##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549-1004
 FORM 10-Q
 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended June 30, 2006
Commission File Number 1-10515
 JMAR TECHNOLOGIES, INC.
  Delaware
    
    68-0131180(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. employer
identification number)
 (Address, including zip code and telephone number including
  þ o
  o o þ
  o þ




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##### 



INDEX
 Page #PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  June 30, 2006 (unaudited) and December 31, 2005
    
    
    2Consolidated Statements of Operations (unaudited)  Three months and six months ended June 30, 2006 and 2005
    
    
    3Consolidated Statements of Cash Flows (unaudited)  Six months ended June 30, 2006 and 2005
    
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONItem 1. N/AItem 1A. Risk Factors
    
    
    32Item 2. N/AItem 3. N/AItem 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 5. N/AItem 6. Exhibits
    
    
    34EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 As of June 30, 2006 and December 31, 2005
 June 30, 2006
    
    
    December 31, 2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    3,389,619
    
    
    $
    5,490,789Accounts receivable
    
    
    1,687,097
    
    
    
    1,640,369Inventories
    
    
    438,370
    
    
    
    435,905Prepaid expenses and other
    
    
    387,989
    
    
    
    489,691Total current assets
    
    
    5,903,075
    
    
    
    8,056,754Property and equipment, net
    
    
    1,509,596
    
    
    
    1,756,452Intangible assets, net
    
    
    1,717,530
    
    
    
    1,708,038Other assets
    
    
    416,648
    
    
    
    380,768Goodwill
    
    
    4,415,932
    
    
    
    4,415,932TOTAL ASSETS
    
    $
    13,962,781
    
    
    $
    16,317,944LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,554,708
    
    
    $
    1,393,272Accrued liabilities
    
    
    808,903
    
    
    
    574,652Accrued payroll and related costs
    
    
    693,970
    
    
    
    914,195Billings in excess of costs incurred
    
    
    63,187
    
    
    
    774,675Current portion of notes payable and other liabilities, net
    
    
    1,624,056
    
    
    
    162,351Deferred rent
    
    
    190,807
    
    
    
    201,008Total current liabilities
    
    
    4,935,631
    
    
    
    4,020,153Notes payable and other long-term liabilities, net of current portion
    
    
    604,055
    
    
    
    773,222Redeemable convertible preferred stock, 785,000 shares issued and
outstanding as of June 30, 2006 and December 31, 2005, net of
unamortized discount of $2,738,463 and $880,659, respectively
    
    
    5,111,537
    
    
    
    6,969,341Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
785,000 shares issued and outstanding as of June 30, 2006 and
December 31, 2005 included in redeemable convertible
preferred stock above
    
    
    
    
    
    
    Common stock, $.01 par value; 80,000,000 shares authorized;
39,349,688 shares issued and outstanding as of June 30, 2006
and 38,823,158 shares issued and outstanding as of December
31, 2005
    
    
    393,497
    
    
    
    388,231Additional-paid in capital
    
    
    83,844,905
    
    
    
    79,589,931Accumulated deficit
    
    
    (80,926,844
    )
    
    
    (75,422,934
    )Total stockholders equity
    
    
    3,311,558
    
    
    
    4,555,228TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    13,962,781
    
    
    $
    16,317,944
  2




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JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months Ended June 30, 2006 and 2005
 and Six Months Ended June 30, 2006 and 2005
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30, 2006
    
    
    June 30, 2005
    
    
    June 30, 2006
    
    
    June 30, 2005Revenues
    
    $
    3,063,156
    
    
    $
    2,714,680
    
    
    $
    5,444,555
    
    
    $
    4,582,011Costs of revenues
    
    
    2,572,515
    
    
    
    2,043,021
    
    
    
    4,606,573
    
    
    
    3,349,896Gross profit
    
    
    490,641
    
    
    
    671,659
    
    
    
    837,982
    
    
    
    1,232,115Operating expenses:Selling, general and administrative
    
    
    1,981,679
    
    
    
    1,704,713
    
    
    
    3,553,704
    
    
    
    3,116,014Research and development
    
    
    977,232
    
    
    
    595,495
    
    
    
    1,977,912
    
    
    
    1,397,477Asset writedowns
    
    
    31,868
    
    
    
    99,218
    
    
    
    39,067
    
    
    
    99,218Total operating expenses
    
    
    2,990,779
    
    
    
    2,399,426
    
    
    
    5,570,683
    
    
    
    4,612,709Loss from operations
    
    
    (2,500,138
    )
    
    
    (1,727,767
    )
    
    
    (4,732,701
    )
    
    
    (3,380,594
    )Interest and other income
    
    
    17,083
    
    
    
    43,815
    
    
    
    51,120
    
    
    
    81,106Interest and other expense
    
    
    (105,948
    )
    
    
    (73,844
    )
    
    
    (167,659
    )
    
    
    (149,757
    )Net loss
    
    
    (2,589,003
    )
    
    
    (1,757,796
    )
    
    
    (4,849,240
    )
    
    
    (3,449,245
    )Deemed preferred stock dividends
    
    
    (305,723
    )
    
    
    (432,186
    )
    
    
    (654,670
    )
    
    
    (813,804
    )Loss applicable to common stock
    
    $
    (2,894,726
    )
    
    $
    (2,189,982
    )
    
    $
    (5,503,910
    )
    
    $
    (4,263,049
    )Basic and diluted loss per share
applicable to common
stock
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )
    
    $
    (0.12
    )Shares used in computation of basic
and diluted loss per share
    
    
    39,340,328
    
    
    
    35,199,784
    
    
    
    39,321,380
    
    
    
    34,454,218
  3




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JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Six Months Ended June 30, 2006 and 2005
 (Unaudited)
 2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (4,849,240
    )
    
    $
    (3,449,245
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation, amortization and debt discount
    
    
    338,887
    
    
    
    314,771Services received in exchange for common stock or options
    
    
    241,807
    
    
    
    55,700Asset write-downs
    
    
    39,067
    
    
    
    99,218Change in assets and liabilities:Accounts receivable
    
    
    (46,728
    )
    
    
    657,675Inventories
    
    
    (2,465
    )
    
    
    7,361Prepaid expenses and other
    
    
    (70,418
    )
    
    
    495,903Billings in excess of costs incurred
    
    
    (711,488
    )
    
    
    (500,039
    )Accounts payable and accrued liabilities
    
    
    180,750
    
    
    
    (221,151
    )Changes in net assets and liabilities of discontinued
operations
    
    
    
    
    
    
    (214,643
    )Net cash used in operating activities
    
    
    (4,879,828
    )
    
    
    (2,754,450
    )Cash flows from investing activities:Capital expenditures
    
    
    (32,480
    )
    
    
    (179,029
    )Payments of note payable of discontinued operations
    
    
    
    
    
    
    (35,000
    )Additions of intangible assets and other assets
    
    
    (43,591
    )
    
    
    (133,988
    )Net cash used in investing activities
    
    
    (76,071
    )
    
    
    (348,017
    )Cash flows from financing activities:Net proceeds from the issuance of common stock
    
    
    1,336,474
    
    
    
    3,866,168Cash payments of preferred stock dividends
    
    
    (302,938
    )
    
    
    (319,806
    )Preferred stock redemptions
    
    
    
    
    
    
    (233,333
    )Net borrowings under line of credit
    
    
    1,821,193
    
    
    
    Net cash provided by financing activities
    
    
    2,854,729
    
    
    
    3,313,029Net increase (decrease) in cash and cash equivalents
    
    
    (2,101,170
    )
    
    
    210,562Cash and cash equivalents, beginning of period
    
    
    5,490,789
    
    
    
    6,599,588Cash and cash equivalents, end of period
    
    $
    3,389,619
    
    
    $
    6,810,150Cash paid for interest
    
    $
    28,744
    
    
    $
    14,934
   4




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




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




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




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  (3) Stock-Based Compensation Plans
  Three Months Ended
    
    
    Six Months Ended JuneJune 30, 2005
    
    
    30, 2005Loss applicable to common stock:
    
    As Reported
    
    $
    (2,189,982
    )
    
    $
    (4,263,049
    )Stock based compensation expense
    
    
    
    
    (140,802
    )
    
    
    (262,934
    )Proforma
    
    $
    (2,330,784
    )
    
    $
    (4,525,983
    )Basic and diluted loss per share:
    
    As Reported
    
    $
    (0.06
    )
    
    $
    (0.12
    )Stock based compensation expense
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )Proforma
    
    $
    (0.07
    )
    
    $
    (0.13
    )
   8




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  Wtd. Avg.Remaining
    
    AggregateWtd. Avg.
    
    Contractual
    
    IntrinsicShares
    
    Exercise Price
    
    Life
    
    ValueOutstanding at
January 1, 2006
    
    
    3,162,610
    
    
    $
    2.11Granted
    
    
    344,095
    
    
    $
    0.79Exercised
    
    
    (65,700
    )
    
    $
    1.09Forfeited
    
    
    (966,200
    )
    
    $
    1.26Outstanding at June
30, 2006
    
    
    2,474,805
    
    
    $
    2.58
    
    
    5.2 years
    
    $
    Vested and expected
to vest
    
    
    2,422,804
    
    
    $
    2.61
    
    
    5.1 years
    
    $
    Exercisable at June
30, 2006
    
    
    1,736,176
    
    
    $
    2.58
    
    
    3.6 years
    
    $
    
  Weighted-averageShares
    
    grant-date fair valueNonvested at December 31, 2005
    
    
    815,657
    
    
    $
    1.21Granted
    
    
    344,095
    
    
    $
    0.55Vested
    
    
    (216,123
    )
    
    $
    1.26Forfeited
    
    
    (205,000
    )
    
    $
    0.96Non-vested at June 30, 2006
    
    
    738,629
    
    
    $
    0.97
  (4) Accounts Receivable
  June 30, 2006
    
    
    December 31, 2005(Unaudited)Billed
    
    $
    1,297,546
    
    
    $
    1,240,922Unbilled
    
    
    608,802
    
    
    
    399,4471,906,348
    
    
    
    1,640,369Less-allowance
for doubtful accounts
    
    
    (219,251
    )
    
    
    $
    1,687,097
    
    
    $
    1,640,369
  9




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  (5) Inventories
  June 30, 2006
    
    
    December 31, 2005(Unaudited)Raw materials, components and sub-assemblies
    
    $
    170,730
    
    
    $
    194,539Work-in-process
    
    
    14,351
    
    
    
    77,692Finished goods and demonstration units
    
    
    253,289
    
    
    
    163,674$
    438,370
    
    
    $
    435,905
 (6) Property and Equipment
  June 30, 2006
    
    
    December 31, 2005(Unaudited)Equipment and machinery
    
    $
    2,904,750
    
    
    $
    2,919,640Software
    
    
    599,752
    
    
    
    590,446Furniture and fixtures
    
    
    382,506
    
    
    
    388,234Leasehold improvements
    
    
    871,403
    
    
    
    862,0504,758,411
    
    
    
    4,760,370Less-accumulated depreciation
    
    
    (3,248,815
    )
    
    
    (3,003,918
    )$
    1,509,596
    
    
    $
    1,756,452
  (7) Segment Information
  Research Division/Vermont Operations
  10




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
    Microelectronics Division
  Sensor Products Group
 TM
  11




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  SensorResearch
    
    Vermont
    
    Microelectronics
    
    ProductsDivision
    
    Operations
    
    Division
    
    Group
    
    Corporate
    
    TotalSix Months Ended June 30, 2006:Revenues
    
    $
    865,742
    
    
    $
    1,618,285
    
    
    $
    2,937,127
    
    
    $
    23,401
    
    
    $
    
    
    
    $
    5,444,555Operating loss
    
    
    (1,147,759
    )
    
    
    (673,387
    )
    
    
    (480,102
    )
    
    
    (2,220,759
    )
    
    
    (210,694
    )
    
    
    (4,732,701
    )Asset writedowns
    
    
    (34,420
    )
    
    
    
    
    
    
    
    
    
    
    (4,647
    )
    
    
    
    
    
    
    (39,067
    )Total assets
    
    
    1,041,676
    
    
    
    5,132,441
    
    
    
    1,359,919
    
    
    
    1,734,339
    
    
    
    4,694,406
    
    
    
    13,962,781Goodwill
    
    
    
    
    
    
    4,415,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,415,932Capital expenditures
    
    
    
    
    
    
    1,242
    
    
    
    4,056
    
    
    
    9,945
    
    
    
    17,237
    
    
    
    32,480Depreciation & amortization
    
    
    49,347
    
    
    
    14,448
    
    
    
    75,695
    
    
    
    11,951
    
    
    
    187,446
    
    
    
    338,887Three Months Ended June 30, 2006:Revenues
    
    
    353,539
    
    
    
    926,364
    
    
    
    1,773,253
    
    
    
    10,000
    
    
    
    
    
    
    
    3,063,156Operating loss
    
    
    (515,905
    )
    
    
    (389,177
    )
    
    
    (203,004
    )
    
    
    (1,297,320
    )
    
    
    (94,732
    )
    
    
    (2,500,138
    )Asset writedowns
    
    
    (30,216
    )
    
    
    
    
    
    
    
    
    
    
    (1,652
    )
    
    
    
    
    
    
    (31,868
    )Goodwill
    
    
    
    
    
    
    4,415,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,415,932Capital expenditures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,484
    
    
    
    1,484Depreciation & amortization
    
    
    24,714
    
    
    
    7,233
    
    
    
    40,494
    
    
    
    6,222
    
    
    
    107,681
    
    
    
    186,344Six Months Ended June 30, 2005:Revenues
    
    
    1,140,332
    
    
    
    1,714,224
    
    
    
    1,727,455
    
    
    
    
    
    
    
    
    
    
    
    4,582,011Operating loss
    
    
    (984,540
    )
    
    
    (465,277
    )
    
    
    (652,482
    )
    
    
    (1,179,068
    )
    
    
    (99,227
    )
    
    
    (3,380,594
    )Asset writedowns
    
    
    (99,218
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99,218
    )Depreciation & amortization
    
    
    50,654
    
    
    
    14,320
    
    
    
    49,616
    
    
    
    3,534
    
    
    
    196,647
    
    
    
    314,771Total assets
    
    
    1,665,109
    
    
    
    4,318,915
    
    
    
    1,746,190
    
    
    
    2,926,827
    
    
    
    7,025,274
    
    
    
    17,682,315Goodwill
    
    
    
    
    
    
    4,415,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,415,932Capital expenditures
    
    
    9,275
    
    
    
    50,221
    
    
    
    3,630
    
    
    
    12,277
    
    
    
    103,626
    
    
    
    179,029Three Months Ended June 30, 2005:Revenues
    
    
    660,903
    
    
    
    1,076,966
    
    
    
    976,811
    
    
    
    
    
    
    
    
    
    
    
    2,714,680Operating loss
    
    
    (538,165
    )
    
    
    (162,410
    )
    
    
    (306,333
    )
    
    
    (662,538
    )
    
    
    (58,321
    )
    
    
    (1,727,767
    )Asset writedowns
    
    
    (99,218
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99,218
    )Depreciation & amortization
    
    
    25,842
    
    
    
    6,718
    
    
    
    25,683
    
    
    
    1,980
    
    
    
    96,523
    
    
    
    156,746Capital expenditures
    
    
    7,560
    
    
    
    50,221
    
    
    
    3,630
    
    
    
    10,760
    
    
    
    59,994
    
    
    
    132,165
   (8) Line of Credit and Notes Payable
  12




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
   Net Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net BalanceDecember 31,
    
    
    Discount
    
    
    Exchange for
    
    
    Amendment
    
    
    at June 30,Series
    
    2005
    
    
    Amortization
    
    
    Series I
    
    
    Fair Value
    
    
    2006F
    
    $
    1,747,948
    
    
    $
    49,515
    
    
    $
    (1,797,463
    )
    
    $
    
    
    
    $
    G
    
    
    1,754,615
    
    
    
    60,246
    
    
    
    (465,210
    )
    
    
    
    
    
    
    1,349,651H
    
    
    3,466,778
    
    
    
    105,744
    
    
    
    (3,572,522
    )
    
    
    
    
    
    
    I
    
    
    
    
    
    
    136,722
    
    
    
    5,835,195
    
    
    
    2,210,031
    
    
    
    3,761,886$
    6,969,341
    
    
    $
    352,227
    
    
    $
    
    
    
    $
    2,210,031
    
    
    $
    5,111,537
  Net Balance at
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net BalanceDecember 31,
    
    
    Amendment Fair
    
    
    Discount
    
    
    
    
    
    
    at June 30,Series
    
    2004
    
    
    Value
    
    
    Amortization
    
    
    Redemptions
    
    
    2005E
    
    $
    752,306
    
    
    $
    79,390
    
    
    $
    182,056
    
    
    $
    83,333
    
    
    $
    771,639F
    
    
    1,812,092
    
    
    
    215,717
    
    
    
    90,042
    
    
    
    37,500
    
    
    
    1,648,917G
    
    
    1,844,699
    
    
    
    234,696
    
    
    
    86,167
    
    
    
    37,500
    
    
    
    1,658,670H
    
    
    3,678,177
    
    
    
    537,000
    
    
    
    189,113
    
    
    
    75,000
    
    
    
    3,255,290$
    8,087,274
    
    
    $
    1,066,803
    
    
    $
    547,378
    
    
    $
    233,333
    
    
    $
    7,334,516
   15




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##### Table of Contents



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




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
 June 30, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Intangible
    
    
    Carrying
    
    
    Accumulated
    
    
    IntangibleAmount
    
    
    Amortization
    
    
    Assets
    
    
    Amount
    
    
    Amortization
    
    
    AssetsPatents
    
    $
    983,045
    
    
    $
    503,411
    
    
    $
    479,634
    
    
    $
    968,768
    
    
    $
    498,626
    
    
    $
    470,142Licenses
    
    
    1,256,925
    
    
    
    19,029
    
    
    
    1,237,896
    
    
    
    1,256,925
    
    
    
    19,029
    
    
    
    1,237,896$
    1,717,530
    
    
    
    
    
    
    
    
    
    
    $
    1,708,038
    For the Year Ended
    
    Estimated AmortizationDecember 31,
    
    Expense2006
    
    $
    196,9472007
    
    
    395,0032008
    
    
    393,0512009
    
    
    393,0512010
    
    
    76,3802011
    
    
    47,592Beyond
    
    
    215,506$
    1,717,530
 (12) Microelectronics Division
   17




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  18




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##### Table of Contents



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




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##### Table of Contents



Standard Products
 TM
 TM
 20




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##### Table of Contents



TM
  New Products Under Development
   Results of Operations
 Revenues
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Research Division
    
    $
    353,539
    
    
    $
    660,903
    
    
    $
    865,742
    
    
    $
    1,140,332Vermont Operations
    
    
    926,364
    
    
    
    1,076,966
    
    
    
    1,618,285
    
    
    
    1,714,224Microelectronics Division
    
    
    1,773,253
    
    
    
    976,811
    
    
    
    2,937,127
    
    
    
    1,727,455Sensor Products Group
    
    
    10,000
    
    
    
    
    
    
    
    23,401
    
    
    
    $
    3,063,156
    
    
    $
    2,714,680
    
    
    $
    5,444,555
    
    
    $
    4,582,011
  21




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##### Table of Contents



Losses
   Gross Margins
 Selling, General and Administrative (SG&A).
 Research, Development and Engineering Program (RD&E).
 
    
    Customer-funded RD&E costs incurred, primarily related to the DARPA Contract and the
NAVAIR Contract, are included in Costs of Revenues, and totaled $1,125,500 and $901,447
for the three months ended June 30, 2006 and 2005, respectively, and $1,917,468 and
$1,351,528 for the six-month periods ended June 30, 2006 and 2005, respectively. The
increase in customer-funded RD&E expenditures for the three and six months ended June 30,
2006 primarily consists of an increase of $344,353 and $658,045, respectively, related to
the NAVAIR Contract.
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##### Table of Contents




    
    Company-funded RD&E costs associated with product development are shown in Operating
Expenses and totaled $977,232 and $595,495 for the three months ended June 30, 2006 and
2005, respectively, and $1,977,912 and $1,397,477 for the six months ended June 30, 2006
and 2005, respectively. The increase in 2006 is primarily due to product development
related to BioSentry.
   Interest and Other Expense.
 Preferred Stock Dividends.
 Liquidity and Financial Condition
 General.
 23




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##### Table of Contents



Sale of Common Stock
   Issuances of Preferred Stock.
 24




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##### Table of Contents



Working Capital Line.
 25




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##### Table of Contents



Letter of Credit
 Cash Used in Operations
 Cash Used in Investing Activities
 Cash Provided by Financing Activities
 26




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##### Table of Contents



Stockholders Equity.
 Commitments
  2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    TotalLeases
    
    $
    351,512
    
    
    $
    715,412
    
    
    $
    530,495
    
    
    $
    373,797
    
    
    $
    371,233
    
    
    $
    715,514
    
    
    $
    3,057,963Deferred
compensation
    
    
    199,361
    
    
    
    275,297
    
    
    
    185,955
    
    
    
    56,003
    
    
    
    
    
    
    
    
    
    
    
    716,616$
    550,873
    
    
    $
    990,709
    
    
    $
    716,450
    
    
    $
    429,800
    
    
    $
    371,233
    
    
    $
    715,514
    
    
    $
    3,774,579
  Preferred Stock Redemption Obligations
  GrossAmountOutstandingat June
    
    
    Scheduled RedemptionsDescription
    
    30, 2006
    
    
    2007
    
    
    2008
    
    
    TotalSeries G Preferred
    
    $
    1,456,020
    
    
    $
    306,042
    
    
    $
    1,149,978
    
    
    $
    1,456,020Series I Preferred
    
    $
    6,393,980
    
    
    
    610,890
    
    
    
    5,783,090
    
    
    
    6,393,980$
    916,932
    
    
    $
    6,933,068
    
    
    $
    7,850,000
 Line of Credit
  27




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##### Table of Contents



License Agreements
    28




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##### Table of Contents



Net Operating Loss Carryforward
  Critical Accounting Policies and Estimates
   Revenues
  Goodwill and Intangible Assets
   29




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1A. Risk Factors
  Our cash requirements are significant and if we do not generate sufficient funds from operations or
obtain additional financing we may be unable to continue our present product development
activities.
   The failure to maintain shareholders equity above $2.5 million or market capitalization of $35
million or to sustain a minimum share price of $1.00 per share could result in delisting of our
shares on the NASDAQ Stock Market.
  32




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##### Table of Contents



A substantial portion of our current revenue depends on sales to a few customers.
  Recent management changes could create uncertainty among our customers, employees and shareholders.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  (a)
    
    The following directors were elected: C. Neil Beer (29,300,996
affirmative votes and 1,742,560 votes withheld); Charles A. Dickinson (29,303,474
affirmative votes and 1,740,082 votes withheld); J. Paul Gilman (29,341,650
affirmative votes and 1,701,906 votes withheld); Edward P. OSullivan II
(29,337,874 affirmative votes and 1,705,682 votes withheld); and Barry Ressler
(29,297,730 affirmative votes and 1,745,826 votes withheld).(b)
    
    The proposal to ratify the selection of Singer Lewak Greenbaum &
Goldstein LLP as the Companys independent auditor for the fiscal year ending
December 31, 2006 was approved with 30,307,507 affirmative votes, 595,811 negative
votes and 140,238 abstaining votes.(c)
    
    The proposal to approve the Companys 2006 Equity Incentive Plan
consisting of a maximum of 2,000,000 shares of Common Stock was approved with
5,520,848 affirmative votes, 2,738,343 negative votes, 113,874 abstaining votes and
22,670,491 non-votes.
 33




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##### Table of Contents



Item 6. Exhibits.
 Exhibit 10.1
    
    JMAR Technologies, Inc. 2006 Equity Incentive Plan.Exhibit 31.1
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act 2002.Exhibit 31.2
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
   JMAR TECHNOLOGIES, INC.August 11, 2006
    
    By:
    
    /s/ C. Neil BeerC. Neil Beer, Chief Executive Officerand Authorized OfficerBy:
    
    /s/ Dennis E. ValentineDennis E. Valentine, Chief Accounting Officer
 34