**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 September 30, 2007**


**Commission
      File Number 1-10515**


**JMAR
      TECHNOLOGIES, INC.**


(Exact
      name of registrant as specified in its charter)


Delaware
              (State
                or other jurisdiction of
            
            68-0131180
              (I.R.S.
                employerincorporation
                or organization)
            
            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 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 (November 13, 2007).


Common
      Stock, $.01 par value: 52,892,580 shares















**INDEX**


(**Page
                #****PART
                I.**
            
            **FINANCIAL
                INFORMATION**Item 1.
            
            Financial
                Statements:Consolidated
                Balance Sheets — September 30, 2007 (unaudited) and December 31,
                2006
            2Consolidated
                Statements of Operations (unaudited) — Three months and nine months ended
                September 30, 2007 and 2006
            3Consolidated
                Statements of Cash Flows (unaudited) — Nine months ended September 30,
                2007 and 2006
            4Notes
                to Consolidated Financial Statements (unaudited)
            5Item 2.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            18Item 3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            29Item 4.
            
            Controls
                and Procedures
            29**PART
                II.**
            
            **OTHER
                INFORMATION**Item 1.
            
            Legal
                Proceedings
            30Item 1A.
            
            Risk
                Factors
            30Item 2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            32Item 3.
            
            N/AItem 4.
            
            N/AItem 5.
            
            N/AItem 6.
            
            Exhibits
            32









1




**PART
      I — FINANCIAL INFORMATION**


**JMAR
      TECHNOLOGIES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**As
      of September 30, 2007 and December 31, 2006**




September
                  30,2007
                (Unaudited)
              
              
              December
                  31,
                2006ASSETSCurrent
                  Assets:Cash
                  and cash equivalents
              
              $
              138,541
              
              
              $
              696,546Accounts
                  receivable, net
              
              
              95,748
              
              
              
              974,886Unbilled
                receivables
              
              
              22,164
              
              
              
              249,099Inventories,
                  net
              
              
              452,340
              
              
              
              519,400Net
                  current assets of discontinued operations
              
              
              546,387
              
              
              
              45,963Prepaid
                  expenses and other
              
              
              82,821
              
              
              
              255,147Total
                  current assets
              
              
              1,338,001
              
              
              
              2,741,041Property
                  and equipment, net
              
              
              744,347
              
              
              
              1,027,239Intangible
                  assets, net
              
              
              1,790,926
              
              
              
              1,759,454Restricted
                cash
              
              
              6,437,408
              
              
              
              —Other
                  assets
              
              
              217,105
              
              
              
              443,082TOTAL
                  ASSETS
              
              $
              10,527,787
              
              
              $
              5,970,816LIABILITIES
                  AND STOCKHOLDERS’ DEFICITCurrent
                  Liabilities:Accounts
                  payable
              
              $
              993,480
              
              
              $
              1,054,558Accrued
                  liabilities
              
              
              427,941
              
              
              
              618,794Accrued
                  payroll and related costs
              
              
              123,599
              
              
              
              451,912Billings
                in excess of costs
              
              
              —
              
              
              
              1,418,372Working
                  capital line of credit, net
              
              
              504,692
              
              
              
              1,059,355Current
                  portion of notes payable and other liabilities, net
              
              
              98,110
              
              
              
              207,710Net
                  current liabilities of discontinued operations
              
              
              1,292,899
              
              
              
              538,636Deferred
                  rent
              
              
              49,429
              
              
              
              49,429Derivative
                  liability
              
              
              8,899,859
              
              
              
              —Total
                  current liabilities
              
              
              12,390,009
              
              
              
              5,398,766




Term
                notes, net of debt discounts
              
              187,500
              
              
              —Notes
                  payable and other long-term liabilities, net of current
                  portion
              
              289,217
              
              
              413,694Notes
                  payable and other long-term liabilities of discontinued operations,
                  net of
                  current portion
              
              
              89,209
              
              
              
              89,209


Total
                liabilities
              
              
              12,955,935
              
              
              
              5,901,669Redeemable
                  convertible preferred stock, 744,709 shares issued and outstanding
                  as of
                  September 30, 2007 and 785,000 at December 31, 2006, net of
                  amortized discount of $1,858,601 and $2,440,473,
                  respectively
              
              
              5,825,649
              
              
              
              5,409,527Commitments
                  and contingencies
              
              
              —
              
              
              
              —Stockholders’
                  deficit:Preferred
                  stock, $.01 par value; 5,000,000 shares authorized; 744,709 shares
                  issued
                  and outstanding as of September 30, 2007 and 785,000 at
                  December 31, 2006 included in redeemable convertible preferred stock
                  above
              
              
              —
              
              
              
              —Common
                  stock, $.01 par value; 80,000,000 shares authorized; 52,892,580
                  shares
                  issued and outstanding as of September 30, 2007, and 39,535,615
                  shares issued and outstanding as of December 31, 2006
              
              
              528,927
              
              
              
              395,356Additional
                  — paid in capital
              
              
              85,044,474
              
              
              
              84,077,547Committed
                  common stock
              
              
              18,300
              
              
              
              —Accumulated
                  deficit
              
              
              (93,845,498**)**
              
              
              
              (89,813,283
              )Total
                  stockholders’ deficit
              
              
              (8,253,797)
              
              
              
              (5,340,380
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS’ DEFICIT
              
              $
              10,527,787
              
              
              $
              5,970,816


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 Ended September 30, 2007 and 2006**


**and
      Nine Months Ended September 30, 2007 and 2006**


**(Unaudited)**


Three
                    Months Ended
                
                
                Nine
                    Months EndedSeptember
                    30,
                  2007
                
                
                September
                    30,
                  2006
                
                
                September
                    30,
                  2007
                
                
                September
                    30,
                  2006Revenues
                
                $
                93,306
                
                
                $
                524,244
                
                
                $
                433,102
                
                
                $
                1,036,069Costs
                    of revenues
                
                
                86,218
                
                
                
                351,960
                
                
                
                312,556
                
                
                
                735,622Gross
                    profit
                
                
                7,088
                
                
                
                172,284
                
                
                
                120,546
                
                
                
                300,447Operating
                    expenses:Selling,
                    general, and administrative
                
                
                667,674
                
                
                
                763,304
                
                
                
                2,474,539
                
                
                
                3,720,314Research
                    and development
                
                
                63,431
                
                
                
                493,854
                
                
                
                479,609
                
                
                
                2,309,043Impairment
                    of long lived assets
                
                
                -
                
                
                
                
                
                
                
                125,117
                
                
                
                39,067Total
                    operating expenses
                
                
                731,105
                
                
                
                1,257,158
                
                
                
                3,079,265
                
                
                
                6,068,424Operating
                    loss from continuing operations
                
                
                (724,017
                )
                
                
                (1,084,874
                )
                
                
                (2,958,719
                )
                
                
                (5,767,977
                )Interest
                    and other income
                
                
                73,882
                
                
                
                1,941
                
                
                
                122,426
                
                
                
                53,061Interest
                    and other expense
                
                
                (5,883,261
                )
                
                
                (125,537
                )
                
                
                (7,331,001
                )
                
                
                (272,273
                )Change
                    in fair value of derivative liability
                
                
                5,748,355
                
                
                
                -
                
                
                
                6,432,152
                
                
                
                -Other
                    income
                
                
                708
                
                
                
                -
                
                
                
                531,167
                
                
                
                -Loss
                    from continuing operations
                
                
                (784,333
                )
                
                
                (1,208,470
                )
                
                
                (3,203,975
                )
                
                
                (5,987,189
                )Income/
                    (loss) from discontinued operations, net of tax
                
                
                (108,766)
                
                
                
                (1,533,318
                )
                
                
                576,616
                
                
                
                (1,603,839
                )Net
                    loss
                
                
                (893,099
                )
                
                
                (2,741,788
                )
                
                
                (2,627,359
                )
                
                
                (7,591,028
                )Deemed
                    preferred stock dividends
                
                
                (578,467
                )
                
                
                (314,499
                )
                
                
                (1,404,850
                )
                
                
                (969,169
                )Loss
                    applicable to common stock
                
                $
                (1,471,566
                )
                
                $
                (3,056,287
                )
                
                $
                (4,032,209
                )
                
                $
                (8,560,197
                )Basic
                    and diluted loss per share applicable to common stock
                
                $
                (0.03
                )
                
                $
                (0.08
                )
                
                $
                (0.09
                )
                
                $
                (0.22
                )Shares
                    used in computation of basic and diluted loss per share
                
                
                50,091,351
                
                
                
                39,402,008
                
                
                
                44,821,188
                
                
                
                39,356,693


The
      accompanying 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 Nine Months Ended September 30, 2007 and 2006**


**(Unaudited)**


**2007**
                  
                  
                  **2006**Cash
                      flows from operating activities:Loss
                      from continuing operations
                  
                  $
                  (3,203,975
                  )
                  
                  $
                  (5,987,189
                  )Adjustments
                      to reconcile loss from continuing operations to net cash used in
                      operating activities:Depreciation
                      and amortization
                  
                  
                  250,592
                  
                  
                  
                  354,383Change
                      in fair value of derivative liability
                  
                  
                  (6,432,152
                  )
                  
                  
                  —Amortization
                      of debt discount and beneficial conversion feature
                  
                  
                  6,992,835
                  
                  
                  
                  —Stock
                      based compensation expense
                  
                  
                  141,420
                  
                  
                  
                  287,989Services
                      received in exchange for common stock/ warrants
                  
                  
                  232,018
                  
                  
                  
                  109,938Services
                      received in exchange for committed common stock
                  
                  
                  18,300
                  
                  
                  
                  —Impairment
                      of long lived assets
                  
                  
                  125,117
                  
                  
                  
                  39,067(Increase)
                      decrease in:Accounts
                      receivable and unbilled receivables
                  
                  
                  288,656
                  
                  
                  
                  (192,844
                  )Inventories
                  
                  
                  (217,182
                  )
                  
                  
                  (96,066
                  )Prepaid
                      expenses and other
                  
                  
                  96,209
                  
                  
                  
                  (193,045
                  )Accounts
                    payable
                  
                  
                  417,122
                  
                  
                  
                  (36,716
                  )Accrued
                      liabilities
                  
                  
                  (475,368
                  )
                  
                  
                  (275,068
                  )Billings
                      in excess of costs incurred
                  
                  
                  —
                  
                  
                  
                  156,030Net
                      cash used from continuing operations
                  
                  
                  (1,766,408
                  )
                  
                  
                  (5,833,521
                  )Income
                      from discontinued operations
                  
                  
                  576,616
                  
                  
                  
                  (1,603,839
                  )Changes
                      in net assets and liabilities of discontinued operations
                  
                  
                  (583,966
                  )
                  
                  
                  944,795Net
                      cash used in operating activities
                  
                  
                  (1,773,758
                  )
                  
                  
                  (6,492,565
                  )Cash
                      flows from investing activities:Capital
                      expenditures of continuing operations
                  
                  
                  (9,989
                  )
                  
                  
                  (29,598
                  )Additions
                      of intangible assets from continuing operations
                  
                  
                  (43,571
                  )
                  
                  
                  (61,274
                  )Capital
                    expenditures of discontinued operations
                  
                  
                  —
                  
                  
                  
                  (5,298
                  )Net
                      borrowings on notes receivable
                  
                  
                  11,570
                  
                  
                  
                  —Net
                      cash provided by (used in) investing activities
                  
                  
                  (41,990
                  )
                  
                  
                  (96,170
                  )Cash
                      flows from financing activities:Net
                      (repayments)/borrowings on term notes and line of credit
                  
                  
                  7,107,949
                  
                  
                  
                  2,998,910Net
                      proceeds from the issuance of common stock
                  
                  
                  384,183
                  
                  
                  
                  1,334,413Increase
                    in restricted cash
                  
                  
                  (6,437,408
                  )
                  
                  
                  —Cash
                      payment of preferred stock dividends
                  
                  
                  (430,861
                  )
                  
                  
                  (466,916
                  )Issuance
                      of preferred stock
                  
                  
                  643,594
                  
                  
                  
                  —Net
                      cash provided by financing activities
                  
                  
                  1,267,457
                  
                  
                  
                  3,866,407Net (decrease) in
                      cash and cash equivalents
                  
                  
                  (548,291
                  )
                  
                  
                  (2,722,328
                  )Cash
                      and cash equivalents, beginning of period
                  
                  
                  686,832
                  
                  
                  
                  5,028,346Cash
                      and cash equivalents, end of period
                  
                  $
                  138,541
                  
                  
                  $
                  2,306,020Cash
                      paid for interest
                  
                  
                  236,102
                  
                  
                  
                  80,132**Supplemental
                      Disclosure of Non Cash Activity:****For
                      the nine months ended September 30, 2007:**Prepayment
                      of deferred compensation proceeds from cash surrender value
                      of life
                      insurance
                  
                  $
                  123,459Conversion
                      by Company of previously existing Series G & I Preferred Stock into
                      7,600,000 shares of common stock in the last and current quarter.
                      (See
                      Note 10)
                  
                  $
                  739,663In
                      conjunction with the exchange of preferred stock to common
                      stock, the
                      recognition of the excess fair value of the common stock over
                      the carrying
                      amount of the preferred stock as a deemed dividend. (See Note
                      10)
                  
                  $
                  476,337Deemed
                      preferred stock dividends
                  
                  $
                  497,657Issuance
                      of committed Series J Preferred Stock (see Note 10)
                  
                  $
                  708,800Establishment
                      of derivative liability in conjunction with the issuance of
                      Series J
                      Preferred Stock (see Note 9)
                  
                  $
                  8,250,000**For
                      the nine months ended September 30, 2006:**Fair
                      value of warrants issued in connection with the 2006 working
                      capital line
                      of credit (see Note 8)
                  
                  $
                  471,926Discount
                      recorded representing the difference between the fair value
                      of the
                      convertible preferred stock and warrants immediately prior
                      to and after
                      the March 28, 2006 amendment. (see Note 8)
                  
                  $
                  2,210,031
 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
        is a
        late-stage technology company with expertise in the development and early
        commercialization of detection and  laser-based
        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 detection and biological monitoring, while continuing
        to
        carry out research and development. JMAR’s BioSentryTM product is a contamination
        warning system for waterborne microorganisms. BioSentry uses laser-based,
        multi-angle light scattering technology to provide continuous, on-line,
        real-time monitoring for harmful microorganisms.
 
 JMAR’s
        pursuit of cutting-edge products includes a new initiative, the double pulse
        (DP) plasma laser, which (based on its exceptional beam quality) is funded
        by a phase II contract from the Army Research Laboratory to enable stand-off
        laser-induced breakdown spectroscopy (LIBS) applications. Light emissions
        from the plasma at targeted substances such as explosives and drugs are detected
        and analyzed by an optical spectrometer to provide identification of the
        target material. JMAR’s DP-LIBS laser is based on a redesign of its patented
        BriteLightTM laser, a stand-alone product as well as the x-ray light source in
        nanolithography systems and x-ray microscopy.
  The
        accompanying consolidated financial statements as of and for the three and
        nine
        months ended September 30, 2007 and 2006 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, 2006. Amounts related to
        disclosures of December 31, 2006 balances within these interim statements
        were derived from that Form 10-K. The results of operations for the three
        and
        nine months ended September 30, 2007 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 $2,627,359, $13,106,681 and $8,032,803 for the nine
        months ended September 30, 2007 and for the years ended December 31,
        2006 and 2005, respectively, and losses are expected for the foreseeable
        future.
        In addition, our revenues from continuing operations declined to $1,620,865
        from
        $1,675,163 for the years ended December 31, 2006 and 2005, respectively. We
        had negative operating cash flow from continuing operations for the nine
        months
        ended September 30, 2007 and for the years ended December 31, 2006 and
        2005 of $1,766,408, $6,595,411 and $4,806,376, respectively. Our cash
        requirements have been and will continue to be significant. We will continue
        to
        use cash in 2007 for 1) product development efforts; 2) corporate costs,
        primarily related to the cost of being a public company; 3) interest cost
        on
        financing; 4) preferred stock dividends; 5) preferred stock redemptions and
        6)
        other working capital needs. Assuming the availability of draw-downs under
        the
        loan facility entered into with Laurus Master Fund, Ltd. (“Laurus”) in September
        2007  (the “$7,500,000 Laurus Note”) (See Note 8 –Line of Credit and
        Notes Payable) management believes that the Company has, adequate resources
        to
        fund its operations through September 30, 2008. The Company will require
        additional draw-downs under the Laurus Note to continue the development of
        some
        of its emerging new products and for working capital requirements in 2007
        and
        2008. There are no assurances that funds will be available under the $7,500,000
        Laurus Note, due to Laurus’ requirement to approve every drawdown. Depending on
        market conditions and other considerations, we intend to continue to pursue
        opportunities to raise funds in 2007 and 2008. Management believes, but cannot
        assure, that the Company will be able to raise additional funds through equity
        or other financings to additionally fund operations. This belief is derived
        from
        the Company’s historical access to equity and debt markets.




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 time necessary
        for it to begin generating significant revenue from those new products, and
        the
        significant administrative cost of being a small 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
        July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for
        Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for
        income taxes by prescribing a minimum probability threshold that a tax position
        must meet before a financial statement benefit is recognized. The minimum
        threshold is defined in FIN 48 as a tax position, that based solely on its
        technical merits is more likely than not to be sustained upon examination
        by the
        applicable taxing authority. The tax benefit to be recognized is measured
        as the
        largest amount of benefit that is greater than fifty percent likely of being
        realized upon ultimate settlement. FIN 48 must be applied to all existing
        tax
        positions upon initial adoption. The cumulative effect of applying FIN 48
        at
        adoption, if any, is to be reported as an adjustment to opening retained
        earnings for the year of adoption. FIN 48 is effective for fiscal years
        beginning after December 15, 2006, although early adoption is permitted.
        The adoption of FIN 48 did not have a material impact on the Company’s financial
        statements.
  In
        September 2006, the FASB issued SFAS 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 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 Company does not expect
        the adoption of SFAS 157 to have a material impact on the Company’s consolidated
        financial statements.
  In
          September 2006, the FASB issued SFAS 158, *Employer’s Accounting for
          Defined Benefit Pension and Other Postretirement Plans*(SFAS 158). SFAS 158
          requires an employer to recognize the over-funded or under-funded status
          of a
          defined benefit plan and other postretirement plans as an asset or liability
          on
          its balance sheet and recognize changes in its funded status in the year
          in
          which the change occurs through accumulated other non-owner changes in
          equity.
          We do not expect the adoption of SFAS 158 to have an impact on our results
          of
          operations or financial condition.
 
 In
        September 2006, the Securities and Exchange Commission issued Staff
        Accounting Bulletin (SAB) No. 108 to address diversity in practice in
        quantifying financial statement misstatements. SAB 108 requires that registrants
        quantify the impact on the current year’s financial statements of correcting all
        misstatements, including the carryover and reversing effects of prior years’
misstatements, as well as the effects of transitional cumulative effect
        adjustment to retained earnings as of January 1, 2006, for errors that were
        not previously deemed material, but are material under the guidance in SAB
        108.
        There was no impact on our consolidated financial statements with respect
        to the
        adoption of SAB 108.
  In
        February 2007, the FASB issued SFAS. 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 159 are elective; however, the amendment to
        SFAS
        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 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
        159
        is effective as of the beginning of an entity’s first fiscal year that begins
        after November 15, 2007. The Company does not expect the adoption of SFAS
        159 to have a material impact on its consolidated financial
        statements.




**(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
        are shareholder-approved and are the only plans of the six stock plans from
        which additional options may be granted. The 2006 Plan authorizes the grant
        of
        up to 2,000,000 shares and options and 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.




6




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 nine months ended September 30, 2007 and
      2006 are compensation charges as follows:




Three
                Months Ended
            
            
            Nine
                Months EndedSeptember
                30,
            
            
            September
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006Compensation
            
            $
            35,616
            
            
            $
            85,178
            
            
            $
            141,420
            
            
            $
            287,989Selling,
                general, & administrative
            
            
            33,874
            
            
            
            64,043
            
            
            
            133,410
            
            
            
            238,559Research
                and development
            
            
            1,742
            
            
            
            21,135
            
            
            
            8,010
            
            
            
            49,430




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
        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 in 2007: risk-free interest rate of approximately
        4.73 percent in 2007 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 2007,
        the expected volatility used was 86 to 100 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 2007 were 4.1 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 September 30, 2007
      and 2006, and changes during the nine months then ended is presented in the
      table below:




2007
            
            2006Wtd.
                Avg.
            
            
            
            
            
            
            
            
            
            
            
            
            Wtd.
                Avg.Wtd.
                Avg.
            
            
            Remaining
            
            
            Aggregate
            
            
            
            
            
            
            Wtd.
                Avg.
            
            
            Remaining
            
            
            AggregateExercise
            
            
            Contractual
            
            
            Intrinsic
            
            
            
            
            
            
            Exercise
            
            
            Contractual
            
            
            IntrinsicShares
            
            
            Price
            
            
            Life
            
            
            Value
            
            Shares
            
            
            Price
            
            
            Life
            
            
            ValueOutstanding
                at beginning of period
            
            
            
            2,329,054
            
            
            
            
            
            $
            2.71
            
            
            
            6.5
            
            
            
            —
            
            
            
            
            3,162,610
            
            
            $
            2.11
            
            
            
            —
            
            
            
            —Granted
            
            
            
            50,000
            
            
            
            
            
            $
            0.22
            
            
            
            9.5
            
            
            
            —
            
            
            
            
            394,095
            
            
            $
            0.75
            
            
            
            —
            
            
            
            —Exercised
            
            
            
            —
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            (65,700
            )
            
            $
            1.09
            
            
            
            —
            
            
            
            —Forfeited
            
            
            
            (944,674
            )
            
            
            
            
            
            $
            2.68
            
            
            
            —
            
            
            
            —
            
            
            
            
            (1,088,617
            )
            
            $
            1.29
            
            
            —
            
            
            
            —Outstanding
                at 9/30/07
            
            
            
            1,434,380
            
            
            
            
            
            
            $
            1.90
            
            
            
            3.9
            
            
            
            —
            
            
            
            
            2,402,388
            
            
            $
            2.71
            
            
            5.1
            
            
            
            —Vested
                and Expected to Vest
            
            
            
            1,429,380
            
            
            
            
            
            
            $
            1.90
            
            
            3.9
            
            
            
            —
            
            
            
            
            2,379,054
            
            
            $
            2.77
            
            
            5.0
            
            
            
            —Exercisable
                at 9/30/07
            
            
            
            1,134,368
            
            
            
            
            
            
            $
            2.35
            
            
            6.2
            
            
            
            —
            
            
            
            
            1,703,758
            
            
            $
            2.47
            
            
            3.3
            
            
            
            —




7




A
      summary
      of the status of the Company’s non vested options at September 30, 2007 and
      2006, and changes during the nine months ended September 30, 2007 and 2006,
      is presented below:




2007
            
            
            2006Weighted
            
            
            
            
            
            
            Weightedaverage
            
            
            
            
            
            
            averagegrant-date
            
            
            
            
            
            
            grant-dateShares
            
            
            fair
                value
            
            
            Shares
            
            
            fair
                valueNon-vested
                at December 31,
            
            
            623,762
            
            
            $
            1.02
            
            
            
            815,657
            
            
            $
            1.21Granted
            
            
            50,000
            
            
            $
            0.18
            
            
            
            394,095
            
            
            $
            0.48Vested
            
            
            (181,998
            )
            
            $
            0.80
            
            
            
            (219,456
            )
            
            $
            1.27Forfeited
            
            
            (191,752
            )
            
            $
            0.84
            
            
            
            (291,666
            )
            
            $
            1.00Non-vested
                at September 30,
            
            
            300,012
            
            
            $
            1.13
            
            
            
            698,630
            
            
            $
            0.90




The
      weighted-average grant-date fair value of options granted during the three
      and
      nine months ended September 30, 2007 and 2006 was $.0, $.18, $.53 and $.48,
      respectively. There were no options exercised in the three and nine months
      ended
      September 30, 2007. The stock based compensation unrecognized expense for
      future periods as of September 30, 2007 is approximately $190,843 with a
      weighted average remaining vesting period of .92 years.




**(4)**
            
            **Accounts
                Receivable**




At
      September 30, 2007 and December 31, 2006, accounts receivable
      consisted of the following:




September
                30,
              2007
            
            
            December
                31,
              2006(Unaudited)Billed
            
            $
            95,748
            
            
            $
            1,402,953Unbilled
            
            
            22,164
            
            
            
            249,099117,912
            
            
            
            1,652,052Less-allowance
                for doubtful accounts
            
            
            --
            
            
            
            (428,067
            )$
            117,912
            
            
            $
            1,223,985




All
      unbilled receivables at September 30, 2007 are expected to be billed and
      collected within one year. Payments to the Company for performance on certain
      U.S. Government contracts are subject to progress payment audits by the Defense
      Contract Audit Agency (DCAA) and are recorded at the amounts expected to be
      realized. The unbilled receivables at September 30, 2007 relates to the
      normal billing cycle and timing of billings. The allowance for doubtful accounts
      primarily relates to accounts receivable from FemtoTrace, Inc.




**(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 September 30, 2007 and December 31, 2006, inventories
      consisted of the following:




September
                30,
              2007
            
            
            December
                31,
              2006(Unaudited)Raw
                materials, components and sub-assemblies
            
            $
            27,126
            
            
            $
            136,811Work-in-process
            
            
            207,093
            
            
            
            174Finished
                goods
            
            
            229,179
            
            
            
            392,683463,398
            
            
            
            529,668Less-reserve
                for excess and obsolete inventory
            
            
            (11,058
            )
            
            
            (10,268
            )$
            452,340
            
            
            $
            519,400




8





**(6)**
            
            **Property
                and Equipment**




At
      September 30, 2007 and December 31, 2006, property and equipment
      consisted of the following:




September
                30,
              2007
            
            
            December
                31,
              2006(Unaudited)Equipment
                and machinery
            
            $
            2,684,910
            
            
            $
            2,641,660Software
            
            
            434,096
            
            
            
            599,752Furniture
                and fixtures
            
            
            220,796
            
            
            
            280,229Leasehold
                improvements
            
            
            607,766
            
            
            
            652,4013,947,568
            
            
            
            4,174,042Less-accumulated
                depreciation
            
            
            (3,203,221
            )
            
            
            (3,146,803
            )$
            744,347
            
            
            $
            1,027,239




Included
      in leasehold improvements is $346,000 of gross proceeds for lease incentives
      the
      Company received from its landlords. These lease incentives were recorded as
      deferred rent to be amortized on a straight-line basis to rent expense over
      the
      life of the leases. Of the net remaining deferred rent of $251,262, $201,833
      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 as of September 30, 2007.




**(7)**
            
            **Segment
                Information**




Until
      the
      quarter ended September 30, 2006, JMAR conducted its operations in the
      following three business segments: Research Division/Vermont Operations,
      Microelectronics Division and Sensor Products Group. The Microelectronics
      Division is reflected as discontinued operations and, accordingly, is no longer
      reflected as a segment. The table below shows the Research Division and Vermont
      Operations separately in order to provide additional disclosure the Company
      feels is relevant. The Vermont Operations were closed on October 16, 2007 and
      the net assets are subject to a preliminary asset purchase agreement with a
      third party. See Note 13 - Subsequent Events for additional
      information.




Research
        Division/Vermont Operations
  Research
        Division — Located in San Diego, California, the Research Division carries out
        contract research and development involving JMAR’s patented high brightness,
        short-pulse, diode pumped solid state lasers (BriteLightTM) and laser-produced
        plasma (LPP) technology. A major portion of the Research Division’s R&D
        has been funded by contracts from the Department of Defense. The Research
        Division shifted its historic focus on x-ray lithography light source R&D
        and equipment development in 2004 when it embarked on an effort to identify
        additional uses for its laser and LPP technologies. As a result of this business
        shift, the Research Division developed soft x-ray prototype products including
        the certain (XRM) technology. This XRM technology was sold to Gatan,
        Inc in May 2007 in exchange for a compensation package of cash, royalties,
        and
        an exclusive laser supplier agreement on future commercial XRM sales. In
        conjunction with the sale of the XRM technology, the Company recorded a gain
        of
        $530,459 as other income in the accompanying statement of
        operations.
  Also
        in
        May 2007, the Research Division successfully demonstrated a double pulse
        (DP) plasma laser under its Phase II SBIR contract with the Army Research
        Laboratory. This significant advance produces an intense plasma at a specified
        stand-off distance, enabling the application of laser-induced breakdown
        spectroscopy (LIBS) and related techniques for the detection and
        identification of explosives and drugs. JMAR is designing two DP-LIBS prototype
        versions, man-portable and vehicle-mounted. New products developed at the
        Research Division, leading to volume sales, will be outsourced to contract
        manufacturing. During the nine months ended September 30, 2007, and 2006,
        the Research Division, combined with Vermont Operations, accounted for 60%
        and
        94%, respectively, of the Company’s revenues.
 
 Vermont
        Operations — The Vermont Operations were closed on October 16, 2007 and the net
        assets are subject to an asset purchase agreement (See Note 13 - Subsequent
        Events for additional information). Located in South Burlington, Vermont,
        the
        Vermont Operations carried out contract research and development for DARPA
        and
        NAVAIR involving advanced materials, nanolithography, semiconductor memory
        chip
        designs and served as JMAR’s manufacturing arm for the BioSentryTM product. The
        Biosentry product inventory is being transferred to the Company’s San Diego,
        California operation.
  9
  Sensor
        Products Group
  This
          segment’s first product is the BioSentryTM sensor, a continuous, on-line,
          real-time monitoring system for detecting harmful microorganisms in water.
          BioSentry is targeted toward a number of applications across multiple markets,
          including homeland security, the cruise ship and beverage industries,
          pharmaceutical companies, and municipal water utilities. We installed a
          new
          unit  this quarter at the Vitens water municipality in the
          Netherlands, our second installation in Europe. During the nine months
          ended
          September 30, 2007 and 2006 the Sensor Products Group accounted for 40% and
          6%, respectively, of the Company’s revenues.




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, 2006. 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).




Segment
      information for the three and nine months ended September 30, 2007 and 2006
      is as follows (excluding discontinued operations):




Research
                Division
              
              
              Sensor
                Products
                Group
              
              
              Corporate
              
              
              TotalNine
                  Months Ended September 30, 2007Revenues
              
              $
              261,033
              
              
              
              172,069
              
              
              $
              —
              
              
              $
              433,102Asset
                  writedowns
              
              
              (117
              )
              
              
              (125,000
              )
              
              
              
              
              
              
              (125,117
              )Operating
                  (loss) profit
              
              
              (594,034
              )
              
              
              (1,277,752
              )
              
              
              (1,086,933
              )
              
              
              (2,958,719
              )Total
                  assets
              
              
              1,102,807
              
              
              
              1,649,648
              
              
              
              7,775,332
              
              
              
              10,527,787Capital
                  expenditures
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Depreciation
                  & amortization
              
              
              56,048
              
              
              
              16,723
              
              
              
              177,821
              
              
              
              250,592Three
                  Months Ended September 30, 2007Revenues
              
              
              53,184
              
              
              
              40,122
              
              
              
              —
              
              
              
              93,306Asset
                  writedowns
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Operating
                  (loss) profit
              
              
              (169,494
              )
              
              
              (276,739
              )
              
              
              (277,784
              )
              
              
              (724,017
              )Capital
                  expenditures
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Depreciation
                  & amortization.
              
              
              17,733
              
              
              
              861
              
              
              
              67,008
              
              
              
              85,602




Nine
                    Months Ended September 30, 2006:Revenues
                
                $
                972,783
                
                
                $
                63,286
                
                
                $
                —
                
                
                $
                1,036,069Operating
                    loss
                
                
                (1,313,657
                )
                
                
                (3,146,838
                )
                
                
                (1,307,482
                )
                
                
                (5,767,977
                )Asset
                    writedowns
                
                
                (34,420
                )
                
                
                (4,647
                )
                
                
                —
                
                
                
                (39,067
                )Total
                    assets
                
                
                1,278,461
                
                
                
                1,657,294
                
                
                
                9,740,048
                
                
                
                12,675,803Capital
                    expenditures
                
                
                —
                
                
                
                12,360
                
                
                
                17,238
                
                
                
                29,598Depreciation
                    & amortization
                
                
                72,603
                
                
                
                23,019
                
                
                
                258,761
                
                
                
                354,383Three
                    Months Ended September 30, 2006:Revenues
                
                
                484,359
                
                
                
                39,885
                
                
                
                —
                
                
                
                524,244Operating
                    (loss) profit
                
                
                (165,898
                )
                
                
                (926,079
                )
                
                
                7,103
                
                
                
                (1,084,874
                )Capital
                    expenditures
                
                
                —
                
                
                
                2,415
                
                
                
                —
                
                
                
                2,415Depreciation
                    & amortization
                
                
                23,256
                
                
                
                11,068
                
                
                
                71,320
                
                
                
                105,644





Sales
        to
        the United States Government totaled $53,184, $241,533, $335,649 and $742,471
        for the three and nine months ended September 30, 2007 and 2006,
        respectively.
 
 Sales
        to
        the United States Government totaled $335,649, $742,471, $1,131,299 and
        $2,979,153 for the three and nine months ended September 30, 2006 and 2005,
        respectively.




10




**(8)**
            
            **Line
                of Credit and Notes Payable and Letter of
                Credit**




*Letter
        of Credit*  In connection with the Company’s lease of its Rancho
        Bernardo facility, Comerica Bank issued a letter of credit in the amount
        of
        $128,645. 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 $128,645.
 
 *Lines
        of Credit*  In March  2006, the Company entered into a new
        working capital with Laurus Master Fund Ltd. (“ Laurus”) which replaced an
        earlier working capital line provided by Laurus with the 2006 Working Capital
        (the “2006 Working Capital Line”). The  2006 Working Capital Line is
        evidenced by a Revolving Fixed Price Convertible Note (the “2006 Secured
        Revolving Note”) which 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. Upon approval of
        Laurus, the 2006 Working Capital Line provided for advances in excess of
        the
        availability (Overadvance). 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 (10.25% as of
        September 30, 2007).  As amended by the Omnibus Amendment, dated
        September 12, 2007, the 2006 Working Capital Line terminates in August 2009
        (See
        below in this Note 8). As of September 30, 2007, there was $649,911
        outstanding under the 2006 Working Capital Line, including a $210,295
        Overadvance.
 
 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 is based on JMAR’s historical stock prices for
        the past 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 (See
        Note 9
— Derivative Liability – Warrants Attached to Debt). 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 is due
        on April 13, 2008, 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, and 7) the Company paid a fee of $26,250 to
        Laurus.
        As of September 30, 2007, $750,000 was outstanding pursuant to the $750,000
        Note. For
        derivative liability arising out of warrants attached to the $750,000 Note,
        see
        Note 9 - Derivative Liability, warrants attached to debt.
  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.
  On
        September 12, 2007, the Company entered into a Securities Purchase Agreement
        (the “September 2007 SPA"), dated for identification purposes as of August 31,
        2007, with Laurus and related agreements. Pursuant to the “September 2007
        SPA,  Laurus completed a loan to the Company of $7,500,000 evidenced
        by a Secured Term Note ("the $7,500,000 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 $7,500,000 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 $7,500,000
        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 $7,500,000
        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 $7,500,000 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 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. The Company’s current
        authorized number of shares is 80,000,000 shares. Pursuant to the September
        2007
        SPA, the Company agreed that on or before March 5, 2008 it will seek and
        have
        obtained shareholder approval and will 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 will constitute an event
        of
        default under the $7,500,000 Term Note.
  11
  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.
  As
        of
        September 30, 2007, $620,000 was outstanding pursuant to the $7,500,000
        Term Note.





**(9)**
            
            **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
        September 30, 2007, the 7,597,750 and 119,000,000 warrants issued in
        conjunction with the $750,000 Note and  the $7,500,000 Term Note
        payable to Laurus, respectively, (see Note 8 – Line of Credit and Notes Payable)
        were being accounted for as 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 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
        $8,800,000 respectively. In accordance with SFAS No. 133, the Company
        revalued the warrants on September 30, 2007 and as a result of the
        revaluation, the Company recorded a change in fair value of derivative liability
        of $(6,233,240) 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 5.03% 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 92%.
        The volatility is based on JMAR’s historical stock prices for the past
        10 years, consistent with the expected life of the warrants.
  Conversion
        Feature Derivatives
  Pursuant
        to an agreement committed to in June, 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 (see
        Note  10 for details of the agreement). 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 September 30, 2007; as a
        result of the revaluation, there was no change in the fair value of the
        derivative liability.
  12
  Warrants
        Issued to
        Non-employee
  As
        part
        of the transaction entered into on June 28, 2007, the Company was required
        to
        reclassify 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 $320,930 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 September 30, 2007 and as a result of this revaluation, there was a
        change of $198,912 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 4.66% — 5.03% based on
        estimated yields of 2-5 year U.S. Treasury Securities; expected dividend
        yield of 0 percent; expected life of 2-5 years; and expected
        volatility of 85-129%. The volatility is based on JMAR’s historical stock prices
        for the past 2-5 years, consistent with the expected remaining life of the
        warrants.





**(10)**
            
            **Equity
                Transactions**a.
            
            Laurus
                Preferred Stock and Warrants




In
        June,
        2007, the Company committed to a transaction with Laurus by executing a term
        sheet providing for the sale from time to time of up to $3.5 million of a
        new Series J preferred stock. The definitive terms of this agreement are
        contained in a Securities Purchase Agreement, dated July 5, 2007, between
        the
        Company and Laurus (the “Series J SPA”).  Such sales are intended to
        be done following the conversion or exchange by Laurus of an equivalent amount
        of its existing preferred stock. On June 28, 2007, the Company entered into
        a Securities Exchange Agreement with Laurus which provided for the issuance
        to
        Laurus of two million (2,000,000) shares of Common Stock in exchange for
        and
        cancellation of $204,400 stated value of Series G and Series I
        Preferred Stock held by Laurus. On July 5, 2007, the Company entered into a
        second Securities Exchange Agreement with Laurus which provided for the issuance
        to Laurus of another two million (2,000,000) shares of Common Stock in exchange
        for and cancellation of another $204,400 stated value of Series G and I
        Preferred Stock. As a result of these two transactions, a total of $408,800
        of
        Series G and Series I Preferred Stock were redeemed and this dollar amount
        was applied to pay the monthly redemption payments due under the outstanding
        Series G and I Preferred Stock such that the remaining monthly redemption
        payment owing in August, the entire September and October monthly redemption
        payments and a portion of the November monthly redemption payment were
        canceled.
  As
        a
        result of the redemption of the Series G and Series I Preferred Stock, in
        the
        quarter ended June 30, 2007 the Company recorded the excess of the fair value
        of
        the consideration issued to Laurus ($280,000) over the carrying amount of
        the
        Series G and I Preferred Stock ($164,435) as preferred stock dividends and
        an increase in paid-in-capital.
  In
        conjunction with the June 28, 2007 transaction and the commitment to issue
        408,800 of the Series J Preferred, as of June 30, 2007 the Company
        created a derivative liability. See Note 9 — Derivative Liability.
  On
        July 5, 2007, the Company and Laurus entered into a Securities Purchase
        Agreement (the “Series J SPA”) The Series J SPA provides for the issuance from
        time to time of up to $3.5 million shares of Series J Cumulative
        Convertible Preferred Stock (“Series J Preferred Stock”). Pursuant to the
        Series J SPA, the Company’s Board of Directors created a new Series J
        Cumulative Convertible Preferred Stock, with a stated value of $1,000 per
        share,
        and authorized sale and issuance from time to time of up to 3,500 of such
        shares. Pursuant to the Series J SPA, purchases by Laurus of shares of
        Series J Preferred Stock will be made from time to time in such amounts and
        at such times as Laurus may determine in its sole discretion. The Series J
        Preferred Stock accrues dividends at the rate of 9.5% per annum and is
        convertible into shares of the Company’s Common Stock at a conversion price
        equal to lesser of (i) $0.15 or (ii) the equivalent price at which Laurus
        has most recently exchanged shares of Common Stock for shares of Series G
        and I. In the event that any shares of Series J Preferred Stock remain
        outstanding on the second anniversary of the issuance of such shares, such
        shares must be redeemed in cash by the Company. The Series J Preferred
        Stock also provides that the Company can force the conversion of the
        Series J Preferred Stock at $0.50 per share if the bid price of the
        Company’s Common Stock for ten consecutive trading days equals or exceeds $0.50
        per share and the trading volume during such ten day period exceeds 100,000
        shares per day. The provisions of the Series J Preferred Stock restrict
        Laurus from converting into shares of Common Stock if Laurus would have
        beneficial ownership of more than 9.99% of the Company.
  The
        Series J SPA also provided that 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.
  The
        Company agreed that it would file a Form S-1 Registration Statement with
        the SEC
        to register the resale of the shares of Common Stock issuable on conversion
        of
        the Series J Preferred Stock within 60 days after an aggregate of
        $1 million of Series J Preferred Stock has been sold. The Company
        agreed to use its best efforts to obtain effectiveness of the registration
        statement within 120 days after filing with the SEC and to pay a penalty
        equal to one percent (1%) per month for a maximum of eight months if the
        registration statement is not filed or declared effective within the required
        deadlines.   As of September 30, 2007, an aggregate of $1 million
        or more of Series J Preferred Stock has not been sold and the Company is
        not yet
        obligated to file such a registration statement.
  13
  On
        July 5, 2007, Laurus purchased 408.8 shares of Series J Preferred
        Stock (with a stated value per share of $1,000) for gross proceeds of $408,800.
        The shares of Series J Preferred Stock issued in this transaction have a
        conversion price of $0.1022 per share (the price at which Laurus had most
        recently received shares of Common Stock in exchange for its Series G and
        Series I Preferred Stock). In connection with the sale of the Series J
        Preferred Stock, the Company paid Midtown Partners & Co., LLC (“Midtown
        Partners”) a fee equal to eight percent (8%) of the gross proceeds from the sale
        of the Series J Preferred Stock and a warrant to purchase 320,000 shares of
        Common Stock, with a term of 5-1/2 years, an exercise price of $0.1022 per
        share and a provision enabling the holder to effect a cashless exercise of
        the
        Warrant. As a result of this issuance of Series J Preferred Stock, pursuant
        to the SPA the conversion price for a total of $817,600 of stated value of
        Series I Preferred Stock was reduced to $0.15 per share. As a result of the
        June 28, 2007 exchange of preferred for common stock transaction and the
        issuance of the new Series J Preferred Stock a derivative liability was
        created. See Note 9 — Derivative Liability.
  On
        July 20, 2007 the Company and Laurus entered into an Agreement which
        provides that certain of the convertible securities owned by Laurus may not
        be
        converted into common stock unless and until the Company’s shareholders have
        approved an amendment to the Company’s Certificate of Incorporation to increase
        the authorized capital stock from 80,000,000 shares of Common Stock to
        300,000,000 shares of Common Stock. The shares which will not be convertible
        consist of 1) those shares of Series I Preferred Stock with a stated value
        of $817,600 that were amended on July 5, 2007 to reduce their conversion
        price as noted above, 2) the shares of Series J Preferred Stock with a
        stated value of $408,800 with a conversion price of $0.1022 that were issued
        on
        July 5, 2007, and 3) up to another $817,600 of Series J Preferred
        Stock and up to another $1,635,200 of Series G and Series I Preferred
        Stock to be adjusted in connection with the sale of such Series J Preferred
        Stock. As of September 30, 2007, only $300,000 of the $817,600 of additional
        shares of Series J Preferred Stock has been sold and the conversion price
        of
        $600,000 of Series G and I Preferred Stock has been reduced as provided.
        Pursuant to this Agreement, the Company agreed to file a proxy statement
        and
        solicit approval by its shareholders of the increase in authorized
        shares.
  On
        August 8, 2007, Laurus purchased 2,100,000 shares of Common Stock in
        exchange for and cancellation of $252,000 stated value of Series G and
        Series I Preferred Stock held by Laurus. As a result of this transaction,
        $252,000 of Series G and Series I Preferred Stock has been redeemed
        and this dollar amount has been applied to pay the monthly redemption payments
        due under the outstanding Series G and I Preferred Stock such that the
        remaining monthly redemption payment owing under the Series G for November,
        2007 has been satisfied, the entire monthly redemption payment under the
        Series I for November has been satisfied and $107,618 of the $122,178
        December redemption payment under the Series I has been satisfied. As a
        result of the August 8, 2007 exchange of preferred for common stock transaction
        and the issuance of Series J Preferred Stock a derivative liability was
        created. See Note 9 — Derivative Liability.On August 9, 2007, Laurus
        purchased $300,000 of shares of Series J Cumulative Convertible Preferred
        Stock (“Series J Preferred Stock”) with a stated value of $1,000 per share.
        These shares of Series J Preferred Stock have a conversion price of $0.12
        per share. The Series J Preferred Stock accrues dividends at the rate of
        9.5% per annum.




The
      following table summarizes the preferred stock activity for the nine months
      ended September 30, 2007.


Series
              
              Balance
                  at December 31, 2006
              
              
              Issuance
              
              
              Discount
                Amortization
              
              
              Redemption
              
              
              Net
                  Balance at September 30, 2007G
              
              
              1,374,197
              
              
              
              -
              
              
              
              36,819
              
              
              
              (278,220
              )
              
              
              1,132,796I
              
              
              4,035,330
              
              
              
              -
              
              
              
              410,166
              
              
              
              (461,443
              )
              
              
              3,984,053J
              
              
              -
              
              
              
              708,800
              
              
              
              -
              
              
              
              -
              
              
              
              708,800Total
              
              $
              5,409,527
              
              
              $
              708,800
              
              
              $
              446,985
              
              
              $
              (739,663
              )
              
              $
              5,825,649


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
      9.9% 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.




Included
        in the loss applicable to common shareholders in the accompanying Consolidated
        Statements of Operations for the three and nine months ended September 30,
        2007 and 2006 are preferred stock dividends of $578,467, $1,404,850, $314,499,
        and $969,169, respectively. The amount for the three and nine months ended
        September 30, 2007 and 2006 represents $159,243, $481,528, $165,504, and
        $467,947, respectively, of preferred stock dividends paid or payable in cash
        and
        $419,224, $923,322, $148,995, and $501,222, respectively, related to 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.




14




b.
            
            Sales
                of Common Stock and Warrants




On
        July 5, 2007, the Company entered into a second Securities Exchange
        Agreement with Laurus which provided for the issuance to Laurus of another
        two
        million (2,000,000) shares of Common Stock in exchange for and cancellation
        of
        another $204,400 stated value of Series G and I Preferred
        Stock.
  On
          August 8, 2007, Laurus purchased 2,100,000 of Common Stock in exchange for
          and cancellation of $252,000 stated value of Series G and Series I
          Preferred Stock held by Laurus (see Note 10 – Equity Transactions- Laurus
          Preferred Stock and Warrants).
  On
          August
          31, 2007, Laurus completed a cashless exercise, in accordance with its
          warrant
          agreement, of 2,388,189 warrants with an exercise price of $0.01, resulting
          in
          the purchase of 2,197,134 shares of common stock.
 
 On
          September 11, 2007 the Company entered into a Securities Purchase Agreement
          providing for the issuance of the $7,500,000 Term Note and issued warrants
          to purchase 119,000,000 shares of common stock to Laurus. As a result,
          a
          derivative liability and debt discount was created.  See Note 9 —
Derivative Liability.





c.
            
            Issuances
                of Common Stock and Warrants for
                Services




During
        the three and nine months ended September 30, 2007 and 2006, the company
        issued 605,677, 968,929, 74,120, and 116,611 shares of common stock,
        respectively, for services and financing. In the second quarter of 2007 the
        Company agreed to issue 461,539 shares of common stock to Midtown Partners
        in
        payment of a $60,000 fee related to the issuance of the $750,000 Note (See
        Note
        8 --- Line of Credit and Notes Payable).
 
 In
        connection with the sale of the Series J Preferred Stock to Laurus on July
        5, 2007, the Company paid Midtown Partners a fee equal to eight percent (8%)
        of
        the gross proceeds from the sale of the Series J Preferred Stock and a
        warrant to purchase 320,000 shares of Common Stock, with a term of
        5-1/2 years, an exercise price of $0.1022 per share and a provision
        enabling the holder to effect a cashless exercise of the Warrant.
 
 On
        August 9, 2007, in connection with
        the sale of the Series J Preferred Stock, the Company issued to Midtown
        Partners a warrant to purchase 168,000 shares of Common Stock, with a term
        of
        5-1/2 years, an exercise price of $0.12 per share and a provision enabling
        the holder to effect a cashless exercise of the Warrant.
  In
          the
          three months and nine months ended September 30, 2007 42,857 and
          297,776****shares of common stock were issued for fees to
          members of the Board of Directors in lieu of cash.
 
 These
          issuances were valued based upon the fair market value of the Company’s common
          stock at the date of issuance.




**(11)**
            
            **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 period. For the three and nine months
        ended
        September 30, 2007 and 2006, 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. As of September 30, 2007 and 2006, the
        Company had shares issuable under outstanding warrants, stock options and
        convertible preferred of 132,666,122, 1,290,121 and 20,065,472, respectively,
        all of which are antidilutive and were excluded from the computation of diluted
        loss per share due to the Company’s losses.




15





**(12)**
            
            **Discontinued
                Operations**




The
        net
        assets and liabilities of the Vermont Operations at September 30,
        2007 and the Microelectronics Division at and December 31, 2006
        consisted of the following:


**September
                    30, 2007**
                  **(Unaudited)**
                
                
                **December
                    31, 2006**Current
                    Assets:Cash
                
                $
                10,138
                
                
                $
                1,897Accounts
                    receivable (net)
                
                
                309,500
                
                
                
                44,066Inventories
                    and prepaid
                
                
                172,361
                
                
                
                -Property,
                    plant and equipment and patents
                
                
                54,388
                
                
                
                -$
                546,387
                
                
                $
                45,963Current
                    Liabilities:Accounts
                    payable
                
                
                635,853
                
                
                
                272,645Accrued
                    liabilities
                
                
                657,046
                
                
                
                265,991$
                1,292,899
                
                
                $
                538,636Non-Current
                    Liabilities:
                
                $
                $89,209
                
                
                $
                89,209




The
        loss
        from operations of discontinued operations of the Vermont Operations and
        Microelectronics Division for the three and nine months ended
        September 30, 2007 and 2006 consisted of the following:


Three
                    Months Ended
                  September
                    30, 2007
                  (Unaudited)
                
                
                Nine
                    Months Ended
                  September
                    30, 2007
                  (Unaudited)
                
                
                Three
                    Months Ended
                  September
                    30, 2006
                  (Unaudited)
                
                
                Nine
                    Months Ended
                  September
                    30, 2006
                  (Unaudited)Revenues
                
                $
                415,676
                
                
                $
                2,401,540
                
                
                $
                468,749
                
                
                $
                5,401,479Cost
                    of revenues
                
                
                505,704
                
                
                
                1,605,867
                
                
                
                832,234
                
                
                
                5,055,145Gross
                    profit (loss)
                
                
                (90,028
                )
                
                
                795,673
                
                
                
                (363,485
                )
                
                
                346,334Selling,
                    general and administrative
                
                
                100,130
                
                
                
                272,639
                
                
                
                727,718
                
                
                
                1,324,412Research
                    and development
                
                
                3,710
                
                
                
                4,424
                
                
                
                47,509
                
                
                
                210,232Total
                    operating expenses
                
                
                103,840
                
                
                
                277,063
                
                
                
                775,227
                
                
                
                1,534,644Loss
                    from operations
                
                
                (193,868
                )
                
                
                518,610
                
                
                
                (1,138,712
                )
                
                
                (1,188,310
                )Interest
                    and other income - net
                
                
                85,102
                
                
                
                58,006
                
                
                
                (4,449
                )
                
                
                (25,372
                )Provision
                    for income taxes
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Income/(loss)
                    from operations of discontinued operations
                
                $
                (108,766
                )
                
                $
                576,616
                
                
                $
                (1,143,161
                )
                
                $
                (1,213,682
                )


**(13)**
            
            **Subsequent
                Events**


Pursuant
        to the $7,500,000 SPA entered into in September 2007, the Company 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.
 
 Located
        in South Burlington, Vermont, the Vermont Operations carried out contract
        research and development involving advanced materials, nanolithography,
        semiconductor memory chip designs and served as JMAR’s manufacturing arm for the
        BioSentryTM product. The Biosentry product inventory is being transferred to the
        Company’s San Diego, California operation. The Vermont Operations accomplished
        contract research and development for DARPA and NAVAIR.
 
 The
        Vermont Operations were closed on October 16, 2007 at which time the Company
        entered into a letter of intent with a prospective purchaser to purchase
        substantially all of the assets of that business.
 
 On
        November 11, 2007, the Company executed an Asset Purchase Agreement (the
        "Agreement") with Applied Research Associates, Inc. (ARA) of Randolph, Vermont.
        Under the Agreement the Company is selling and ARA is purchasing certain
        assets
        of the Vermont Operation 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 is 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 March 31,
        2008.






16




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




**Overview**




JMAR
        Technologies, Inc. is an innovator in the development of laser-based technology
        for nano-scale imaging, chemical and biological analysis, and fabrication.
        The
        Company is leveraging more than a decade of laser and photonics research
        to
        develop a portfolio of products with commercial applications in rapidly growing
        industries, while continuing to carry out research and development for the
        U.S.
        Government. Management believes, that with the financing provided by the
        $7,500,000 Laurus Note (see Note 8 –Line of Credit and Notes Payable) it has,
        subject to periodic reviews with Laurus, adequate resources to fund its
        operations through September 30, 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.  Depending on market conditions and other
        considerations, we intend to continue to pursue opportunities to raise
        additional funds in the future. 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.
  JMAR’s
        pursuit of cutting-edge products includes a new initiative, the double pulse
        (DP) plasma prototype laser, which (based on its exceptional beam quality)
        is
        funded by a phase II contract from the Army Research Laboratory to enable
        laser-induced breakdown spectroscopy (LIBS) applications. Light emissions
        from
        the plasma at targeted substances such as explosives and drugs are detected
        and
        analyzed by an optical spectrometer to provide identification of the target
        material. JMAR’s DP-LIBS laser is based on a redesign of its patented
        BriteLightTM laser, a stand-alone product as well as the x-ray light source in
        nanolithography systems, and x-ray microscopy.
  JMAR’s
        BioSentryTM
        product is a continuous, on-line, real-time monitoring system for detecting
        harmful microorganisms in water. BioSentry is targeted toward a number of
        applications across multiple markets, including homeland security, the cruise
        ship and beverage industries, pharmaceutical companies, and municipal water
        utilities.
  In
        addition, to accelerate the commercialization of its technologies, JMAR is
        seeking joint ventures with large established companies with similar business
        pursuits, with existing sales and marketing staffs and distribution
        networks.




**Sources
      of Revenue**




Contract
        Research and Development, Technical Support, and Production
        Programs
  A
        contract issued to JMAR’s Vermont Operations by Naval Air Systems Command,
        supported continued x-ray lithography technology and infrastructure development.
        Under this contract, JMAR procured sub-100 nm feature size x-ray masks used
        in
        the development of high performance computer memory chips. A total of
        approximately $15.5 million has been received under this contract,
        including approximately $3.1 million funded in August 2006.
        Incremental funding under the contract was sought on an annual
        basis.
 The
        Vermont Operations were closed on October 16, 2007 at which time the Company
        entered into a letter of intent with a prospective purchaser to purchase
        substantially all of the assets of that business, including the Vermont
        Operations’ current proposal to NAVAIR, the x-ray stepper and optical microscope
        hardware, as well as the intellectual property, including four patents, related
        to x-ray lithography.
  The
        U.S.
        Army Research Laboratory (ARL) has issued a series of contracts to JMAR’s
        Research Division totalling approximately $25.5 million since 2001; a Phase
        II SBIR contract awarded in 2007 which supports the DP-LIBS plasma laser
        development program and prior year contracts which facilitated development
        of
        the Company’s Collimated Plasma Lithography (CPL) system. No program funding
        related to CPL is included in the United States Government’s current fiscal year
        budget and the Company expects no further funding under this
        contract.
 
 Standard
        Products
  JMAR’s
        diode pumped solid state BriteLightTM 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 Korea, in Japan with the Advanced
        Institute for Science and Technology (AIST), and at the Lawrence Livermore
        National Laboratory. JMAR is carrying out manufacturing engineering to reduce
        production costs and to expand the addressable market for this high performance
        laser.
  The
        Company has developed and is marketing and selling its BioSentry sensor for
        continuous, on line, real-time monitoring of drinking water for the presence
        of
        microorganisms. JMAR has received a number of orders for a small number of
        units
        from commercial and government customers, including a beverage company, a
        cruise
        line and several water utility, municipal and federal agencies. Additional
        resources for further product development, marketing and distribution are
        necessary in order to take advantage of the potential markets for the
        BioSentry.
  17
  New
        Products Under Development
  JMAR
        has identified commercial
        opportunities for instruments enabled by the laser and soft x-ray technology
        developed by the Company over the past decade. Products under development
        include the DP-LIBS plasma laser and the next two versions of the BioSentry,
        following the goal of fielding an integrated CBR sensor. In all these cases,
        the
        new and improved products are targeted at large addressable markets. JMAR
        continues to pursue public and private funding in areas that support its
        needs
        and create valuable technology for homeland security, military and commercial
        applications, being responsive to market needs
 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 continued investment
        by JMAR through next year, and we will face challenges in transitioning each
        of
        our new products from the proof of concept, alpha and beta stages to commercial
        introduction and market acceptance. See “Risk Factors” in Item 1A below and
        in our Annual Report in Form 10-K 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
        September 30, 2007 and 2006 were $93,306, and $524,244, respectively.
        Revenues for the nine months ended September 30, 2007 and 2006 were
        $433,102 and $1,036,069, respectively. The majority of the Company’s revenues
        for all of these periods were contract revenues. Revenues for the three and
        nine
        months ended September 30, 2007 and 2006 were as
        follows:




Three
                Months Ended
            
            
            Nine
                Months EndedSeptember
                30,
            
            
            September
                30,
            
            
            September
                30,
            
            
            September
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006Research
                Division
            
            $
            53,184
            
            
            $
            484,359
            
            
            $
            261,033
            
            
            $
            972,783Sensor
                Products Group
            
            
            40,122
            
            
            
            39,885
            
            
            
            172,069
            
            
            
            63,286$
            93,306
            
            
            $
            524,244
            
            
            $
            433,102
            
            
            $
            1,036,069


The
              decrease in revenues for the three and nine months ended September 30, 2007
              compared to the three and nine months ended September 30, 2006, was due
              primarily to a reduction in revenue from the DARPA Contract. The revenue
              from
              the DARPA Contract fell by $335,649 and $673,269**,**during the
              three and nine month periods ended September 30, 2007, respectively. In
              addition, there was a decrease of $210,811 of Britelight sales from the
              nine month period ended September 30, 2006 compared to the nine month
              period
              ended September 30, 2007. Partially offsetting these decreases, there was
              an increase in SBIR contract funding of $172,331 and an increase of
              revenue for
              the Sensor Product Group of $108,783, during the nine month period
              ended
              September 30, 2007,due to the sale and installation of a BioSentry unit. As
              discussed above in “Sources of Revenue”, the Company reflects the
              Microelectronics Division as a discontinued operation, which was implemented
              in
              the third quarter of 2006.
 *Income
          (Losses) From Continuing Operations*. The net loss from continuing
          operations for the three months ended September 30, 2007 and 2006 was
          $(784,333), and $(1,208,470), respectively. The loss from operations for
          those
          same periods was $(724,017) and $(1,084,874). The net loss from continuing
          operations for the nine months ended September 30, 2007 and 2006 was
          $(3,203,975) and $(5,987,189), respectively. The loss from operations for
          those
          same periods was $(2,958,719) and $(5,767,977), respectively.
  Included
            in the net loss for the three and nine months ended September 30, 2007 are
            costs invested in product development (see further discussion below)
            of
**$**63,431 and $479,609, respectively, and asset write-downs
            of $0
            and $125,117, respectively. In addition, as a result of the adoption
            of SFAS
            No. 123(R) on January 1, 2006, included in the net loss for the three
            and nine months ended September 30, 2007 is a non-cash compensation charge
            of $35,616 and $141,420, respectively. Included in the net loss for the
            three
            and nine months ended September 30, 2006 are costs invested in product
            development of $493,854 and $2,309,043, respectively, and asset write-downs
            of
            $0 and $39,067, respectively. Included in the net loss for the three
            months
            ended September 30, 2007 is non-cash interest associated with derivative
            liability of $5,590,000, $72,618 related to Laurus’ benefit conversion features,
            and amortization of debt discount of $93,750. Included in the net loss
            for the
            nine months ended September 30, 2007 is non-cash interest associated with
            derivative liability of $6,587,481, $217,854 related to Laurus’ benefit
            conversion features, and amortization of debt discount of $187,500. Included
            in
            the net loss for the three months and nine months ended September 30, 2007
            are non-cash gains in fair value of derivative liability of $5,748,355
            and
            $6,432,152, respectively. Included in the net loss for the three and
            nine months
            ended September 30, 2006 is a non-cash compensation charge of $88,207 and
            $202,812, respectively.
  *Gross
            Margins*. Gross margins of continuing operations for the nine months ended
            September 30, 2007 and 2006 were 27.8% and 29.0%, respectively. Gross
            margins for the three months ended September 30, 2007 and 2006 were 7.6%
            and 32.9%, respectively. The Company’s margins were higher in the nine month vs.
            three months of 2007 and were lower in the nine month vs three months
            of 2006
            due to the positive effect of greater relative sales of sensor products
            and
            research on gross margins. 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 for the nine
          months ended September 30, 2007 and 2006 were $ 2,474,539 and $ 3,720,314,
          respectively. SG&A expenses for the three months ended September 30,
          2007 and 2006 were $667,674 and $763,304, respectively. The decrease in
          SG&A
          expenses for the three and nine months ended September 30, 2007 compared to
          2006 was primarily attributable to cost and headcount reductions management
          achieved in 2007.
  18
  *Research,
          Development and Engineering Program (RD&E).*The Company’s RD&E
          consists of two types: customer-funded RD&E (U.S. government and other
          companies) and Company-funded RD&E. Both types of RD&E costs are
          expensed when incurred.
  ·
                Customer-funded
                    RD&E costs incurred are included in “Costs of Revenues”, and totaled
                    $61,141 and $221,017 for the three months ended September 30, 2007
                    and 2006, respectively, and $230,790 and $460,613 for the nine-month
                    periods ended September 30, 2007 and 2006, respectively. The decrease
                    in customer-funded RD&E expenditures for the three and nine months
                    ended September 30, 2007, primarily consists of an decrease of
                    $221,017 and $460,613 related to the DARPA
                    Contract.
 
 ·
                Company-funded
                    RD&E costs associated with product development are shown in “Operating
                    Expenses” and totaled $63,431 and $493,854 for the three months ended
                    September 30, 2007 and 2006, respectively, and $479,609 and
                    $2,309,043 for the nine months ended September 30, 2007 and 2006,
                    respectively. The decrease in 2007 is primarily due to reduced
                    product
                    development expenditures related to
                    BioSentry.
  Total
            RD&E expenditures for the three month periods were $124,572 and $ 714,871
            for 2007 and 2006, respectively, and $710,399 and $2,769,656 for the
            nine-month
            periods in 2007 and 2006, respectively. Total RD&E expenditures as a
            percentage of revenues were 134% and 136% for the three months ended
            September 30, 2007 and 2006, respectively, and  164%
            and  196% for the nine months ended September 30, 2007 and 2006,
            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.
  *Interest
          and Other Expense.*Interest and other expense for the three months ended
          September 30, 2007 and 2006 was $5,883,261 and $125,537, respectively, and
          for the nine months ended September 30, 2007 and 2006 was $7,331,001 and
          $272,273, respectively. Interest expense is higher in 2007 due to the recorded
          derivative liability related to warrants attached to the $750,000 Note
          and
          $7,500,000 Term Note from Laurus, interest cost associated with utilization
          of
          the Company’s 2006 Working Capital Line and additional debt under the $7,500,000
          Term Note, recorded amortization of debt discount and an increase in the
          interest rates on the Working Capital Line and $7,500,000 Term Note. Included
          in
          interest expense for the three and nine months ended September 30, 2007 and
          September 30, 2006 is $5,756,368, $7,052,835, $72,618 and $183,551,
          respectively, related to the beneficial conversion feature and fair value
          of
          warrants issued in connection with the Working Capital Line  and
          $7,500,000 Term Note 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 stockholders in
            the accompanying Consolidated Statements of Operations for the three
            and nine
            months ended September 30, 2007 and 2006 are preferred stock dividends of
            $578,467, $1,404,850, $314,499 and $969,169, respectively.  The
            preferred stock dividend amounts for the three and nine months ended
            September 30, 2007 consist of $159,243, and $481,528, respectively, of
            preferred stock dividends paid or payable in cash and $419,224, $923,322,
            respectively, related to 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 the
            2005 and 2006 Amendments. The preferred stock dividend amounts for the
            three and
            nine months ended September 30, 2006 consist of $165,504 and $467,947,
            respectively, of preferred stock dividends paid or payable in cash and
            $148,995
            and $501,222, respectively, related to 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 the
            2006 and 2005 Amendments.


**Liquidity
        and Financial Condition**
 *General.*Cash and cash equivalents at September 30, 2007 was $138,541. For the
            last several years, we have funded our operations primarily from the
            sale of
            preferred and common stock. The decrease in cash and cash equivalents
            during the
            nine months ended September 30, 2007 of $548,291 resulted primarily from
            cash used in operations of $1,773,758 (primarily related to operating
            losses)
            and payment of preferred stock dividends of $430,861, offset by net proceeds
            of
            $620,000 from the $7,500,000 term note,  net proceeds from the
            issuance of preferred stock of $643,594 and issuance of common stock
            of
            approximately $384,183.
 
 Our
            cash
            requirements have been and will continue to be significant. JMAR’s
            operations will continue to use cash in 2007 for 1) product development
            efforts; 2) corporate costs, primarily related to the cost of being a
            public
            company; 3) interest cost on financing; 4) preferred stock dividends;
            5)
            preferred stock redemptions and 6) other working capital needs. Management
            believes that with the financing provided by the $7,500,000 Term Note
            (see Note8
–Line of Credit and Notes Payable) it has, subject to periodic reviews
            with
            Laurus, adequate resources to fund its operations through September 30,
            2008.
            Until this time, the Company has determined that it will require additional
            drawdowns under the Note to continue the development of some of its emerging
            new
            products and for working capital requirements in 2007 and 2008. There
            are no
            assurances that funds will be available under the Note, due to Laurus’
requirement to approve every drawdown. Depending on market conditions
            and other
            considerations, we intend to continue to pursue opportunities to raise
            funds in
            2007 and 2008. Management believes, but cannot assure, that the Company
            will be
            able to raise additional funds through equity or other financings to
            additionally fund 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 Item 1A below.
  Working
            capital as of September 30, 2007 and December 31, 2006 was
            $(11,052,008) and $(2,657,725), respectively. The increased deficit in
            working
            capital during the nine months ended September 30, 2007 is caused
            principally by cash used in operations of $1,773,758 (primarily related
            to
            operating losses) and payment of preferred stock dividends of $430,861
            offset by
            net proceeds from the issuance of preferred stock of $643,594 and issuance
            of
            common stock of approximately $384,183.
 19
  *Preferred
          Stock*
 
 On
          June 28, 2007, the Company entered into a Securities Exchange Agreement
          with Laurus which provided for the issuance to Laurus of two million (2,000,000)
          shares of Common Stock in exchange for and cancellation of $204,400 stated
          value
          of Series G and Series I Preferred Stock held by Laurus. On
          July 5, 2007, the Company entered into a second Securities Exchange
          Agreement with Laurus which provided for the issuance to Laurus of another
          two
          million (2,000,000) shares of Common Stock in exchange for and cancellation
          of
          another $204,400 stated value of Series G and I Preferred Stock. As a
          result of these two transactions, a total of $408,800 of Series G and
          Series I Preferred Stock have been redeemed and this dollar amount will
          be
          applied to pay the monthly redemption payments due under the outstanding
          Series G and I Preferred Stock such that the remaining monthly redemption
          payment owing in August, the entire September and October monthly redemption
          payments and a portion of the November monthly redemption payment are
          canceled.
  On
          July 5, 2007, the Company and Laurus entered into a Securities Purchase
          Agreement (“SPA”) which provides for the issuance from time to time of up to
          $3.5 million shares of Series J Cumulative Convertible Preferred Stock
          (“Series J Preferred Stock”). Pursuant to the SPA, the Company’s Board of
          Directors created a new Series J Cumulative Convertible Preferred Stock,
          with a stated value of $1,000 per share, and authorized sale and issuance
          from
          time to time of up to 3,500 of such shares. Pursuant to the SPA, purchases
          by
          Laurus of shares of Series J Preferred Stock will be made from time to time
          in such amounts and at such times as Laurus may determine in its sole
          discretion. The Series J Preferred Stock accrues dividends at the rate of
          9.5% per annum and is convertible into shares of the Company’s Common Stock at a
          conversion price equal to lesser of (i) $0.15 or (ii) the equivalent price
          at which Laurus has most recently exchanged shares of Common Stock for
          shares of
          Series G and I. In the event that any shares of Series J Preferred
          Stock remain outstanding on the second anniversary of the issuance of such
          shares, such shares must be redeemed in cash by the Company. The Series J
          Preferred Stock also provides that the Company can force the conversion
          of the
          Series J Preferred Stock at $0.50 per share if the bid price of the
          Company’s Common Stock for ten consecutive trading days equals or exceeds $0.50
          per share and the trading volume during such ten day period exceeds 100,000
          shares per day. The provisions of the Series J Preferred Stock restrict
          Laurus from converting into shares of Common Stock if Laurus would have
          beneficial ownership of more than 9.99% of the Company.
  The
          Series J SPA also provided that 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. See Note (9) Equity Transactions.
  On
          July 5, 2007, Laurus purchased 408.8 shares of Series J Preferred
          Stock (with a stated value per share of $1,000) for gross proceeds of $408,800.
          The shares of Series J Preferred Stock issued in this transaction have a
          conversion price of $0.1022 per share (the price at which Laurus had most
          recently received shares of Common Stock in exchange for its Series G and
          Series I Preferred Stock). In connection with the sale of the Series J
          Preferred Stock, the Company paid Midtown Partners & Co., LLC (“Midtown”) a
          fee equal to eight percent (8%) of the gross proceeds from the sale of
          the
          Series J Preferred Stock and a warrant to purchase 320,000 shares of Common
          Stock, with a term of 5-1/2 years, an exercise price of $0.1022 per share
          and a provision enabling the holder to effect a cashless exercise of the
          Warrant.
  On
          July 20, 2007 the Company and Laurus entered into an Agreement which
          provides that certain of the convertible securities owned by Laurus may
          not be
          converted into common stock unless and until the Company’s shareholders have
          approved an amendment to the Company’s Certificate of Incorporation to increase
          the authorized capital stock from 80,000,000 shares of Common Stock to
          300,000,000 shares of Common Stock. These shares which will not be convertible
          consist of 1) those shares of Series I Preferred Stock with a stated value
          of $817,600 that were amended on July 5, 2007 to reduce their conversion
          price as noted above, 2) the shares of Series J Preferred Stock with a
          stated value of $408,800 with a conversion price of $0.1022 that were issued
          on
          July 5, 2007, and 3) up to another $817,600 of Series J Preferred
          Stock and up to another $1,635,200 of Series G and Series I Preferred
          Stock to be adjusted in connection with the sale of such Series J Preferred
          Stock. Pursuant to this Agreement, the Company agreed to file a proxy statement
          and solicit approval by its shareholders of the increase in authorized
          shares.
  On
          August 8, 2007, Laurus purchased 2,100,000 shares of Common Stock in
          exchange for and cancellation of $252,000 stated value of Series G and
          Series I Preferred Stock held by Laurus. As a result of this transaction,
          $252,000 of Series G and Series I Preferred Stock has been redeemed
          and this dollar amount has been applied to pay the monthly redemption payments
          due under the outstanding Series G and I Preferred Stock such that the
          remaining monthly redemption payment owing under the Series G for November,
          2007 has been satisfied, the entire monthly redemption payment under the
          Series I for November has been satisfied and $107,618 of the $122,178
          December redemption payment under the Series I has been
          satisfied.
  On
          August 9, 2007, Laurus purchased $300,000 of shares of Series J
          Cumulative Convertible Preferred Stock (“Series J Preferred Stock”) with a
          stated value of $1,000 per share. These shares of Series J Preferred Stock
          have a conversion price of $0.12 per share. The Series J Preferred Stock
          accrues dividends at the rate of 9.5% per annum.
  In
          connection with this sale of  Series J Preferred Stock, the
          Company paid Midtown a fee equal to eight percent (8%) of the gross proceeds
          from the sale of the Series J Preferred Stock and a warrant to purchase
          168,000 shares of Common Stock, with a term of 5-1/2 years, an exercise
          price of $0.12 per share and a provision enabling the holder to effect
          a
          cashless exercise of the Warrant.
  20
  *Working
          Capital Lines and******Term Notes.* In
          March 2006, the Company entered into a new working capital line of credit
          with Laurus Master Fund Ltd. (“Laurus”) which replaced an earlier working
          capital line provided by Laurus (The “2006 Working Capital Line”). The 2006
          Working Capital Line is evidenced by a Revolving Fixed Price Convertible
          Note
          (the “2006 Secured Revolving Note”) which allows 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. Upon
          approval of Laurus, the 2006 Working Capital Line provides for advances
          in
          excess of the availability (“Overadvance”). 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 (10.25%
          as of September 30, 2007).  As amended by the Omnibus Amendment,
          dated September 12, 2007, the 2006 Working Capital Line terminates in August
          2009 (See below in this Note 8). As of September 30, 2007, and
          December 31, 2006, there was $649,911, and $1,422,428, respectively,
          outstanding under the 2006 Working Capital Line,
          including  Overadvances of $210,295 and $227,232, all of which is
          included in current liabilities on the accompanying Consolidated Balance
          Sheets.
 
 The
          $750,000 Note entered into in April 2007 accrues interest at the rate of
          prime
          rate plus 2%, with interest payable monthly in arrears which commenced
          on
          May 1, 2007, and with the principal and all unpaid interest is due in
          August 2009,  As of September 30, 2007, $750,000 was outstanding
          pursuant to the Note.
 
 Pursuant
          to the $7,500,000 Term Note interest 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. Of the original principal
          amount of $7,500,000, approximately $6,420,000 of the proceeds of the Note
          were
          funded into a restricted account, with the disbursement of such funds subject
          to
          the conditions described below, 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. 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.  As of September 30, 2007, only $620,000
          has been disbursed and is unrestricted pursuant to the $7,500,000 Term
          Note.
 
 Under
          the
          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 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 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.*Letter of Credit*. In connection with the Company’s
          lease of its Rancho Bernardo facility, Comerica Bank issued a letter of
          credit
          in the amount of $128,645. If the Company’s cash in its accounts with Comerica
          falls below $1 million at the end of any quarter, Comerica will 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 $128,645.
 *Cash
            Used in Operations*. Net cash used in continuing operations was $1,766,408
            for the nine months ended September 30, 2007 compared to $5,833,521 for
            the nine
            months ended September 30, 2006. The loss net of non-cash items
            (depreciation, amortization, change in fair value of derivative liability,
            debt
            discount, stock-based compensation expense, services received in exchange
            for
            common stock or options and asset write-downs) was $1,875,845 and $5,195,812
            for
            the nine months ended September 30, 2007 and 2006, respectively. The lower
            use of cash related to the loss net of non-cash items in 2007 is primarily
            due
            to reduced headcount and expenses in 2007 compared to 2006. Product development
            expenditures will continue to be significant in 2007 as the Company brings
            its
            new products to market, particularly BioSentry. Favorably impacting cash
            flow
            from operations in 2007 was a decrease in inventories $217,182 and an
            increase
            of accounts payable and accruals of $475,368, as the company managed
            cash
            resources Negatively impacting cash flow from operations in 2007 was
            an increase
            of accounts receivable of $288,656.   2006 was negatively
            impacted by a decrease in billings in excess of cost incurred of
            $156,030.
  *Cash
            Generated (Used) in Investing Activities*. For the nine months ended
            September 30, 2007, cash used in investing activities was $(41,990)
            compared to $(96,170) for the nine months ended September 30,
            2006.
  *Cash
            Provided (Used) in Financing Activities*. For the nine months ended
            September 30, 2007, cash provided by financing activities was $1,267,457
            compared to $3,866,407 provided for the nine months ended September 30,
            2006.
            Net proceeds from the sale of common stock were $384,183 and $1,334,413
            in 2007
            and 2006, respectively. Preferred stock dividends paid in 2007 and 2006
            were
            $430,861 and $466,916, respectively.


21




**Commitments**




Future
      minimum annual commitments under contractual obligations, net of sublease
      income, and deferred compensation as of September 30, 2007 are as follows
      (2007 is for three months) (unaudited):




2007
            
            
            2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            Thereafter
            
            
            TotalLeases
            
            $
            180,294
            
            
            $
            530,495
            
            
            $
            373,797
            
            
            $
            371,233
            
            
            $
            384,494
            
            
            $
            331,020
            
            
            $
            2,171,333Deferred
                compensation
            
            
            30,000
            
            
            
            130,000
            
            
            
            65,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            225,000$
            210,294
            
            
            $
            660,495
            
            
            $
            438,797
            
            
            $
            371,233
            
            
            $
            384,494
            
            
            $
            331,020
            
            
            $
            2,396,333




The
      leases are primarily for facilities. The deferred compensation is presented
      at
      the total amount to be paid, whereas the liability has been discounted for
      financial reporting purposes.




**Preferred
      Stock Redemption Obligations**




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


**Gross
                  Amount Outstanding at September 30,**
              
              
              **Scheduled
                  Redemptions****Description**
              
              **2007**
              
              
              **2007**
              
              
              **2008**
              
              
              **2009**
              
              
              **Total**Series G
                  Preferred
              
              $
              1,177,800
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1,177,800
              
              
              $
              1,177,800Series I
                  Preferred
              
              
              5,797,650
              
              
              
              -
              
              
              
              -
              
              
              
              5,797,650
              
              
              
              5,797,650Series
                  J Preferred
              
              
              708,800
              
              
              
              -
              
              
              
              -
              
              
              
              708,800
              
              
              
              708,800$
              7,684,250
              
              
              $
              -
              
              
              $
              -
              
              
              $
              7,684,250
              
              
              $
              7,684,250


**Line
        of Credit**




The
        terms
        of the 2006 Working Capital Lines are described in “Liquidity”
above.
  **$750,000
          Note**
  The
          terms
          of the $750,000 Note are described in “Liquidity” above. As of
          September 30, 2007, $750,000 was outstanding pursuant to the $750,000 Note.
          The amount outstanding at September 30, 2007 is included within Current
          Liabilities, “Working Capital Line of Credit, Net” on the accompanying
          Consolidated Balance Sheet and is excluded from the above table.
  **$7,500,000 Term
          Note**
  The
          terms
          of the $7,500,000 Term Note are described in “Liquidity” above.  As of
          September 30, 2007, $620,000 was outstanding pursuant to the $7,500,000
          Term Note.
 
 **Net
          Operating Loss Carryforward**
  At
          December 31, 2006, the Company had approximately $58 million of
          Federal net operating loss carry-forwards subject to certain annual limitations,
          which expire from 2006 through 2026. To the extent the Company has taxable
          income in the future these carry-forwards may be used by the Company to
          reduce
          its cash outlay for taxes. Both of the Company's discontinued operations
          file a
          consolidated income tax return with JMAR Technologies, Inc. and $576,616
          of
          those net operating losses will be utilized in the current
          year.




22




**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
      each
      of the three years ended December 31, 2006, 2005 and 2004, over 90% of the
      Company’s revenues were contract revenues, with the remainder consisting of two
      BriteLightTM
      sales, spare parts sales and service. Contract revenues are recognized based
      on
      the percentage of completion method wherein income is recognized pro-rata over
      the life of the contract based on the ratio of total incurred costs to
      anticipated total costs of the contract. The program manager prepares a
      statement of work, schedule and budget for each contract. At least quarterly,
      actual costs are compared to budget and technical progress is compared to the
      planned schedule. The Company prepares an estimate of costs to complete for
      each
      contract at least quarterly. Estimated losses based on this review are fully
      charged to operations when identified. Actual costs could differ from these
      estimated costs. Reimbursable or recoverable general and administrative
      (G&A) costs are charged to G&A expense as incurred.





**Goodwill
      and Intangible Assets**




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




Management
      performed an interim evaluation of goodwill as of June30, 2004 following
      notification that no additional funding of the DARPA Contract was included
      in
      the Government’s fiscal year 2005 budget. A further evaluation of goodwill was
      performed again as of December 31, 2004, December 31, 2005,
      June 30, 2006, and December 31, 2006. Until September 30, 2006,
      the business units identified were Vermont Operations/Research Division,
      Microelectronics Division and Sensor Products Group. With the discontinuance
      of
      the Microelectronics Division, the Company now has two business units. All
      of
      the Company’s goodwill arose from the acquisition of SAL, Inc. (the predecessor
      to the Vermont Operations) and was allocated to the Vermont Operations/Research
      Division business unit. The Research Division and Vermont Operations are viewed
      as one business unit due to the interrelations of their businesses (i.e., X-ray
      source related development and commercialization, with the source and technology
      development coming from the Research Division and the product design,
      manufacturing engineering, integration, testing and assembly performed by the
      Vermont Operations, as well as the zone plate optics development and
      manufacturing for the future laser based products to be performed by the Vermont
      Operations). Additionally, the Vermont Operations will use its core capabilities
      to perform manufacturing for other products of the Company.




The
      discounted cash flow analysis is based on a 7-year projection of revenue,
      operating expenses, capital expenditures, and working capital requirements
      and a
      continuity value of 5 times the 7th year cash flow. The discount rate used
      for
      the most recent analysis was 30%, taking into account the risk of the new
      products. Sensitivity analysis is also performed to determine the
      appropriateness of the assumptions used in the discounted cash flow analysis.
      As
      a majority of the Company’s expected revenues in the future are based on
      products that are currently under development, the Company estimates the
      expected revenues based on its current knowledge of the market and our
      expectations of successfully penetrating those markets.




The
      market capitalization test is used as a complementary test to the discounted
      cash flow analysis. The Company estimates its market capitalization based on
      the
      average stock price over the preceding year and estimates the three business
      units’ relative contribution to the market value of the Company based on
      shareholder inquiries, emphasis by the Company in discussions with shareholders
      and others, and emphasis in formal shareholder communications (i.e., press
      releases).




Based
      on
      the Company’s analysis as of December 31, 2006, the entire amount of
      goodwill of $4,415,932 was written off.




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.




23




**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.




**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.




24




**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
        $7,500,000 Term Note and Preferred Stock, both of which bear interest and
        dividends, respectively, based on the prime rate. As of September 30, 2007,
        we had $7,500,000, $750,000 and $894,267 outstanding under the $7,500,000
        Term
        Note, the $750,000 Note and the 2006 Working Capital Line, respectively,
        and
        $5,825,649 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 $150,000 on
        an
        annual basis.




**Item 4.
      Controls and Procedures.**




The
        Company maintains disclosure controls and procedures that are designed to
        ensure
        that information required to be disclosed in the Company’s Exchange Act reports
        is recorded, processed, summarized and reported within the time periods
        specified in the SEC’s rules and forms, and that such information is accumulated
        and communicated to the Company’s management, including its Chief Executive
        Officer and Chief Financial Officer, as appropriate, to allow timely decisions
        regarding required disclosure. In designing and evaluating the disclosure
        controls and procedures, management recognizes 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 necessarily was
        required to apply its judgment in evaluating the cost-benefit relationship
        of
        possible controls and procedures.
  The
        Company carried out an evaluation, under the supervision and with the
        participation of the Company’s management, including the Company’s Chief
        Executive Officer and the Company’s Chief Financial Officer, of the
        effectiveness as of September 30, 2007 of the design and operation of the
        Company’s disclosure controls and procedures (as defined in Exchange Act
        Rule 13a-15(e)). Based on such evaluation, the Company’s Chief Executive
        Officer and Chief Financial Officer concluded that the Company’s disclosure
        controls and procedures were not effective.
  In
        February and March 2007, the Company’s Chief Financial Officer, Corporate
        Controller and Audit Committee Chairman resigned. The Chief Financial Officer
        was replaced at the end of March 2007, but resigned in September 2007 and
        was
        replaced by the current Chief Financial Officer. Although the Company has
        replaced the Chief Financial Officer and has engaged contract accounting
        personnel, the learning curve of the replacements will impact the Company
        internal control over financial reporting until those individuals become
        more
        familiar with the Company’s operations.
  Material
        weaknesses in internal control over financial reporting were identified by
        the
        Company’s independent registered public accounting firm during the
        December 31, 2006 audit process. They identified control deficiencies
        regarding 1) lack of segregation of duties; 2) lack of timely completion
        of
        financial control and reporting processes and 3) lack of formal internal
        control
        environment. Management of the Company believes that these material weaknesses
        are due to the small size of the Company’s accounting staff, exacerbated by the
        resignation of the Company’s Chief Financial Officer and Corporate Controller
        prior to the completion of the audit. Management has taken recent actions
        to
        replace these positions; however, the small size of the Company’s accounting
        staff may prevent adequate controls in the future such as segregation of
        duties
        due to the cost/benefit of such remediation.






25




**PART
      II — OTHER INFORMATION**




**Item 1.
        Legal Proceedings**
  As
        reported previously, Mezzetti Financial Services, Inc, the assignee of Ray
        L.
        Hellwig Plumbing & Heating (Hellwig), is the plaintiff in a lawsuit against
        JMAR, JSI Microelectronics, Inc. and JMAR Precision Systems, Inc. to recover
        $174,906 including interest and fees, amounts alleged to be owed by the
        defendants in connection with work performed by Hellwig for JSI
        Microelectronics, Inc.  JMAR Technologies, Inc. is not a party to a
        contract with the plaintiff and believes it has no legal responsibility for
        the
        obligations of JSI Microelectronics, Inc. The plaintiff has attached
        approximately $50,310 in the Company’s funds principally from accounts
        receivable and cash accounts of JSI Microelectronics, Inc.
  **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, 2006 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 nine months ended September 30, 2007 and
        for the years ended December 31, 2006 and 2005 was $1,766,408, $4,752,912
        and $4,806,376, 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 2007 and the Company
        will require additional borrowings under its $7,500,000 Term Note for working
        capital requirements through 2008 and to continue the development of some
        of our
        emerging new products. Although we have been able to draw down under the
        $7,500,000 Term Note there is no assurance that Laurus will continue to release
        funds.  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.
  **In
        order to complete significant additional financings, we will be required
        to
        obtain the approval of our shareholders to increase the number of authorized
        shares of capital stock.**
  In
        order
        to comply with our obligations to our principal lender and in order complete
        significant additional financings in the future using our equity, we will
        have
        to increase the number of authorized shares of our capital stock. In order
        to do
        so, we intend to file a proxy statement in the near future to seek shareholder
        approval for such an increase. There can be no assurance that our shareholders
        will approve this increase and the failure to obtain such approval will result
        in a default under our financing arrangements which have a significant adverse
        effect on the Company’s financial condition.
 
 **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 nine months ended
          September 30, 2007 and for the years ended December 31, 2006 and 2005
          were $433,102, $1,620,865 and $1,675,163, respectively. Our net loss for
          the
          nine months ended September 30, 2007 and for the years ended December 31,
          2006 and 2005 was $2,627,359, $13,106,681 and $8,032,803, 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.
  **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, that results in a more than remote
        likelihood that a material misstatement of annual or interim financial
        statements will not be prevented or detected.
  Material
        weaknesses in our internal control over financial reporting and in our
        disclosure controls existed as of December 31, 2006 and continue to exist
        as of September 30, 2007 with regard to 1) lack of segregation of duties;
        2) lack of timely completion of financial control and reporting and 3) lack
        of
        formal internal control environment. Management of the Company believes that
        these material weaknesses are due to the small size of the Company’s accounting
        staff, exacerbated by the resignations of the Company’s Chief Financial Officer
        and Corporate Controller prior to the completion of the audit and the change
        in
        Chief Financial Officer at the end of the third quarter. Management has taken
        recent actions to replace these positions, however, the small size of the
        Company’s accounting staff may prevent adequate controls in the future such as
        segregation of duties due to the cost/benefit of such remediate. See
“Item 4 — Controls and Procedures” for a more complete description of this
        material weakness.
  26
  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 September 30, 2007, there were 133,956,243 shares of common stock
              subject to issuance upon exercise of outstanding options and warrants
              (with the
              recently-issued warrants for 80 million and 39 million shares not being
              exercisable unless and until the Company has increased its authorized
              shares to
              allow for the issuance of the shares issuable under all of the Company’s
              outstanding warrants, options and convertible securities).
 
 As
              of September 30 2007, 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. In
              July,
              2007, Laurus agreed that the shares of Series J preferred stock issued in
              July and August and shares of Series I the conversion prices of which had
              been reduced in July and August cannot be converted into common stock
              unless the
              Company’s shareholders have approved an increase in the Company’s authorized
              common shares.  Notwithstanding these stated conversion prices, we have in
              the past and will continue to issue shares of Common Stock to Laurus
              in exchange
              for shares of Series G and I Preferred Stock at prices which are at a
              discount to the current market prices for our shares of Common Stock
              and may
              continue to reduce the conversion price of existing preferred stock.
              These
              issuances have resulted and will result in substantial dilution.
  To
              the
              extent that outstanding options and warrants are exercised prior to
              their
              expiration dates, additional funds will 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 Convertible
              Note and
              Preferred Stock could adversely affect the market price of our common
              stock.


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




(a) (i)
              
              In
                  the third quarter 42,860****shares of common stock were
                  issued for fees to members of the Board of Directors in lieu of
                  cash. The
                  Company valued the stock based on the fair value on the date of
                  issuance.(a) (ii)
              
              Stock
                  Awards to Key Employees: In August 2007, the Company issued 50,000
                  shares
                  under the 2006 Equity Incentive Plan to a key employee.




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




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**Item 6.
      Exhibits.**




Exhibit 3.1
              
              Certificate
                  to Set Forth Designations, Voting Powers, Preferences, Limitations,
                  Restrictions and Relative Rights of Series J Cumulative Convertible
                  Preferred Stock (Incorporated by reference to Exhibit 3.1 filed with
                  the Company’s Form 8K filed on July 17, 2007)Exhibit
                  4.1
              
              Warrant,
                  dated as of August 31, 2007, for the purchase of 80,000,000
                  shares issued to Laurus Master Fund, Ltd. (“Laurus”)Exhibit
                  4.2
              
              Warrant,
                  dated as of August 31, 2007, for the purchase of 39,000,000 shares
                  issued to Laurus Master Fund, Ltd. (“Laurus”)Exhibit 10.1
              
              Securities
                    Exchange Agreement, dated June 28, 2007, between the Company
                    and Laurus.
                    (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                    Form 8-K filed on July 17, 2007).Exhibit 10.2
              
              Securities
                    Exchange Agreement, dated as of July 5, 2007, between the Company and
                    Laurus. (Incorporated by reference to Exhibit 10.2 filed with the
                    Company’s Form 8-K filed on July 17,
                    2007).Exhibit 10.3
              
              Securities
                    Purchase Agreement, dated as of July 5, 2007, between the Company and
                    Laurus. (Incorporated by reference to Exhibit 10.3 filed with the
                    Company’s Form 8-K filed on July 17,
                    2007).Exhibit 10.4
              
              Securities
                    Purchase Agreement (Offering No.1), dated as of July 5, 2007,
                    between the
                    Company and Laurus.Exhibit 10.5
              
              Agreement,
                    dated as of July 20, 2007, between the Company and
                    Laurus.Exhibit 10.6
              
              Securities
                    Exchange Agreement, dated as of August 8, 2007, between the Company
                    and
                    Laurus.Exhibit 10.7
              
              Securities
                    Purchase Agreement (Offering No. 2), dated as of August  8,
                    2007, between the Company and Laurus.Exhibit 10.8
              
              Securities
                    Purchase Agreement, dated as of August 31, 2007, between the
                    Company and
                    Laurus.Exhibit 10.9
              
              Secured
                    Term Note, dated as of August 31, executed by the Company in
                    favor of
                    Laurus.Exhibit 10.10
              
              Omnibus
                    Amendment, dated as of August 31, between the Company and
                    Laurus.Exhibit 10.11
              
              Employment
                Letter - Edward C. HallExhibit 10.12
              
              Executive
                Services Agreement - Tatum LLCExhibit
                  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
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act
                  2002.




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SIGNATURE




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.November
                14, 2007
            By:
            /s/
                C. Neil BeerC.
                Neil Beer, Chief Executive OfficerBy:
            /s/  Edward
                C. HallEdward
                C. Hall, Chief Financial Officer






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