,263,217 included in interest expense for the
six months ended June 30, 2008 and 2007, respectively, are related to the
beneficial conversion feature and fair value of warrants issued in connection
with the Working Capital Line, and the $750,000 and $7.5 million Term Notes
described below. These amounts were charged to expense using the effective yield
method over the period from the issuance date to the earlier of the maturity
date of the debt or the conversion dates.





Preferred Stock
Dividends.  Included in the loss applicable to common
shareholders in the accompanying Consolidated Statements of Operations for the
three months ended June 30, 2008 and 2007 are deemed preferred stock dividends
of $255,582 and $515,482, respectively. The amounts for the three months
ended June 30, 2008 and 2007 consist of $106,587 and $160,378 of preferred stock
dividends paid or payable in cash and $148,995 and $355,104 of the discount
representing the beneficial conversion feature of the redeemable convertible
preferred stock, the fair value of warrants issued in connection with the
preferred stock and the difference between the fair value of the preferred stock
immediately prior to and after certain prior amendments to the Preferred
Stock.




Included in the loss applicable
to common shareholders in the accompanying Consolidated Statements of Operations
for the six months ended June 30, 2008 and 2007 are deemed preferred stock
dividends of $531,219 and $826,383, respectively. The amounts for the six
months ended June 30, 2008 and 2007 consist of $233,229 and $322,285 of
preferred stock dividends paid or payable in cash and $297,990 and $504,098 of
the discount representing the beneficial conversion feature of the redeemable
convertible preferred stock, the fair value of warrants issued in connection
with the preferred stock and the difference between the fair value of the
preferred stock immediately prior to and after certain prior amendments to the
Preferred Stock.




Change in fair value of derivative
liabilityThe major factor in the increased loss for the three months
ended June 30, 2008 compared to 2007 was the change in the derivative liability
of $13,147,801. This was due to the effect of the increase in the stock price
from $.12 to $0.21 per share during the quarter ended June 30, 2008. The major
factor in the increased loss for the six months ended June 30, 2008 compared to
2007 was the change in the derivative liability of $23,416,202. This was due to
the effect of the increase in the stock price from $.04 to $0.21 per share
during the six months ended June 30, 2008.





Liquidity and
Financial Condition




General.Cash and cash
equivalents at June 30, 2008 and December 31, 2007 were $22,925 and
$174,879, respectively. In the six months ended June 30, 2008, we funded our
operations primarily from borrowings under the working capital line and term
notes. The decrease in cash and cash equivalents during the six months ended
June 30, 2008 of $151,954 resulted from many factors, principally cash used in
operations of $2,502,619, largely related to operating losses, net of non-cash
items of $25,212,897 and payment of preferred dividends of $243,255. This was
offset by a decrease in restricted cash of $2,551,329, a reduction of net
assets of discontinued operations of $474,959, an increase in accrued
liabilities of $266,665 and proceeds from the issuance of common stock of
$84,360.




Working
capital (deficit) as of June 30, 2008 and December 31, 2007 was $(30,
246,426) and $(6,384,787), respectively. The $23,861,639 decrease in working
capital is primarily due to the $23,034,828 increase in the Company’s derivative
liabilities. This liability will not require payment in cash.




17




Our cash
requirements have been and will continue to be significant. JMAR’s operations
will continue to use cash in 2008 for 1) marketing; 2) product development
efforts; 3) corporate costs, primarily related to the cost of being a public
company; 4) interest and preferred stock dividends and 5) other working capital
needs. We believe that with the financing provided by the $7.5 million Term
Note the Company has, subject to periodic reviews with Laurus, adequate
resources to fund its operations through late September, 2008. Based on
discussions with Laurus, the Company anticipates receiving additional financing
for a significant period beyond September 2008.





The
Company will require drawdowns under the $7.5 million Term Note to continue the
marketing and development of some of its emerging new products and for working
capital requirements until this time. There are no assurances that funds will be
available under the $7.5 million Term Note, due to Laurus’ requirement to
approve every drawdown.  The Company is continuing to pursue other
opportunities to raise additional funds in the future. In addition, the Company
is engaged in discussion with a large international commercial company regarding
their potential as a consumer and distributor of BioSentry products. Management
believes, but cannot assure, that the Company will be able to raise those
additional funds through equity or other financings to fund future
operations.  This belief is derived from the Company’s historical
access to equity and debt markets. See further discussion in Note 1 in the
accompanying Notes to Consolidated Financial Statements and “Risk Factors” in
Part II - Item 1A below.




Working Capital Line. In
March 2003, the Company entered into a Revolving Fixed Price Convertible
Note (Working Capital Line) with Laurus. The term of the Working Capital Line
expired on March 21, 2006 and was replaced by a new line of credit
facility.




On
March 28, 2006, the Company and Laurus replaced the expiring Working
Capital Line with the 2006 Working Capital Line. The 2006 Working Capital Line
allowed the Company to borrow from time-to-time up to 90% of eligible accounts
receivable and up to 50% of eligible inventory up to $500,000, up to an
aggregate maximum of $3 million.




JMAR’s
obligations under the 2006 Working Capital Line are secured by a security
interest in all of JMAR’s assets. Upon a default by JMAR under the 2006 Working
Capital Line, Laurus would have the right to foreclose on the Company’s assets
and sell those assets to repay the outstanding balance of the 2006 Working
Capital Line and related costs. In addition, the Company’s obligations under the
Preferred Stock, including its obligations to make dividend payments and to make
regular payments in redemption of the Preferred Stock, are also secured by this
blanket security interest.




The 2006
Working Capital Line is non-convertible and has no financial ratio covenants.
The interest rate on the 2006 Working Capital Line is equal to the prime rate
plus 2 percent (7% as of June 30, 2008). The 2006 Working Capital Line
terminates on August 31, 2009. As of June 30, 2008, there was $649,911
outstanding under the 2006 Working Capital Line.




In
connection with the 2006 Working Capital Line, the Company issued two warrants
to Laurus to purchase approximately 458,181 shares of common stock at an
exercise price of $0.01 per share and paid fees of $108,000. Of the 458,181
warrants, 218,181 warrants vested on issuance and 240,000 vested in
March 2007 based on the average borrowings under the 2006 Working Capital
Line. Both warrants expire in March 2016. In connection with the issuance
of these warrants, the Company recorded a discount of $471,926, representing the
fair value of the 458,181 warrants based on the Black Scholes pricing model
using the following assumptions: risk—free interest rate of 4.9 percent based on
estimated yields of 10-year U.S. Treasury Securities; expected dividend yield of
0 percent; expected life of 10 years; and expected volatility of
91 percent. The volatility was based on JMAR’s historical stock prices for
the previous ten years, consistent with the expected life of the
warrants.




Term Notes. On April 13,
2007, the Company and Laurus entered into a Securities Purchase Agreement which
provided for the loan of $750,000 to the Company evidenced by a Secured
Promissory Note (the “$750,000 Note”), together with a Warrant to purchase
7,597,750 shares of Common Stock.  The terms of this transaction provided
for the following: 1) the $750,000 Note accrues interest at the rate of prime
rate plus 2%, with interest payable monthly in arrears which commenced on
May 1, 2007, 2) the principal and all unpaid interest  was due in
March 2008 (changed to August 31, 2009 with the Omnibus Amendment related to the
September 2007 SPA  –see below), 3) $250,000 of the loan proceeds are
held in a restricted account until the satisfaction of certain stated minimum
“burn rate” conditions and the achievement of certain business milestones, 4)
the obligations under the Securities Purchase Agreement and the $750,000 Note
are secured by the grant of a security interest in all of the Company’s assets,
together with the benefit of security interests previously granted to secure
other financing transactions with Laurus, 5) the Warrant has a term of ten years
and an exercise price of $0.01 per share and contains a cashless exercise
provision which is exercisable in the event that a registration statement
covering the Warrant is not effective; provided, however,  Laurus is
restricted from selling the shares issuable under the Warrant for a one year
period following issuance of the Warrant, 6) the Company entered into a
registration rights agreement providing for the filing of a registration
statement covering the resale of the Warrant shares within six months after the
closing of this transaction (this requirement has been waived by Laurus) and 7)
the Company paid a fee of $26,250 to Laurus. As of June 30, 2008, $750,000 was
outstanding pursuant to the $750,000 Note, at an interest rate of 7%.  In
connection with the $750,000 Note, the Company agreed to issue
461,539 shares of restricted common stock in payment of a fee to Midtown
Partners & Co., LLC (“Midtown”) and issued those shares in the third quarter
of 2007.




18




On
September 12, 2007, the Company entered into a Securities Purchase Agreement
with Laurus (the “September 2007 SPA"), dated for identification purposes as of
August 31, 2007. Pursuant to the September 2007 SPA,  Laurus completed
a loan to the Company of $7,500,000 evidenced by a Secured Term Note (the “$7.5
million Term Note") and was issued two warrants (the “September 2007 Warrants")
for the purchase of a total of 119,000,000 shares of the Company’s Common Stock.
The maturity date of the $7.5 million Term Note is August 31, 2009. Interest on
the Note is payable monthly, with interest accruing at the rate of two percent
above the prime rate, as determined from time to time, but at a rate of no less
than 10.25% per annum. The $7.5 million Term Note was disbursed principally as
follows: 1) $620,000 was disbursed directly to the Company, 2) $6,420,600.61 of
the proceeds of the $7.5 million Term Note were funded and placed in a
restricted account, with the disbursement of such funds subject to the
conditions described below, 3) $194,899.39 of the proceeds of the $7.5 million
Term Note were paid to Laurus at closing in satisfaction of outstanding
interest, dividends and other obligations owing to Laurus under other loans and
securities previously issued to Laurus, and 4) Laurus Capital Management, LLC,
was paid a closing fee of $262,500. The incremental release of the funds
deposited into the restricted account will only occur pursuant to written
operating budgets of the Company to be submitted to Laurus no less than monthly
(the "Monthly Operating Budgets"), which budgets shall be, in form and substance
acceptable to Laurus in its sole discretion. If the Monthly Operating Budgets
fail to be acceptable to Laurus in form or substance, no funds from the
restricted account shall be released to the Company.




The
September 2007 Warrants have an exercise price of $0.01 per share and a term of
ten years. In no event may the September 2007 Warrants be exercised for in
excess of the number of shares which would cause the total number of issued and
outstanding shares of the Company’s Common Stock plus the number of shares of
Common Stock reserved for issuance under all outstanding options, warrants
(including the September 2007 Warrants) and preferred stock to exceed the number
of the Company’s authorized shares of Common Stock. Pursuant to the September
2007 SPA, the Company agreed that on or before March 5, 2008 it would seek and
have obtained shareholder approval to have amended its certificate of
incorporation to increase its authorized Common Stock to no less than
300,000,000 shares. A failure to increase the Company’s authorized shares to at
least 300,000,000 shares on or before such date would have constituted an event
of default under the $7.5 million Term Note. On February 20, 2008, the Company’s
shareholders approved an amendment to the Company’s Certificate of Incorporation
to increase the authorized shares of Common Stock to 380,000,000
shares.




Under the
September 2007 SPA, the Company also agreed to pay Laurus a monthly royalty
payment equal to (x) two percent (2.0%) of all gross receipts of the Company
arising from sales, licenses or royalty payments of any kind from any municipal,
city, state or federal entity (each, a "Governmental Body") received by the
Company within the previous calendar month; and (y) twelve percent (12.0%) of
all gross receipts of the Company arising from sales, licenses or royalty
payments of any kind (the "12% Royalty") from any entity that is not a
Governmental Body received by the Company within the previous calendar month
provided, however that solely with respect to gross receipts arising from sales
of the Company’s BioSentry product to any entity that is not a Governmental
Body, the 12.0% Royalty shall be reduced to 7%.




In
connection with the September 2007 SPA, the Company and Laurus also entered into
an Omnibus Amendment which amended the terms of the Company’s Series G, I and J
Convertible Preferred Stock held by Laurus to discontinue all monthly redemption
obligations and to extend the respective redemption dates so that the full
stated amount of such preferred stock will be redeemable, if not previously
converted or redeemed, in full on August 31, 2009. The Omnibus Amendment also
amended the Secured Revolving Note related to the Company’s 2006 Working Capital
Line of credit to extend its maturity date from March 27, 2008 to August 31,
2009 and amended the $750,000 Note entered into in April, 2007 to extend
its maturity date to August 31, 2009.




Pursuant
to the September 2007 SPA, the Company also agreed that by mid-October 2007 it
would discontinue all business operations at its Burlington Vermont
location ("Vermont Operations") and sell the assets associated with the Vermont
Operations to one or more third parties and transfer any remaining assets to the
Company’s San Diego location. In January 2008, JMAR received payment
for the sale of the Vermont Operations, including reimbursement of
certain building lease payments and operating costs for total proceeds of
$218,607.




Sale of XRM Assets.In
March 2007, the Company entered into an agreement with a leading microscopy
company under which JMAR sold the assets of its XRM product. Among other
provisions, under the agreement JMAR received an initial payment of $100,000 and
reimbursement of up to $50,000 in costs, an additional payment of $500,000 once
the XRM is operational at the acquirer’s facility, another $100,000 upon
satisfaction of certain performance criteria and a four year royalty based on
the sale of XRM units by the other party. JMAR was also appointed exclusive
laser supplier to the other party for the same four year period.




Letter of Credit.In connection with the
Company’s lease of its Rancho Bernardo facility, Comerica Bank issued a letter
of credit currently in the amount of $78,645.  If the Company’s cash
in its accounts with Comerica falls below $1 million at the end of any
quarter, Comerica could require the Company to set aside the amount of the
letter of credit. The Company’s cash has fallen below this requirement, but the
Company has not set aside the amount of the letter of credit. Should the Company
default on its lease obligations, the Landlord would collect on the letter of
credit. Comerica, most likely, would pursue a legal remedy to collect the
$78,645.




Cash Used in Operations. Cash
used in operating activities was $1,793,136 higher in the six months ended June
30, 2008 as compared to the six months ended June 30, 2007, principally due to a
greater loss from operating activities of ($2,449,701) and a relatively higher
use of cash for working capital items of ($236,936) in the six months ended June
30, 2008 compared to the six months ended June 30, 2007. This was offset by the
relative increase in the change of $893,501 in net assets and liabilities of
discontinued operations.




Cash Used in Investing
Activities. In the six months ended June 30, 2008, cash used in investing
activities was $41,769 compared to a use of $19,938 in the six months ended June
30, 2007, principally due to the purchase of intangible assets
(patents).




Cash Provided by (Used in) Financing
Activities. In the six months ended June 30, 2008, cash provided by
financing activities was $2,392,434 compared to $125,271in the six months ended
June 30, 2007, principally due to the release of restricted cash of $2,551,329
to the Company by Laurus. Cash payments of preferred stock dividends were
$243,255 as compared to $270,244 in the six months ended June 30, 2008 and 2007,
respectively. Net proceeds from the sale of common stock were $84,360 and
$384,182 in the six months ended June 30, 2008 and 2007,
respectively.




19




Commitments




a.
Leases


The
Company leases its office facilities under various operating leases expiring
through October, 2012. Minimum future rental payments for non-cancelable leases
as of June 30, 2008, are as follows (2008 is for six months)
(unaudited):


Year
      Ending December 31,20       2008
            
            $
            175,12520       2009
            
            
            360,5722         2010
            
            
            374,790201     2011
            
            
            389,57620       2012
            
            
            335,678Th    Thereafter
            
            
            —$
            1,635,741


Related
rent expense was $145,020 and $127,496 for the six months ended June 30, 2008
and 2007, respectively.




b.
Deferred Compensation




Pursuant
to a 2002 employment agreement with a former executive, the Company recorded a
discounted liability for deferred compensation. The unamortized amount included
in notes payable and other long-term liabilities on the accompanying Balance
Sheet at June 30, 2008 is $154,022.




Included
in “Selling, general and administrative” in the accompanying Statement of
Operations are $6,585, $13,477, $7,133 and $37,761 for the three and
six months ended June 30, 2008 and 2007, respectively, for the amortization of
the discounts recorded against the deferred compensation obligations. Total
deferred compensation obligations for 2008 (remaining six months) and 2009 (the
termination of the obligation) are $65,000 and $70,000, respectively. The
Company has accounted for this individual deferred compensation arrangement in
accordance with Accounting Principles Board (APB) Nos. 12 and 21.




Preferred
Stock Redemption Obligations




Excluded
from the above table are redemption obligations under Series G, I and J
Preferred Stock. If not previously converted, the Series Series G, I
and J Preferred Stock must be redeemed by the Company as follows:










Gross
      AmountOutstanding
      at
            
            
            Scheduled
      RedemptionsDescription
            
            June
      30, 2008
            
            
            2008
            
            
            2009
            
            
            TotalSeries G
      Preferred
            
            $
            1,177,800
            
            
            $
            —
            
            
            $
            1,177,800
            
            
            $
            1,177,800Series I
      Preferred
            
            
            5,797,651
            
            
            
            —
            
            
            
            5,797,651
            
            
            
            5,797,651Series
      J Preferred
            
            
            708,800
            
            
            
            —
            
            
            
            708,800
            
            
            
            708,800Total
            
            $
            7,684,251
            
            
            
            —
            
            
            $
            7,684,251
            
            
            $
            7,684,251





Subject
to the contractual limitation on total beneficial ownership by Laurus to 9.99%
of our common stock, the Series G, I and J Preferred Stock are convertible
into a total of 20,065,472 shares of Common Stock.




Working
Capital Line





The terms
of the 2006 Working Capital Line are described in “Liquidity and Financial
Condition” above.  As of June 30, 2008, $649,911 was outstanding under the
2006 Working Capital Line.




$750,000
Note




The terms
of the $750,000 Note are described in “Liquidity and Financial Condition”
above.  As of June 30, 2008, $750,000 was outstanding under the
$750,000 Note.




$7.5
million Term Note




The terms
of $7.5 million Term Noteare described in
“Liquidity and Financial Condition” above.  As of June 30, 2008, $7,500,000
was outstanding under the $7.5 million Term Note.




20





Net
Operating Loss Carryforward




At
December 31, 2007, we had federal net operating loss (NOL) carry-forwards of
approximately $60 million. These NOLs expire incrementally through
2027.  Realization of future tax benefits from utilization of our net
operating loss carry-forwards for income tax purposes is limited by changes in
ownership in 1990, 1992 and 1993. Of the above net operating loss carryforwards,
annual limitations of approximately $658,000 apply to approximately $2.5 million
of Company and acquired company loss carryforwards. Approximately
$57.7 million of the net operating loss carryforwards are not subject to
annual limitations. Due to our taxable losses, we have been unable to take
advantage of the benefits of these NOLs. The realization of the benefits of
these NOLs is dependent upon our recognition of taxable income in the future
prior to the expiration of the NOLs.




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, goodwill and intangible assets, beneficial conversion
feature and warrant valuation, accounts receivable, deferred taxes 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




For the
three months ended June 30, 2008 and 2007, approximately 68.3% and 44.6%,
respectively, of the Company’s revenues were contract revenues, with the
remainder BriteLight sales, product sales, and field service revenues from
Biosentry. For the six months ended June 30, 2008 and 2007, approximately 30.8%
and 55.4%, respectively, of the Company’s revenues were contract revenues, with
the remainder BriteLight sales, product sales, and field service revenues from
Biosentry. Contract revenues are recognized based on the percentage of
completion method wherein income is recognized pro-rata over the life of the
contract based on the ratio of total incurred costs to anticipated total costs
of the contract. Actual costs could differ from these estimated costs.
Reimbursable or recoverable general and administrative (G&A) costs are
charged to G&A expense as incurred. Estimated losses are fully charged to
operations when identified. Product revenues are recognized upon the later of
when the product is shipped or when additional contractual requirements related
to the sale are completed.





Intangible
Assets





Capitalized
patent costs are amortized over ten years, and other intangible assets are
amortized over not more than five years. Capitalized patent costs are reviewed
quarterly for utilization and recoverability.  The Company
periodically evaluates the carrying value of its long-lived assets and applies
the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets.” Under SFAS No. 144, long-lived assets and certain
identifiable assets to be held and used in operations are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be fully recoverable. An impairment loss is recognized if the
sum of the expected long-term, undiscounted cash flows is less than the carrying
amount of the long-lived assets being evaluated. Management believes the
carrying value of its long-lived assets does not exceed their estimated net
realizable value at June 30, 2008.




Beneficial
Conversion Feature and Warrant Valuation




In
accordance with Financial Accounting Standards Board (FASB) Emerging Issues
Task Force Issue (EITF) No. 98-5 and FASB EITF No. 00-27, the
Company records a beneficial conversion feature (BCF) related to the
issuance of convertible preferred stock and convertible debt that have
conversion features at fixed rates that are in the money when issued and records
the fair value of warrants issued with those instruments. The BCF for the
convertible instruments is recognized and measured by allocating a portion of
the proceeds to warrants and as a reduction to the carrying amount of the
convertible instrument equal to the intrinsic value of the conversion features,
both of which are credited to paid-in-capital. The Company calculates the fair
value of warrants issued with the convertible instruments using the Black
Scholes valuation method.




For
convertible preferred stock and related warrants, the recorded discount is
recognized as a dividend from the date of issuance to the earlier of the
redemption dates or the conversion dates using the effective yield method. For
convertible debt and related warrants, the recorded discount is recognized as
interest expense from the date of issuance to the earlier of the maturity date
of the debt or the conversion dates using the effective yield
method.




21




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 amounts
of potential losses.




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.





Derivatives




Statement
of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for
Derivative Instruments and Hedging Activities” requires measurement of certain
derivative instruments at their fair value for accounting purposes. In
determining the appropriate fair value, we use the Black-Scholes Option Pricing
Formula (“Black-Scholes model”) where applicable. Derivative liabilities are
adjusted to reflect fair value at each period end, with any increase or decrease
in the fair value being recorded in consolidated statements of operations as
adjustments to fair value of derivatives.




Stock-Based
Compensation Expense




Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123(R), using the modified prospective transition method and
therefore has not restated results for prior periods. Under this transition
method, the Company recognizes compensation expense for all stock options
granted prior to, but not yet vested as of January 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of
SFAS No. 123. Stock-based compensation expense for all stock-based
compensation awards granted after January 1, 2006 is based on the grant
date fair value estimated in accordance with the provisions of SFAS
No. 123(R). Prior to the adoption of SFAS No. 123(R) on
January 1, 2006, the Company recognized stock-based compensation expense in
accordance with APB No. 25, and provided proforma disclosure in accordance
with SFAS No. 123, as if the fair value method defined by SFAS No. 123
had been applied to its stock-based compensation. Under the fair value
recognition provisions of SFAS No. 123(R), the Company recognizes
stock-based compensation expense for those shares expected to vest on a
straight-line basis over the requisite service period of the award.




The
Company uses the Black Scholes option valuation model to estimate the fair value
of its stock options at the date of grant. The Company uses historical data to
estimate the expected price volatility, the expected option life and the
expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant for the estimated life of the option.
Determining the appropriate fair value model and calculating the fair value of
share-based payment awards requires the input of subjective assumptions. The
assumptions used in calculating the fair value of share-based payment awards
represent management’s best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if
factors change and we use different assumptions, our stock-based compensation
expense could be materially different in the future. See Note 3 to the
Consolidated Financial Statements for a further discussion on stock-based
compensation.




Item 3. Quantitative and Qualitative Disclosures about Market
Risk.




The
Company is required to provide quantitative and qualitative information about
market risks (interest rate risk, foreign currency risk, commodity price risk
and other relevant market risks) to the extent such risks are material to the
Company. The Company has no investments in derivative financial instruments or
in commodities. We are exposed to interest rate risk with borrowings under our
$7.5 million Term Note and Preferred Stock, both of which bear interest and
dividends, respectively, based on the prime rate. As of June 30, 2008, we had
$7,500,000, $750,000 and $649,911 outstanding under our $7.5 million and
$750,000 Term Notes and the 2006 Working Capital Line, respectively, and
$7,684,251 of Preferred Stock outstanding. An immediate change of one percentage
point in the prime rate would have caused an increase or decrease in interest
and dividends, net of money market interest, of approximately $165,000 on an
annual basis.




Item 4. Controls and Procedures.




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified by the SEC
and that such information is accumulated and communicated to management,
including our CEO and CFO, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, we recognize that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
  Management,
with participation by our CEO and CFO, has designed the Company’s disclosure
controls and procedures to provide reasonable assurance of achieving the desired
objectives. As required by SEC Rule 13a-15(b), in connection with filing
our Quarterly Report on Form 10-Q, management conducted an evaluation, with the
participation of our CEO and CFO, of the effectiveness of the design and
operation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as of June 30, 2008, the end of the period covered by the report.
  Based
upon that evaluation as of June 30, 2008, and the evaluation conducted by
management in connection with the audit of the Company’s financial statements
for the year ended December 31, 2007, we identified material weaknesses in
our internal control over financial reporting which still existed as of
June 30, 2008. A material weakness is “a significant deficiency, or a
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected by us in a timely manner.” As a
result of these material weaknesses, our CEO and CFO concluded that our
disclosure controls and procedures were not effective at the reasonable
assurance level as of June 30, 2008.
  22
  As of
December 31, 2007, we identified the following control deficiencies and the
following remediation’s have been taken as of June 30, 2008:
  ·
                As
      a small company, we historically employed a very small staff in our
      accounting and finance department. As a result, we did not have a
      sufficient complement of personnel with an appropriate level of accounting
      knowledge and expertise during the year ended December 31,
      2007.  As of the date of this Report, we have added an
      additional executive to aid in the transaction approval process, and we
      have hired additional accounting staff to aid in the segregation of
      duties. Our existing staff has gained accounting knowledge through
      additional experience however we feel a material weakness still exists as
      of June 30, 2008 due to the need of a qualified individual who has
      experience with public company accounting and
  reporting.
 
 ·
                As
      of December 31, 2007 we were in the process of implementing appropriate
      policies and procedures to allow for timely completion of financial
      control and reporting processes.  As of June 30, 2008, the
      Company has added additional policies, additional accounting personnel and
      has added review procedures by the CFO and CEO to contribute to the timely
      completion of financial control and reporting
  processes.
 
 ·
                As
      of December 31, 2007 there was a need for a stronger internal control
      environment.  As of June 30, 2008, the Company has added
      additional corporate control policies, additional accounting personnel and
      has added review procedures by the CFO and CEO to develop a stronger
      internal control environment.
 
 ·
                As
      of December 31, 2007 there were weaknesses identified in the Company’s
      revenue recognition and sales cut-off procedures.  As of June
      30, 2008, the Company has added additional corporate control policies,
      additional accounting personnel and has added review procedures by the CFO
      and CEO to complement their revenue recognition and sales-cut off
      procedures.
  Each of
these control deficiencies could result in a misstatement of account balances or
disclosures that would result in a material misstatement to our financial
statements that would not be prevented or detected. Accordingly, we have
determined that each of the control deficiencies described above constitutes a
material weakness.
  In light
of these material weaknesses, we performed additional analyses and procedures in
order to conclude that our consolidated financial statements for the year ended
December 31, 2007, as well as our condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q for the three and
six month periods ended June 30, 2008, were fairly stated in accordance
US GAAP for such financial statements. Accordingly, management believes
that despite our material weaknesses, our condensed consolidated financial
statements for the year ended December 31, 2007 as well as our condensed
consolidated financial statements included in this Quarterly Report on
Form 10-Q, are fairly stated, in all material respects, in accordance with
US GAAP.




Changes
in Internal Control Over Financial Reporting





The Chief
Executive Officer and President and the Chief Financial Officer conducted an
evaluation of our internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) ("Internal Control") to determine whether any
changes in Internal Control occurred during the quarter ended June 30, 2008,
that have materially affected or which are reasonably likely to materially
affect Internal Control. Based on that evaluation, despite the presence of some
material weaknesses, the Company has concluded that improvements in
internal control procedures occurred during the past six month
period.




23





PART
II — OTHER INFORMATION





Item 1. Legal Proceedings




The
Company has been sued by Midtown Partners & Co., LLC (“Midtown”) for payment
of fees allegedly owed for services Midtown claims it performed associated with
the arrangement of the $7.5 million Term Note with Laurus. The Company
categorically denies any liability and is working on a settlement to avoid
potential further costs associated with litigation.





Item 1A. Risk
Factors




In
addition to the risk factors described below, see “Risk Factors” in Part I,
Item 1A of our Form 10-K for the year ended December 31, 2007 for a
description of other risk factors relevant to the Company’s business and
investment in the Company’s securities.




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.




Our cash
requirements have been and will continue to be significant. Our net cash used
from continuing operations for the six months ended June 30, 2008 and for the
years ended December 31, 2007 and 2006 were $(2,977,578), $(2,600,442) and
$(12,440,650), respectively. These negative cash flows are primarily related to
operating losses and fluctuations in working capital items. As disclosed
elsewhere in this report, we will continue to use cash in 2008 and the Company
will require additional borrowings under its $7.5 million Term Note and
additional financing for working capital requirements through 2008, to continue
the development of some of our emerging new products and to continue our
progression toward commercialization of all products. Although we have been able
to draw down under the $7.5 million Term Note to date there is no assurance that
Laurus will continue to release additional funds beyond late September,
2008.  The Company is continuing to pursue other opportunities to
raise additional funds in the future. Although the Company has been successful
in raising funds in the past, there can be no assurance that we will be able to
successfully raise additional funds in the future. The failure to raise
additional capital will have a significant adverse effect on the Company’s
financial condition and its operations.




Our
continuing decline in revenues and our net and operating losses are significant
and could have an adverse impact on our stock price.




Our
revenues, exclusive of discontinued operations, for the six months ended June
30, 2008 and for the years ended December 31, 2007 and 2006 were $212,961,
$869,662 and $1,998,183, respectively. Our net loss for the six months ended
June 30, 2008 and for the years ended December 31, 2007 and 2006 was
$28,270,656, $1,623,906 and $13,106,681, respectively. Failure to achieve
significant sales of our new products in the future and continued losses will
further reduce our shareholders’ equity and will have a significant adverse
impact on our stock price.




If
our BioSentry business is unsuccessful, it will cause a significant adverse
effect on our financial condition and significant accounting
write-offs.





If our
BioSentry business is unsuccessful over the next year in either selling
significant numbers of BioSentry units or in arranging significant partnering
arrangements, we will have to consider curtailing the BioSentry operations which
would result in further reductions in BioSentry personnel and the write-down of
a significant portion of the BioSentry assets.





Weaknesses in our internal control
over financial reporting could result in material misstatements in our financial
statements.




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal controls are processes designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with U.S. generally
accepted accounting principles. A material weakness is a control deficiency, or
combination of control deficiencies, such that there is a reasonable possibility
that a material misstatement of annual or interim financial statements will not
be prevented or detected in a timely manner.




Material
weaknesses in our internal control over financial reporting and in our
disclosure controls existed as of December 31, 2007 and continue to exist,
but to a lesser degree, as of June 30, 2008.  The Company has added to
the segregation of duties by adding additional executives in the transaction
approval process, improved timely completion of financial control and reporting
activities through additional staff and increased experience of existing staff
and increased its formal internal control environment through additional
corporate control procedures and accounting staff. Management of the Company
believes that these material weaknesses still exist however, due to the smaller
size of the Company’s accounting staff. However, the relatively small size of
the Company’s accounting staff may prevent the achievement of completely
adequate controls in the future, such as segregation of duties, due to the
cost/benefit of such remediation. See “Part I -Item 4 — Controls and
Procedures” for a more complete description of this material
weakness.





We cannot
assure you that additional control deficiencies or material weaknesses will not
be identified by our management or independent registered public accounting firm
in the future. In addition, even after having taken steps to remediate these
weaknesses, our internal controls may not prevent all potential errors or fraud.
Any control system, no matter how well designed and implemented, can only
provide reasonable and not absolute assurance that the objectives of the control
system will be achieved. Failure to achieve adequate internal control over
financial reporting could adversely affect our business operations and financial
position.




If
our outstanding options and warrants are exercised and if our preferred stock is
converted it will result in substantial dilution.




As
of June 30, 2008, there were 136,891,372 shares of common stock subject to
issuance upon exercise of outstanding options and warrants. In addition, as of
June 30, 2008, our Series G, I and J Preferred Stock is convertible into a total
of 20,065,472 shares of Common Stock at conversion prices ranging from $0.1022
to 2.00 per share, subject to a contractual limitation on total beneficial
ownership by Laurus of 9.99% of our Common Stock.








To the
extent that outstanding options and warrants are exercised prior to their
expiration dates, additional funds may be paid to us at the expense of dilution
to the interests of our stockholders. Moreover, the terms upon which we will be
able to obtain additional equity capital may be adversely affected since the
holders of outstanding options and warrants and other securities can be expected
to exercise or convert them at a time when we would, in all likelihood, be able
to obtain any needed capital on terms more favorable to us than those provided
in such securities. The sale of the shares issued upon exercise of our
outstanding warrants and options and conversion of our Preferred Stock could
adversely affect the market price of our common stock.




Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.


(a)
            
            On
      March 29, 2008, the Company’s Board of Directors approved the grant of a
      total of 2,400,000 warrants to purchase the Company’s Common Stock as part
      of compensation to Investor Relations International, Inc (“IRI”). The
      warrants are exercisable at prices from $0.10 to $0.75 per share and vest
      immediately.


All
of the foregoing transactions were exempt under Section 4(2) of the
Securities Act of 1933.





Item
4.  Submission of Matters to a Vote of Security Holders




None




Item 6.
Exhibits.


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
    2002.Exhibit
      32.1
            
            Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act 2002.






24




SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




JMAR
      TECHNOLOGIES, INC.August
      14, 2008
            By:
            /s/
      C. Neil BeerC.
      Neil Beer, Chief Executive OfficerPursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has duly caused this report to be signed on its behalf by the undersigned
      thereunto duly authorized.August
      14, 2008
            By:
            /s/  Edward
      C. HallEdward
      C. Hall, Chief Financial Officer