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, 2008




Commission
File Number 1-10515




JMAR
TECHNOLOGIES, INC.


(Exact
name of registrant as specified in its charter)


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




10905
Technology Place


San
Diego, CA 92127


(858) 946-6800


(Address,
including zip code and telephone number including


area code
of registrant’s principal executive office)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for at least the past 90 days.


Yes þ          No
o




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





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






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


Yes o          No
þ




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date (November 12, 2008).




Common
Stock, $.01 par value: 58,201,461


shares












INDEX


(Page #PART
      I.
            
            FINANCIAL
      INFORMATIONItem 1.
            
            Financial
      Statements:Consolidated
      Balance Sheets — September 30, 2008 (unaudited) and December 31,
      2007
            2Consolidated
      Statements of Operations (unaudited) — Three and Nine months ended
      September 30, 2008 and 2007
            3Consolidated
      Statements of Cash Flows (unaudited) — Nine months ended September 30,
      2008 and 2007
            4Notes
      to Consolidated Financial Statements (unaudited)
            5Item 2.
            
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            17Item 3.
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            29Item 4T.
            
            Controls
      and Procedures
            29PART
      II.
            
            OTHER
      INFORMATIONItem 1.
            
            Legal
      Proceedings
            31Item 1A.
            
            Risk
      Factors
            31Item 2.
            
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            32Item 3.
            
            N/AItem 4.
            
            Submission
      of Matters to a Vote of Security Holders
            32Item 5.
            
            N/AItem 6.
            
            Exhibits
            32














PART I — FINANCIAL INFORMATION




JMAR
TECHNOLOGIES, INC.


CONSOLIDATED
BALANCE SHEETS


As
of September 30, 2008 and December 31, 2007






ASSETS
              
              September 30,
                2008
              
              
              December
      31,
                2007(unaudited)Current
      Assets:Cash
      and cash equivalents
              
              $
              159,833
              
              
              $
              174,879Accounts
      receivable
              
              
              9,963
              
              
              
              44,544Unbilled
      receivables
              
              
              20,404
              
              
              
              21,180Inventories
              
              
              682,198
              
              
              
              308,029Current
      assets of discontinuted operations
              
              
              -
              
              
              
              479,342Prepaid
      expenses and other
              
              
              174,228
              
              
              
              160,610Total
      current assets
              
              
              1,046,626
              
              
              
              1,188,584Property
      and equipment, net
              
              
              571,825
              
              
              
              683,249Intangible
      assets, net
              
              
              1,702,352
              
              
              
              1,641,913Restricted
      cash
              
              
              1,181,956
              
              
              
              4,251,252Other
      assets
              
              
              222,555
              
              
              
              217,302TOTAL
      ASSETS
              
              
              4,725,314
              
              
              
              7,982,300LIABILITIES AND
      STOCKHOLDERS' DEFICITCurrent
      Liabilities:Accounts
      payable
              
              $
              263,766
              
              
              $
              534,586Accrued
      liabilities
              
              
              713,796
              
              
              
              427,600Term
      notes, net of debt discounts
              
              
              6,290,368
              
              
              
              -Accrued
      payroll and related costs
              
              
              214,759
              
              
              
              218,562Working
      capital line of credit, net
              
              
              514,744
              
              
              
              508,725Current
      portion of notes payable and other liabilities, net
              
              
              125,385
              
              
              
              103,375Current
      liabilties of discontinued operations
              
              
              704,333
              
              
              
              708,716Current
      portion of deferred rent
              
              
              49,429
              
              
              
              49,429Derivative
      liabilities
              
              
              14,904,337
              
              
              
              5,022,378Total
      current liabilities
              
              
              23,780,917
              
              
              
              7,573,371Term
      notes, net of debt discounts
              
              
              -
              
              
              
              1,505,208Long-term
      portion of deferred rent
              
              
              152,404
              
              
              
              250,887Long-term
      liabilities of discontinued operations
              
              
              89,209
              
              
              
              89,209Total
      liabilities
              
              
              24,022,530
              
              
              
              9,418,675Redeemable
      convertible preferred stock: $0.01 par value;5,000,000
      shares authorized; 738,329 sharesissued
      and outstanding at September 30, 2008 andDecember
      31, 2007, net of unamortized discount of$1,312,277
      and $1,709,606, respectively
              
              
              6,545,574
              
              
              
              5,974,644Commitments
      and contingenciesStockholders'
      deficit:Common
      stock: $0.01 par value; 380,000,000 shares authorized;57,701,461
      shares issued and outstanding at September 30,2008,
      and 53,839,559 shares issued and outstanding atDecember 31,
      2007
              
              
              577,015
              
              
              
              538,395Additional
      paid-in-capital
              
              
              86,840,392
              
              
              
              85,191,382Committed
      common stock
              
              
              24,030
              
              
              
              -Accumulated
      deficit
              
              
              (113,284,227
              )
              
              
              (93,140,796
              )Total
      stockholders' deficit
              
              
              (25,842,790
              )
              
              
              (7,411,019
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
              
              $
              4,725,314
              
              
              $
              7,982,300





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




2




JMAR
TECHNOLOGIES, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


For
the Three Months and Nine Months Ended September 30, 2008 and 2007


(Unaudited)




Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      30, 2008
              
              
              September
      30, 2007
              
              
              September
      30, 2008
              
              
              September
      30, 2007Revenues
              
              $
              71,145
              
              
              $
              93,306
              
              
              $
              284,106
              
              
              $
              433,102Costs
      of revenues
              
              
              58,912
              
              
              
              86,218
              
              
              
              279,489
              
              
              
              312,556Gross
      profit
              
              
              12,233
              
              
              
              7,088
              
              
              
              4,617
              
              
              
              120,546Operating
      expenses:Selling,
      general and administrative
              
              
              1,901,147
              
              
              
              667,674
              
              
              
              4,029,991
              
              
              
              2,474,539Research
      and development
              
              
              349,408
              
              
              
              63,431
              
              
              
              1,293,998
              
              
              
              479,609Impairment
      of long-lived assets
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              125,117Total
      operating expenses
              
              
              2,250,555
              
              
              
              731,105
              
              
              
              5,323,989
              
              
              
              3,079,265Operating
      loss from  continuing operations
              
              
              (2,238,322
              )
              
              
              (724,017
              )
              
              
              (5,319,372
              )
              
              
              (2,958,719
              )Interest
      and other income
              
              
              -
              
              
              
              73,882
              
              
              
              61,352
              
              
              
              122,426Interest
      and other expense
              
              
              (1,266,921
              )
              
              
              (5,883,261
              )
              
              
              (3,785,474
              )
              
              
              (7,331,001
              )Change
      in fair value of derivative liability
              
              
              12,358,365
              
              
              
              5,748,355
              
              
              
              (10,374,040
              )
              
              
              6,432,152Other
      Income
              
              
              11,000
              
              
              
              708
              
              
              
              11,000
              
              
              
              531,167Income/
      (loss) from continuing operations
              
              
              8,864,122
              
              
              
              (784,333
              )
              
              
              (19,406,534
              )
              
              
              (3,203,975
              )Income/(loss)
      from discontinued operations
              
              
              -
              
              
              
              (108,766
              )
              
              
              
              
              
              
              576,616Net
      income (loss)
              
              
              8,864,122
              
              
              
              (893,099
              )
              
              
              (19,406,534
              )
              
              
              (2,627,359
              )Less:
      Preferred stock dividends
              
              
              (205,678
              )
              
              
              (578,467
              )
              
              
              (736,897
              )
              
              
              (1,404,850
              )Income
      (loss) available to common stockholders - basic
              
              
              8,658,444
              
              
              
              (1,471,566
              )
              
              
              (20,143,431
              )
              
              
              (4,032,209
              )Deemed
      preferred stock dividends
              
              
              205,678
              
              
              
              -
              
              
              
              -
              
              
              
              -Income
      (loss) available to common stockholders - fully diluted
              
              $
              8,864,122
              
              
              $
              (1,471,566
              )
              
              $
              (20,143,431
              )
              
              $
              (4,032,209
              )Weighted
      average number of common shares outstanding - basic
              
              
              58,141,217
              
              
              
              50,091,351
              
              
              
              55,381,078
              
              
              
              44,821,188Conversion
      of Convertible Preferred Stock
              
              
              20,065,473Exercise
      of stock options and warrants
              
              
              139,055,467
              
              
              
              -
              
              
              
              -
              
              
              
              -Weighted
      average number of common shares outstanding - fully
diluted
              
              
              217,262,157
              
              
              
              50,091,351
              
              
              
              55,381,078
              
              
              
              44,821,188Earnings
      per common shareBasic
      earnings per shareContinuing
      operations
              
              $
              0.15
              
              
              $
              (0.03
              )
              
              $
              (0.36
              )
              
              $
              (0.10
              )Discontinued
      operations
              
              
              0.00
              
              
              
              (0.00
              )
              
              
              0.00
              
              
              
              0.01Basic
      EPS
              
              $
              0.15
              
              
              $
              (0.03
              )
              
              $
              (0.36
              )
              
              $
              (0.09
              )Fully
      diluted earnings per shareContinuing
      operations
              
              $
              0.04
              
              
              $
              (0.03
              )
              
              $
              (0.36
              )
              
              $
              (0.10
              )Discontinued
      operations
              
              
              0.00
              
              
              
              (0.00
              )
              
              
              0.00
              
              
              
              0.01Fully
      diluted EPS
              
              $
              0.04
              
              
              $
              (0.03
              )
              
              $
              (0.36
              )
              
              $
              (0.09
              )





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, 2008 and 2007


(Unaudited)






2008
                
                
                2007Cash
      flows from operating activities:Net
      Loss
                
                $
                (19,406,534
                )
                
                $
                (2,627,359
                )Adjustments
      to reconcile loss from continuing operations to net cash used in
      operating activities:Depreciation
      and amortization
                
                
                197,493
                
                
                
                250,592Change
      in fair value of derivative liability
                
                
                10,374,040
                
                
                
                (6,432,152
                )Amortization
      of debt discount and beneficial conversion feature
                
                
                3,103,929
                
                
                
                6,992,835Stock
      based compensation expense
                
                
                276,051
                
                
                
                110,586Services
      received in exchange for common stock and warrants
                
                
                924,563
                
                
                
                232,018Services
      received in exchange for committed common stock
                
                
                24,030
                
                
                
                18,300Impairment
      of long lived assets
                
                
                -
                
                
                
                125,117(Increase)
      decrease in:Accounts
      receivable and unbilled receivables
                
                
                35,357
                
                
                
                288,656Inventories
                
                
                (374,169
                )
                
                
                (217,182
                )Prepaid
      expenses and other
                
                
                65,305
                
                
                
                96,209Accounts
      payable
                
                
                (270,820
                )
                
                
                417,122Accrued
      liabilities
                
                
                292,419
                
                
                
                (364,841
                )Deferred
      compensation
                
                
                (39,401
                )
                
                
                (73,456
                )Deferred
      rent
                
                
                (37,072
                )
                
                
                (37,071
                )Net
      cash used in continuing operations
                
                
                (4,834,809
                )
                
                
                (1,220,626
                )Changes
      in net assets and liabilities of discontinued operations
                
                
                474,959
                
                
                
                (553,132
                )Net
      cash used in operating activities
                
                
                (4,359,850
                )
                
                
                (1,773,758
                )Cash
      flows from investing activities:Purchase
      of property and equipment
                
                
                (84,829
                )
                
                
                (9,989
                )Proceeds
      from the disposition of property and equipment
                
                
                2,547
                
                
                
                -Purchases
      of intangible assets
                
                
                (64,227
                )
                
                
                (43,571
                )Payments
      received on notes receivable
                
                
                -
                
                
                
                11,570Net
      cash used in investing activities
                
                
                (146,509
                )
                
                
                (41,990
                )Cash
      flows from financing activities:Borrowing
      on term notes and line of credit, net of debt issue costs
                
                
                1,687,250
                
                
                
                7,107,949Net
      proceeds from the issuance of common stock
                
                
                84,360
                
                
                
                384,183Decrease/(Increase)
      in restricted cash
                
                
                3,069,297
                
                
                
                (6,437,408
                )Cash
      payment of preferred stock dividends
                
                
                (349,594
                )
                
                
                (430,861
                )Issuance
      of preferred stock, net
                
                
                -
                
                
                
                643,594Net
      cash provided by financing activities
                
                
                4,491,313
                
                
                
                1,267,457Net decrease in
      cash and cash equivalents
                
                
                (15,046
                )
                
                
                (548,291
                )Cash
      and cash equivalents, beginning of period
                
                
                174,879
                
                
                
                686,832Cash
      and cash equivalents, end of period
                
                $
                159,833
                
                
                $
                138,541Cash
      paid for interest
                
                $
                680,540
                
                
                $
                236,102Supplemental
      Disclosure of Non Cash Investing & Financing
    Activities:The
      nine months ended September 30, 2008:Reclassification
      of preferred stock and non employee warrants to additional paid in
      capital
                
                $
                281,830
                
                
                $
                -Estimated
      fair value issuance of common stock and warrants issued for prepaid
      consulting services
                
                $
                176,013
                
                
                $
                -Deemed
      preferred stock dividends
                
                $
                397,329
                
                
                $
                -Warrant
      exercised
                
                $
                661
                
                
                $
                -The
      nine months ended September 30,  2007:Repayment
      of deferred compensation proceeds from cash surrender value of life
      insurance
                
                $
                -
                
                
                $
                123,459Conversion
      by Company of previously existing Series G & I Preferred Stock into
      7,600,000shares
      of common stock in the last and current quarter.
                
                $
                -
                
                
                $
                739,663In
      conjunction with the exchange of preferred stock to common stock, the
      recognition of theexcess
      fair value of the common stock over the carrying amount of the preferred
      stock as a deemed dividend.
                
                $
                -
                
                
                $
                476,337Deemed
      preferred stock dividends
                
                $
                -
                
                
                $
                497,657Issuance
      of Series J Preferred Stock
                
                $
                -
                
                
                $
                708,800Establishment
      of derivative liability in conjunction with the issuance of Series J
      PreferredStock
                
                $
                -
                
                
                $
                8,250,000




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


4





JMAR
TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




(1)          
Basis of Presentation and
Financial Condition




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




JMAR
Technologies, Inc. is a leading innovator in the development and
commercialization of sensing systems for the detection of chemical, biological,
radiological, nuclear and explosive (CBRNE) materials. Coupled with its
established expertise in building advanced laser systems, JMAR provides
solutions for a broad range of military, industrial and commercial
applications.





The
Company draws on more than twenty years of experience and thirty patents in
photonics, laser and detection technologies to develop products and solutions
that address some of the world’s most pressing issues such as water quality,
hazard detection and homeland security. JMAR’s vision is to continue to develop
innovative technologies and products that support the advancement of global
health, safety, and security initiatives. Currently, JMAR has two commercial
product lines: the BioSentry® system, an on-line real-time monitoring
system for detecting and classifying harmful microorganisms in water, also
available 1) a transportable version called BioSentryLab, and 2) BioAlert, an
online monitoring service; and the BriteLightTM laser, a stand-alone laser
product for several high power, high brightness applications, as well as in the
light source for x-ray microscopy.




JMAR’s
continued pursuit of cutting-edge products includes our ongoing program funded
by the Army Research Laboratory (ARL) and the Company for the development and
demonstration of a double pulse (DP) plasma laser. The exceptional beam
quality realized in this product will enable the use of stand-off laser-induced
breakdown spectroscopy (LIBS) in applications requiring the identification
of foreign substances of interest. The light emissions resulting from the plasma
generated on the targeted object are analyzed by an optical spectrometer which
provides the identification of trace substances such as explosives, metals and
drugs. The DP laser technology is based on the continued evolution of JMAR’s
patented BriteLightTM laser. In the third quarter, JMAR competitively won two
custom laser contracts: the first from Johns Hopkins University Applied Physics
Laboratory to develop two prototype special purpose lasers; and the second from
Zebra Imaging, Inc. to provide custom RGB (red, green, blue) lasers for use in a
holographic imaging product currently under development.




Because
of the national security and potential commercial applications for DP laser
products, JMAR contracted with D&K Engineering to accelerate the transition
from laboratory prototype to a man-portable “shoebox size” double pulse laser
product. This project has been expanded to include the integration of analytic
and sensor components for system-level LIBS, laser-induced fluorescence (LIF)
and Raman applications. More recently, JMAR contracted with D&K for assembly
and manufacture of BioSentry systems to keep pace with anticipated purchase
orders as they are received.





In line
with the Company’s business strategy to develop detection technologies across
the CBRNE spectrum (chemical, biological, radiological, nuclear, explosive
substances), the establishment of the Company’s Spectral Systems
Group (SSG) in August 2008 is quickly resulting in the design and
development of products to detect, locate and identify radiological/nuclear
threats with minimum intrusion. SSG was recently awarded a subcontract by
Creative Electron Inc. to support efforts under a Department of Homeland
Security (DHS) contract for development of a new non-intrusive inspection (NII)
image processing tool, and showing significant progress on an internal research
and development project, SSG is developing an NII product to locate faint
radiation sources.





Laurus
Master Fund (“Laurus”) currently owns 9.9% of JMAR common stock, limited to that
percentage by written agreement, all of its preferred stock and a substantial
position in JMAR warrants resulting primarily from an equity requirement of the
$7.5 million financing received in September 2007.




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




JMAR was
incorporated in the state of Delaware in 1987.




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




5


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 $ 19,406,534, $1,623,906 and $13,106,681 for the nine
months ended September 30, 2008 and for the years ended December 31, 2007
and 2006, respectively, and losses are expected for the foreseeable future. Our
revenues from continuing operations declined to $284,106 from $433,102 for the
nine months ended September 30, 2008 and 2007, respectively. We had negative
cash flow from operations for the nine months ended September 30, 2008 and for
the years ended December 31, 2007 and 2006 of $4,359,850, $3,682,771 and
$6,019,946, respectively.  Our cash requirements have been and will
continue to be significant. JMAR’s operations will continue to use cash in 2008
and 2009 for 1) marketing; 2) product development efforts; 3) corporate costs,
primarily related to the cost of being a public company; 4) interest and
preferred stock dividends and 5) other working capital needs. In September 2008,
the Company accepted interim financing of $1,750,000 from Laurus (the “$1.75
million Term Note”).  Based on operating budget projections and
discussions with Laurus, the Company anticipates receiving additional financing
that will cover continuing operations through year-end and beyond.





The
Company will require drawdowns through this period under the $1.75 million Term
Note to continue the marketing and development of emerging new products and for
working capital requirements. There are no assurances that funds will be
available under the $1.75 million Term Note, due to Laurus’ requirement to
approve every drawdown.  The Company is continuing to pursue other
opportunities to raise additional funds in the future. Management believes, but
cannot assure, that the Company will be able to raise additional funds through
equity or other financings to fund future operations.  This belief is
derived from the Company’s historical access to equity and debt markets. See
further discussion in “Risk Factors” - Item 1A.




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





Restricted
cash




Restricted
cash consists of cash held for approved cash flow purposes.  Once
authorized, the cash is released from restriction (see Note 8).





Fair
Value of Financial Instruments




The
carrying value of certain of the Company’s financial instruments, including
accounts receivable, accounts payable and accrued expenses, approximates fair
value due to their short maturities.





Use
of Estimates




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.





Long-Lived
Assets




The
Company periodically evaluates the carrying value of its long-lived assets and
applies the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Under Statement of Financial Accounting
Standards SFAS No. 144, long-lived assets and certain identifiable assets
to be held and used in operations are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. An impairment loss is recognized if the sum of the expected
long-term, undiscounted cash flows is less than the carrying amount of the
long-lived assets being evaluated. Management believes the carrying value of its
long-lived assets does not exceed their estimated net realizable value at
September 30, 2008.




The net
assets and liabilities of a disposal group classified as held for sale is
presented separately in the asset and liability sections of the consolidated
balance sheet. In accordance with SFAS No. 144, the Company classifies
assets held for sale when management commits to a plan of disposal, the disposal
group is available for immediate sale and an active plan to locate a buyer has
been initiated.





Revenues




For the
nine months ended September 30, 2008 and 2007, approximately 48% and 56%,
respectively, of the Company’s revenues were contract revenues, with the
remainder BriteLight sales, product and spare parts sales, and field service
revenues from BioSentry. Contract revenues are recognized based on the
percentage of completion method wherein income is recognized pro-rata over the
life of the contract based on the ratio of total incurred costs to anticipated
total costs of the contract. Actual costs could differ from these estimated
costs. Reimbursable or recoverable general and administrative costs are charged
to expense as incurred. Estimated losses are fully charged to operations when
identified. Product revenues are recognized upon the later of when the product
is shipped or when additional contractual requirements related to the sale are
completed.


6






Derivative
Liabilities
  In
connection with the issuance of warrants with certain notes payable (see Note 8)
the Company was required to register the underlying shares. The Company
determined that the registration rights are an embedded derivative instrument
pursuant to SFAS No. 133, Accounting for Derivative
  Instruments and Hedging
Activities, as amended. Under the provisions of Emerging Issues Task
Force (“EITF”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock,
the accounting treatment of these derivative financial instruments required that
the Company record the derivatives at their fair values as of the inception date
of the warrant agreements and at fair value as of each subsequent balance sheet
date. Any change in fair value was recorded as non-operating, non-cash income or
expense at each balance sheet date. If the fair value of the derivatives was
higher at the subsequent balance sheet date, the Company recorded a
non-operating, non-cash charge. If the fair value of the derivatives was lower
at the subsequent balance sheet date, the Company recorded non-operating,
non-cash income.





(2)          
Recent Accounting
Pronouncements





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




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





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





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




In
October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active (“FSP
157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not
active, and provides an illustrative example intended to address certain key
application issues. FSP 157-3 is effective immediately, and applies to the
Company’s September 30, 2008 consolidated financial statements. The Company
has concluded that the application of FSP 157-3 did not have a material impact
on its consolidated financial position and results of operations as of and for
the periods ended September 30, 2008.






7





(3)          
Stock-Based
Compensation




The
Company has six stock — based compensation plans, the 2006 Equity Incentive Plan
(“2006 Plan”), the 1991 Stock Option Plan (“1991 Plan”), the 1999 Stock Option
Plan (“1999 Plan”), the Management Anti-Dilution Plan (“Anti-Dilution Plan”) and
two incentive plans which provided for the issuance of options to Research
Division employees (“Research Division Plans”). The 2006 Plan and the 1999 Plan
were shareholder-approved and are the only plans of the six stock plans
from which additional options may be granted.  On June 25, 2007, the Board
of Directors unanimously approved an increase in the authorized shares of the
2006 Plan to 20,000,000 shares, subject to a shareholder-approved increase in
authorized shares of the Company. On February 20, 2008, shareholders
approved an increase in the Company’s authorized shares to 380,000,000 shares.
The 1999 Plan authorizes the grant of options to purchase up to 1,900,000 shares
of the Company’s common stock. The Company is also a party to a non-plan option
agreement with one individual.





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




Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Selling,
      general, & administrative
            
            $
            178,439
            
            
            
            23,596
            
            
            
            218,899
            
            
            
            102,577Research
      and development
            
            
            54,829
            
            
            
            1,742
            
            
            
            57,152
            
            
            
            8,010$
            233,268
            
            
            
            25,338
            
            
            
            276,051
            
            
            
            110,587







In
accordance with SFAS No. 123 (R), Share based Payment, the
Company recognizes stock-based compensation cost 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.




During
the three months ended September 30, 2008, an aggregate of 5,000,000 options to
purchase shares of common stock of the Company with an exercise price of $0.12
per share were granted to the four members of the Company’s Board of Directors,
an aggregate of 13,500,000 options with an exercise price of $0.12 per share
were granted to five officers of the Company and an aggregate of 4,200,000
options with an exercise price of $0.13 per share were granted to ten key
employees of the Company. All of these options vest 50% after one year and the
remaining 50% vest after the second year from date of issuance. The options
require continued employment or membership on the board of directors at the time
of vesting.





In
conjunction with the Board of Directors’ approval on October 10, 2008 of a four
year agreement, commencing April 1, 2008, retaining the consulting services of
Nationwide Solutions, Inc. (“NSI”) to provide business, financial and related
services to the Company and/or its subsidiaries and affiliates, the Board
approved the award of options to NSI to purchase shares of common stock of the
Company, exercisable at $0.0001 per share, in the amount of 12,268,103 options
with two-year vesting, commencing April 1, 2009.




The
weighted-average grant date fair value of options granted during the three and
nine months ended September 30, 2008 and 2007 was $0.08, $0.08, $0 and $0.18,
respectively. There were no options exercised in the three and nine month
periods ended September 30, 2008. The unrecognized stock based compensation
expense, net of estimated forfeitures, for the nine months ended September 30,
2008 and 2007 was approximately $1,665,000, and $191,000 with a weighted average
remaining vesting period of 2.53 and 0.92 years,
respectively.


8





The fair
value of each option granted in the three months ended September 30,
2008  was estimated on the date of grant using the Black-Scholes
Option Pricing Model (“Black-Scholes Model”) with the following weighted-average
assumptions used for grants during 2008: risk-free interest rate of
2.44 percent based on the U.S. Treasury yields in effect at the time of
grant; expected dividend yields of 0 percent as the Company has not, and
does not intend to, issue dividends; and expected lives of 3 to 7 1/2 years
based upon the historical life of options. For grants in 2008, the expected
volatility used was 199 percent, based on the Company’s historical stock
price fluctuations for a period matching the expected life of the options.
Forfeiture rates are calculated on a historical basis with the option grants
organized into three pools (directors, officers and employees). The forfeiture
rates used for 2008 were 2.7 percent for directors, 3.6 percent for
officers and 9.3 percent for employees. Grants pursuant to the 2006 and
1999 Plans generally have requisite service periods of 3 to 10 years with
contractual lives of 10 to 11 years.





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





Wtd. Avg.
            
            
            Wtd.
      Avg.
              Remaining
            
            
            AggregateExercise
            
            
            Contractual
            
            
            IntrinsicShares
            
            
            Price
            
            
            Life
      (yrs)
            
            
            ValueOutstanding
      at beginning of period
            
            
            1,382,714
            
            
            $
            2.25Granted
            
            
            35,968,103
            
            
            
            0.08Exercised
            
            
            —
            
            
            
            —Forfeited
            
            
            (716,964
            )
            
            
            3.01Outstanding
      at end of period
            
            
            36,633,853
            
            
            $
            0.10
            
            
            
            7.6
            
            
            $
            2,183,308Vested
      and expected to Vest
            
            
            35,557,363
            
            
            $
            0.11
            
            
            7.6
            
            
            $
            2,183,308Exercisable
      at end of period
            
            
            555,750
            
            
            $
            1.57
            
            
            5.4
            
            
            $
            —




Issuance
of Stock for Non-cash Consideration





All
issuances of the Company’s common stock for non-cash consideration have been
assigned a dollar amount equaling either the market value of the shares issued
or the value of consideration received whichever is more readily determinable.
The majority of the non-cash consideration received pertains to services
rendered by consultants and others and has been valued at the market value of
the shares issued. In certain issuances, the Company may discount the value
assigned to the stock issued for illiquidity and restrictions on
resale.





The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF Issue
No. 96-18, Accounting for
Equity Instruments That are Issued to Other   Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services, and EITF Issue No.
00-18, Accounting Recognition
for Certain Transactions   Involving Equity Instruments Granted to Other
Than Employees. The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor’s performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.





(4)           Accounts
Receivable





All
unbilled receivables at September 30, 2008 are expected to be billed and
collected within one year. The unbilled receivables at September 30, 2008 relate
to the normal billing cycle and timing of billings. In addition, included in
other assets on the accompanying consolidated balance sheet are withheld fees,
$166,977 of which are from the Company’s contract from the U.S. Defense Advanced
Research Projects Agency (“DARPA”) and $37,820 from the Company’s Small Business
Innovation Research (“SBIR”) contract, both of which it expects to receive upon
completion of the contracts and final audit from the U.S. Defense Contracting
Audit Agency (“DCAA”).




9




(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, 2008 and December 31, 2007, inventories
consisted of the following:




September
      30,
              2008
              (unaudited)
            
            
            December
      31,
              2007Raw
      materials, components and sub-assemblies
            
            $
            229,700
            
            
            $
            55,494Work-in-process
            
            
            323,587
            
            
            
            85,486Finished
      goods
            
            
            128,911
            
            
            
            167,049$
            682,198
            
            
            $
            308,029




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




(6)           Segment
Information




Business
Segments




JMAR
conducts its operations in three business segments; Laser Products, Sensor
Products, and Spectral Systems.




Laser
Products Group




The Laser
Products Group, formerly named the Research Division was established to design
and build custom lasers for several promising applications, in addition to
building and promoting sales of the BriteLightTM laser, a stand-alone laser
product for several high power, high brightness applications, as well as the
light source for x-ray microscopy. BriteLightTM is a patented, short pulse, diode
pumped solid state laser originally developed for creating laser-produced plasma
(LPP). In the third quarter, this group competitively won two custom laser
contracts: the first from Johns Hopkins University Applied Physics Laboratory to
develop two prototype special purpose lasers; and the second from Zebra Imaging,
Inc. to provide custom RGB (red, green, blue) lasers for use in a holographic
imaging product currently under development.





Sensor
Products Group




This
segment’s first product is the BioSentry sensor, a continuous, on-line,
real-time monitoring system for detecting and classifying harmful microorganisms
in water. BioSentry is targeted toward a number of applications across multiple
markets, including homeland security, beverage industries, highly visible
buildings such as government embassies, pharmaceutical companies, municipal and
private water utilities and the rapidly growing number of water amusement parks.
Most recently, JMAR has introduced two substantially modified versions: 1) a
transportable version called BioSentryLab; and 2) BioAlert, an online monitoring
service.





Spectral
Systems Group





The Spectral Systems Group designs and
develops systems to detect, locate and identify chemical, biological,
radiological, nuclear and explosives threats with minimum intrusion, and was
recently awarded a subcontract by Creative Electron Inc. to support efforts
under a Department of Homeland Security (DHS) contract for development of a new
non-intrusive inspection (NII) image processing tool. This business segment is
also responsible for developing and demonstrating a double pulse
(DP) plasma laser system. This product will use stand-off laser-induced
breakdown spectroscopy (LIBS) in applications requiring the identification
of foreign substances of interest. The light emissions from targeted objects are
analyzed by an optical spectrometer which provides the identification of trace
substances such as explosives, metals and drugs.





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




10




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




Laser
              
              
              Sensor
              
              
              SpectralProducts
              
              
              Products
              
              
              Systems
              
              
              Corporate
              
              
              Total9
      months ended September 30, 2008Revenue
              
              $
              197,679
              
              
              $
              74,527
              
              
              $
              11,900
              
              
              $
              -
              
              
              $
              284,106Asset
      writedowns and special items
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
      Income (Loss) from continued operations
              
              
              (2,366,395
              )
              
              
              (1,792,645
              )
              
              
              (173,924
              )
              
              
              (986,408
              )
              
              
              (5,319,372
              )Total
      assets
              
              
              939,803
              
              
              
              1,778,848
              
              
              
              33,312
              
              
              
              1,973,351
              
              
              
              4,725,314Capital
      Expenditures
              
              
              22,257
              
              
              
              29,335
              
              
              
              7,629
              
              
              
              25,608
              
              
              
              84,829Depreciation
      and Amortization
              
              
              52,702
              
              
              
              6,952
              
              
              
              212
              
              
              
              137,627
              
              
              
              197,4933
      months ended September 30, 2008Revenue
              
              $
              59,245
              
              
              $
              -
              
              
              $
              11,900
              
              
              $
              -
              
              
              $
              71,145Asset
      writedowns and special items
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
      Income (Loss)
              
              
              (655,893
              )
              
              
              (606,574
              )
              
              
              (173,924
              )
              
              
              (801,931
              )
              
              
              (2,238,322
              )Capital
      Expenditures
              
              
              18,424
              
              
              
              29,335
              
              
              
              7,629
              
              
              
              20,583
              
              
              
              75,971Depreciation
      and Amortization
              
              
              18,592
              
              
              
              563
              
              
              
              212
              
              
              
              46,536
              
              
              
              65,9039
      months ended September 30, 2007Revenue
              
              $
              261,033
              
              
              $
              172,069
              
              
              $
              -
              
              
              $
              -
              
              
              $
              433,102Asset
      writedowns and special items
              
              
              (117
              )
              
              
              (125,000
              )
              
              
              -
              
              
              
              -
              
              
              
              (125,117
              )Operating
      Income (Loss)
              
              
              (594,034
              )
              
              
              (1,277,752
              )
              
              
              -
              
              
              
              (1,086,933
              )
              
              
              (2,958,719
              )Total
      assets
              
              
              1,102,806
              
              
              
              1,649,648
              
              
              
              -
              
              
              
              7,775,333
              
              
              
              10,527,787Capital
      Expenditures
              
              
              -
              
              
              
              8,292
              
              
              
              -
              
              
              
              1,697
              
              
              
              9,989Depreciation
      and Amortization
              
              
              56,048
              
              
              
              16,723
              
              
              
              -
              
              
              
              177,821
              
              
              
              250,5923
      months ended September 30, 2007Revenue
              
              $
              53,184
              
              
              $
              40,122
              
              
              $
              -
              
              
              $
              -
              
              
              $
              93,306Asset
      writedowns and special items
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Operating
      Income (Loss)
              
              
              (169,494
              )
              
              
              (276,739
              )
              
              
              -
              
              
              
              (277,784
              )
              
              
              (724,017
              )Capital
      Expenditures
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Depreciation
      and Amortization
              
              
              17,733
              
              
              
              861
              
              
              
              -
              
              
              
              67,008
              
              
              
              85,602






Sales to
the United States Government totaled $ 71,145, $53,184, $136,679 and $241,533
for the three and nine months ended September 30, 2008 and 2007,
respectively.




(7)
            
            Derivative
      Liabilities




Derivative
Liabilities


In connection with the issuance of
warrants with certain notes payable (see Note 8), the Company was required to
register the underlying shares. The Company determined that the registration
rights are an embedded derivative instrument pursuant to SFAS No. 133, as
amended. Under the provisions of Emerging Issues Task Force (“EITF”) Issue No.
00-19,, the accounting
treatment of these derivative financial instruments required that the Company
record the derivatives at their fair values as of the inception date of the
warrant agreements and at fair value as of each subsequent balance sheet
date.




Warrants Attached to
Debt




In
connection with the issuance of 5,209,561 warrants, net of 2,388,189 warrants
exercised on August 31, 2007, and 119,000,000 warrants issued in
conjunction with the $750,000 Note and the $7.5 million Term Note payable
to Laurus (see Note 8), respectively, the Company is required to register
the underlying shares. Under the provisions of Emerging Issues Task Force
(“EITF”) Issue No. 00-19, the accounting treatment of
these derivative financial instruments required that the Company record the
derivatives at their fair values as of the inception date of the warrant
agreements and at fair value as of each subsequent balance sheet
date.  The outstanding warrants were fair valued on April 13,
2007 and September 11, 2007 and determined to have a fair value of $1,747,481
and $13,090,000 respectively.





At
September 30, 2008 and December 31, 2007, the Company had derivative liabilities
valued at $14,904,337 and $5,022,378, respectively. During the three and nine
months ended September 30, 2008, the Company recognized income of $12,358,365
and expense of $10,374,040 related to the change in fair value of the derivative
liabilities.  During the three and nine months ended September 30,
2007, the Company recognized income of $5,748,355
and  $6,432,152  related to the change in fair value of the
derivative liabilities.




11




Warrant-related
derivatives were valued using the Black-Scholes Option Pricing Model with the
following assumptions during the three and nine months ended September 30, 2008:
dividend yield of 0% and 0%; expected life of 8 and 9 years; average volatility
of 105% and 109%; and risk free interest rate of 3.85% and 3.85%,
respectively.
 
 During
the current quarter, the Company re-assessed the derivative liability
classification of certain of its convertible preferred stock and options and
warrants issued to non-employees.  It was determined that liability
classification was not appropriate and accordingly the Company reclassified
approximately $280,000 from derivative liabilities to additional paid in capital
and preferred stock based on the values of such equity
instruments.




(8)          
Notes Payable





Notes
payable as of September 30, 2008 and December 31, 2007, were as follows (all
funded debt obligations are with Laurus):





2008
            
            
            2007$7.5
      million term note - bears interest at 10.25%
            
            $
            7,500,000
            
            
            $
            7,500,000$1.75
      million term note - bears interest at 15%
            
            
            1,750,000
            
            
            
            —$750,000
      term note - interest at the prime rate plus 2%
            
            
            750,000
            
            
            
            750,000$3,000,000
      working capital line - interest at the prime rate plus 2%.
            
            
            649,911
            
            
            
            649,91110,649,911
            
            
            
            8,899,911Less:
      Debt discount
            
            
            (3,844,799)
            
            
            
            (6,885,978)Less:
      Current
      portion
            
            
            (6,805,112)
            
            
            
            (612,100
            )$
            —
            
            
            $
            1,401,833





Working Capital Line  In
March 2003, the Company entered into a Revolving Fixed Price Convertible
Note (the “Working Capital Line”) with Laurus . The term of the Working Capital
line expired on March 21, 2006 and was replaced by a new line of credit
facility (2006 Working Capital Line). The 2006 Working Capital Line allowed the
Company to borrow from time-to-time up to 90% of eligible accounts receivable
and up to 50% of eligible inventory up to $500,000, up to an aggregate maximum
of $3 million. Upon approval from 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 (7 percent at September 30, 2008) on the 2006 Working
Capital Line is equal to the prime rate plus 2 percent. The 2006 Working
Capital Line matures in August 2009. As of September 30, 2008, there was
$649,911 outstanding under the 2006 Working Capital Line, including a $500,000
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.  The
warrants were vested immediately.  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 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.





At
September 30, 2008 and December 31, 2007, the unamortized discount and fees of
$135,167 and $141,186, respectively, were offset against borrowings on the
Working Capital Line in the accompanying consolidated balance sheets. The
discount is being amortized over the life of the 2006 Working Capital Line,
resulting in $21,180 and $63,450 of interest expense for the three and nine
months ended September 30, 2008 and $93,750 and $187,500 for the three and nine
months ended September 30, 2007, respectively. Also included in the discount are
other fees paid to Laurus, including annual renewal fees.





Term Notes   On
April 13, 2007, the Company and Laurus entered into a Securities Purchase
Agreement which provided for the loan of $750,000 to the Company evidenced by a
Secured Promissory Note (the “750,000 Note”), together with a Warrant to
purchase 7,597,750 shares of Common Stock. The terms of this transaction
provided for the following: 1) the $750,000 Note accrues interest at the rate of
prime rate plus 2%, with interest payable monthly in arrears which commenced on
May 1, 2007, 2) the principal and all unpaid interest is due on August 31,
2009, 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 net share cashless exercise provision, 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. Based on the registration rights associated with the
underlying shares of the warrant, the Company has recorded the fair value of the
warrants as derivative liabilities in accordance with EITF No.
00-19.  The estimated fair value was $625,147 at September 30, 2008.
 The Company recorded the estimated fair value of the warrant of the
$750,000 Note as a debt discount and is amortizing it over the life of the
$750,000 Note. During the three and nine months ended September 30, 2008, the
Company recorded $74,220 and $222,660 of interest expense related to such
amortization. During the three and nine months ended September 30, 2007, the
Company recorded $93,750 and $187,500 of interest expense related to such
amortization.


12





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 warrants have a term of ten
years with immediate vesting and an exercise price of $0.01.  Based on
the registration rights associated with the underlying shares of the warrant,
the Company has recorded the estimated fair value of the warrants of $13,090,000
based on the Black Scholes option pricing model as debt discount and derivative
liabilities in accordance with EITF No. 00-19.  The estimated fair
value was $14,280,000 at September 30, 2008. At September 30, 2008 and December
31, 2007, the unamortized discount and fees of $1,250,000 and $4,062,500,
respectively, were offset against borrowings in the accompanying consolidated
balance sheets. The discount is being amortized over the life of the September
2007 SPA, resulting in $937,500 and $2,812,500 of interest expense for the three
and nine months ended September 30, 2008 and $937,500 and $1,250,000 for the
three and nine months ended September 30, 2007, respectively.
 
 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 of the proceeds 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.
 
 On
September 24, 2008, the Company entered into a Securities Purchase Agreement
with Laurus (the “September 2008 SPA"). Pursuant to the September 2008
SPA, Laurus completed a loan to the Company totaling $1,750,000 evidenced
by a Secured Term Note (the “$1.75 million Term Note"). The maturity date of the
$1.75 million Term Note is August 31, 2009. Interest on the $1.75 million Term
Note is payable monthly, with interest payable at 10% per annum and an
additional 5% accruing monthly and payable at maturity. The $1.75 million Term
Note was disbursed as follows: 1) $380,000 was disbursed directly to the
Company, 2) $1,307,250of the
proceeds was funded and placed in a restricted account, 3) Laurus was paid a
closing fee of $61,250, and 4) a $1,500 fee was paid to the escrow agent, all of
which have been included in debt discount and are being amortized through August
2009. Amortization of $5,319 was charged to interest expense in the three and
nine months ended September 30, 2008.
  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.




Letter of Credit.In
connection with the Company’s lease of its Rancho Bernardo facility, a
commercial bank previously issued a letter of credit currently in the amount of
$78,645 that is expiring in November.  The Company will be replacing
the letter of credit starting in November through security of a bank account in
favor of the landlord that will increase to $53,645by January 2009. In the
future, as the total obligation under the lease reduces, funds will be released
to the Company from the account in accordance with the security provision in the
lease.





(9)           
Equity Transactions





Laurus
Preferred Stock and Warrants





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




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




In
connection with the preferred stock financing transactions with Laurus, the
Company issued warrants to Laurus to purchase a total of 127,048,956 shares of
common stock at prices ranging from $0.01 to $5.00. As of September 30, 2008 all
of the preferred stock and warrants held by Laurus are convertible or
exercisable into approximately 147.1 million shares.





13




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




Included
in the income/ (loss) available to common shareholders in the accompanying
consolidated statements of operations for the three months ended September 30,
2008 and 2007 are preferred stock dividends of $205,678, and $578,467,
respectively. These amounts for the three months ended September 30, 2008 and
2007 consist of two elements: 1) $106,338, and $159,243, respectively, of
preferred stock dividends paid or payable in cash and 2) $99,340 and $419,224,
respectively, related to the discount representing the beneficial conversion
feature of the redeemable convertible preferred stock which is the fair value of
warrants issued in connection with the preferred stock and the difference
between the fair value of the preferred stock immediately prior to and after
certain amendments to the Preferred Stock.





Included
in the loss applicable to common shareholders in the accompanying consolidated
statements of operations for the nine months ended September 30, 2008 and 2007
are preferred stock dividends of $736,897, and $1,404,850, respectively. These
amounts for the nine months ended September 30, 2008 and 2007 consist of two
elements: 1) $339,567, and $481,528, respectively, of preferred stock dividends
paid or payable in cash and 2) $397,330 and $923,322, respectively, related to
the discount representing the beneficial conversion feature of the redeemable
convertible preferred stock which is the fair value of warrants issued in
connection with the preferred stock and the difference between the fair value of
the preferred stock immediately prior to and after certain amendments to the
Preferred Stock.





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





In April
2008, the Company entered into a four-year consulting agreement for services
related to investor communications. The terms of the agreement, among other
items, include monthly payments of $10,000 plus expenses. Also, a warrant to
purchase an aggregate of 12,268,103 shares of the Company’s common stock at an
exercise price of $0.0001, vesting through April 2010 and expires in 2012.
During the nine months ended September 30, 2008, the Company recorded $526,506
of consulting expense related to the amortization of 3,067,026 warrants that
vested during the period.  In accordance with EITF Topic D-90, the
unvested equity instruments are not considered to be issued or
outstanding.





In March
2008, the Company entered into a one-year consulting agreement for services
related to investor communications. The terms of the agreement, among other
items, include monthly payments of $12,000 plus expenses. In addition, the
Company issued the consultant 600,000 shares of non-forfeitable common stock,
which was valued at $60,000 (estimated fair value based on the closing market
price on the measurement date), recorded as a prepaid asset and is being
amortized over the life of the consulting agreement. Also, a fully-vested
non-forfeitable warrant to purchase an aggregate of 2,400,000 shares of the
Company’s common stock at exercise prices ranging from $0.10 - $0.75, and
expires in March 2010. The warrant was valued at $116,013 based on the Black
Scholes option pricing model, was recorded as a prepaid asset and is being
amortized over the life of the related consulting agreement.  During
the nine months ended September 30, 2008, the Company recorded $91,837 of
consulting expense related to the amortization of the equity instruments that
vested during the period.





Issuances
of Common Stock





During
the three months ended March 31, 2008, the Company issued 37,500 shares of
common stock for services performed in the amount of $4,500.  The
shares were valued at the fair market value of the Company’s common stock on the
date of issuance.





During
the three months ended March 31, 2008, the Company entered into an agreement
with a service provider in which half of their fees incurred will be paid in
stock.  The stock will be priced at 80% of the average closing price
of the Company’s common stock over the last ten trading days prior to the
invoice date.  64,280 shares of common stock were issued during the
three months ended September 30, 2008 at a value of $8,776.  20,157 of
these shares were committed to be issued as of June 30, 2008 at a value of
$3,131, with the remaining value recognized during the three months ended
September 30, 2008.





During
the three months ended June 30, 2008, the Company issued 12,500 shares of common
stock for services performed in the amount of $2,625.  The shares were
valued at the fair market value of the Company’s common stock on the date of
issuance.





During
the three months ended June 30, 2008, the Company issued 681,489 shares of
common stock for services performed to the Company’s board of directors in the
amount of $55,002.  552,046 of these shares were committed to be
issued as of March 31, 2008 at a value of $31,002, with the remaining value
recognized during the three months ended June 30, 2008.  The shares
were valued at the fair market value of the Company’s common stock on the date
of issuance.  During the three months ended September 30, 2008, the
Company committed to issue shares of common stock to the board of directors
valued at $24,030.





During
the three months ended June 30, 2008, the Company’s Chairman purchased 2,000,000
shares of common stock for $100,000.  The shares were committed to be
issued as of March 31, 2008.





During
the three months ended June 30, 2008, the Company agreed to issue 1,500,000
shares of common stock to employees.  The shares vest through March
2011 and will be valued when they are vested.  A total of 400,000
shares vested during the three months ended March 31, 2008 at a value of
$47,000, were committed to be issued at March 31, 2008 and were formally issued
during the three months ended June 30, 2008.


14





During
the three months ended September 30, 2008, warrants to purchase 144,000 shares
of common stock were exercised on a cashless basis.  The Company
issued 66,133 shares of common stock upon the exercise







(10)
            Earnings
      Per Share




The
Company accounts for earnings per share in accordance with SFAS No. 128,
Earnings per Share.
Basic earnings per common share were computed by dividing loss applicable to
common stock by the weighted average number of shares of common stock
outstanding during the year. At September 30, 2008 and 2007 the Company had
approximately 200,000,000 and 155,000,000 potentially dilutive shares,
respectively, all of which are antidilutive and were excluded from the
computation of diluted loss per share due to the Company’s losses in the nine
months ended September 30, 2008 and in the three and nine months ended September
30, 2007. Dilutive shares for the three months ended September 30, 2008 are
presented in the accompanying statement of operations.




(11)
            Discontinued
      Operations





The
income/ (loss) from discontinued operations of $0, $(108,766), $ 0 and $576,616
for the three and nine months ended September 30, 2008 and 2007, respectively,
is related to the closure of the business operations of the Company’s
Burlington, Vermont location (the “Vermont Operations”) as of September 30,
2007. On November 7, 2007 the Company executed an Asset Purchase Agreement (the
"Agreement") with Applied Research Associates, Inc. (“ARA”) of Randolph, Vermont
to sell to ARA certain assets of the Vermont Operations including; rights to the
Vermont Operations’ current proposal to NAVAIR; the x-ray stepper and optical
microscope hardware; and the intellectual property, including four patents,
related to x-ray lithography. Under the Agreement, ARA was responsible for all
lease payments and certain other facility operating costs of the Vermont
Operations’ building under a sublease from the Company for the remainder of the
lease term from October 16, 2007 through its termination on March 30, 2008. In
January 2008, JMAR received payment for the sale of the Vermont
Operations, including reimbursement of certain building lease payments and
operating costs for total proceeds of $218,607.





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





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





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





15








Three
      Months
              Ended
              September
      30,
              2008
            
            
            Three
      Months
              Ended
              September
      30,
              2007
            
            
            Nine
      Months
              Ended
              September
      30,
              2008
            
            
            Nine
      Months
              Ended
              September
      30,
              2007Revenues
            
            $
            —
            
            
            $
            415,676
            
            
            $
            —
            
            
            $
            2,401,540Cost
      of revenues
            
            
            —
            
            
            
            505,704
            
            
            
            —
            
            
            
            1,605,867Gross
      profit
            
            
            —
            
            
            
            (90,028
            )
            
            
            —
            
            
            
            795,673Selling,
      general and administrative
            
            
            —
            
            
            
            100,130
            
            
            
            —
            
            
            
            272,639Research
      and development
            
            
            —
            
            
            
            3,710
            
            
            
            —
            
            
            
            4,424Total
      operating expenses
            
            
            —
            
            
            
            103,840
            
            
            
            —
            
            
            
            277,063Income/
      (loss) from operations
            
            
            —
            
            
            
            (193,868
            )
            
            
            —
            
            
            $
            518,610Interest
      and other income - net
            
            
            —
            
            
            
            85,102
            
            
            
            —
            
            
            
            58,006Provision
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Income/
      (loss) from operations of discontinued operations
            
            $
            —
            
            
            $
            (108,766
            )
            
            $
            —
            
            
            $
            576,616







(12)
            Income
      Taxes




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





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





(13)
  On
October 10, 2008 the Board of Directors approved a four year agreement,
effective April 1, 2008, retaining the consulting services of NSI to provide
business, financial and related services to the Company and/or its subsidiaries
and affiliates as the Board may designate (see Note 3). NSI shall receive
compensation for the services rendered consisting of (i) options to purchase
shares of common stock of the Company, exercisable at $0.0001 per share, in the
amount of 12,268,103 options with two year vesting, commencing April 1, 2009 and
(ii) an annual consulting fee of $120,000 for each calendar year, payable
monthly in arrears. NSI is a Canadian corporation.
  On
November 11, 2008 250,000 shares were issued to each of two directors as the
result of one year vesting from approval by the Company’s Board of Directors on
October 26, 2007.





16


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




Overview




JMAR
Technologies, Inc. is a leading innovator in the development and
commercialization of sensing systems for the detection of chemical, biological,
radiological, nuclear and explosive (CBRNE) materials. Coupled with its
established expertise in building advanced laser systems, JMAR provides
solutions for a broad range of military, industrial and commercial
applications.




The
Company draws on more than twenty years of experience and thirty patents in
photonics, laser and detection technologies to develop products and solutions
that address some of the world’s most pressing issues such as water quality,
hazard detection and homeland security. JMAR’s vision is to continue to develop
innovative technologies and products that support the advancement of global
health, safety, and security initiatives. Currently, JMAR has two commercial
product lines: the BioSentry® system, an on-line real-time monitoring
system for detecting and classifying harmful microorganisms in water, also
available in 1) a transportable version called BioSentryLab, and 2) BioAlert, an
online monitoring service; and the BriteLightTM laser, a stand-alone laser
product for several high power, high brightness applications, as well as the
light source for x-ray microscopy.




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




Over the
past 15 years, our research and development programs received in excess of $100
million in funding under DARPA and ARL contracts, which for DARPA ended in 2006,
and which for ARL the funding support continues today for very different and
unique technology development projects. In the nine months ended September 30,
2008 and 2007, approximately 48.1% and 55.8%, respectively, of our revenue was
derived as the prime contractor or subcontractor for a government
contract.





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





JMAR
conducts its operations in three business segments; Laser Products, Sensor
Products, and Spectral Systems




Laser Products
Group




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


17





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




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




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




During
the three and nine months ended September 30, 2008, and 2007, Laser Products
accounted for approximately 83.3%, 69.6%, 57.0% and 60.0%, respectively of
the Company’s revenues.





Sensor Products
Group




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





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




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




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




During
the three and nine months ended September 30, 2008, and 2007, the Sensor
Products segment accounted for approximately 0%, 26.2%, 43.0 %
and 40.0%, respectively, of the Company’s revenues.





18


Spectral Systems
Group





The
Spectral Systems Group designs and develops products to detect, locate and
identify radiological/nuclear threats with minimum intrusion, and was recently
awarded a subcontract by Creative Electron Inc. to support efforts under a
Department of Homeland Security (DHS) contract for development of a new
non-intrusive inspection (NII) image processing tool. Spectral Systems has also
been assigned systems integration responsibilities and in this regard is
building JMAR’s first DP – LIBS system for demonstration in the spring of 2009,
using government and Company funding to accelerate product development for
security applications.





During
the three and nine months ended September 30, 2008, and 2007, Spectral Systems
accounted for approximately 16.7%, 4.2%, 0 % and 0%,
respectively, of the Company’s revenues.




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




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




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




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





The
financing provided by the $7.5 million Term Note has funded the Company’s
operations through late September, 2008.





In
September 2008, the Company accepted interim financing of $1,750,000 from Laurus
(the “$1.75 million Term Note”).  Based on operating budget
projections and discussions with Laurus, the Company anticipates receiving
additional financing that will cover continuing operations through year-end and
beyond.





The
Company will require drawdowns through the near term under the $1.75 million
Term Note to continue the marketing and development of emerging new products and
for working capital requirements. There are no assurances that funds will be
available under the $1.75 million Term Note, due to Laurus’ requirement to
approve every drawdown.  The Company is continuing to pursue other
opportunities to raise additional funds in the future. Management believes, but
cannot assure, that the Company will be able to raise additional funds through
equity or other financings to fund future operations.  This belief is
derived from the Company’s historical access to equity and debt markets. See
further discussion in Note 1 in the accompanying Notes to Consolidated Financial
Statements and “Risk Factors” in Part II - Item 1A below.




Sources
of Revenue




Contract Research and
Development, Technical Support, and Production Programs




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


19





Standard
Products




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




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




New Products Under
Development




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




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




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








Results
of Operations




Revenues. Total revenues from
continuing operations for the three months ended September 30, 2008 and
2007 were $71,145, and $93,306, respectively. Revenues for the nine months ended
September 30, 2008 and 2007 were $284,106 and $433,102, 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, 2008
and 2007 were as follows (unaudited):


20







Three
      Months Ended
            
            
            Nine
      Months EndedSeptember
      30,
            
            
            September
      30,
            
            
            September
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Sensor
      Products Group
            
            $
            -
            
            
            $
            40,122
            
            
            $
            74,527
            
            
            $
            172,069Laser
      Products Group
            
            
            59,245
            
            
            
            53,184
            
            
            
            197,679
            
            
            
            261,033Spectral
      Systems Group
            
            
            11,900
            
            
            
            -
            
            
            
            11,900
            
            
            
            -$
            71,145
            
            
            $
            93,306
            
            
            $
            284,106
            
            
            $
            433,102





The
decrease in revenues for the three months ended September 30, 2008 compared
to the three months ended September 30, 2007, was due primarily to a
reduction in revenue from sales of BioSentry. The decrease in revenues for the
nine months ended September 30, 2008 compared to the nine months ended
September 30, 2007, was due to a $116,754reduction
in revenues from our SBIR contract and a $97,542 reduction in revenues in the
Sensor Products Group.  Partially offsetting these decreases was an
increase of $53,400
of BriteLight and $11,900 of Spectral Systems sales from the nine month period
ended September 30, 2008 compared to the nine month period ended September 30,
2007.  As discussed above in “Sources of Revenue”, the Company reflects the
Vermont Operations as a discontinued operation.





Income/ (Losses).The net
income/ (loss) for the three months ended September 30, 2008 and 2007 was
$8,988,808 and $(893,099), respectively and for the nine months ended September
30, 2008 and 2007, the net income/ (loss) was $(19,406,534) and $(2,627,359),
respectively. The income/ (loss) from continuing operations for the three months
ended September 30, 2008 and 2007 was $ 8,864,122 and $(784,333), respectively,
and for the nine months ended September 30, 2008 and 2007 the income/ (loss)
from continuing operations was $(19,406,534) and $(3,203,975), respectively. The
$9,757,221 increase in net income for the three months ended September 30, 2008
as compared to the loss for September 30, 2007 is principally due to a reduction
in the fair value of derivative liability of $6,610,010, a reduction in interest
and other expense of $4,616,455 and a reduction in the loss from discontinued
operations of $108,766, principally offset by an increase in selling, general
and administrative expenses of $1,233,473 and an increase in the costs invested
in product development (see further discussion below) of $285,977. The
$16,779,175 increase in the net loss for the nine months ended September 30,
2008 as compared to September 30, 2007 is principally due to relatively greater
increased change in the fair value of derivative liability of $16,806,192, plus
an increase in selling, general and administrative expenses of $1,555,452 , an
increase in product development (see further discussion below) of $814,389, a
reduction in the income from discontinued operations of $576,616, a reduction of
other income from sales of assets of $520,167 and a reduction of gross profit of
$115,929, offset by a reduction in interest and other expense of $3,545,642 and
by a reduction in asset write-downs of $125,117.





Gross Margins. Gross margins
for the three months ended September 30, 2008 and 2007 were 17.2 % and 7.6
%, respectively. Gross margins for the nine months ended September 30, 2008
and 2007 were 1.6 % and 27.8%, respectively. The Company’s margins were higher
in the three months ended September 30, 2008 compared to the three months ended
September 30, 2007 due to higher gross margin earned on the SBIR Contract in
2008 than on SBIR and BioSentry revenue in 2007. The Company’s margins were
lower in the first nine months of 2008 as compared to the first nine months of
2007 principally due to a loss on the sale of a laser product in the first
quarter of 2008. The Company is investing in new product development activities
that it believes will lead to increased sales and higher margin products in the
future.





21


Selling, General and Administrative
(SG&A).SG&A expenses were $1,901,147 and $667,674 for the three
months ended September 30, 2008 and 2007, respectively, and $4,029,991 and
$2,474,539 for the nine months ended September 30, 2008 and 2007, respectively.
The increase in SG&A expenses for the three months ended September 30, 2008
compared to 2007 was primarily attributable to an increase in professional fees
–including legal, accounting and proxy services - of $739,815, stock-based
compensation of $154,843, salaries and benefits of $153,678, marketing support,
advertising and industry show expenses of $107,086 and recruitment and
relocation costs of $13,719 for new employees. The increase in SG&A expenses
for the nine months ended September 30, 2008 compared to 2007 was principally
due to increases in professional fees – including legal, accounting and proxy
services - of $982,989, stock-based compensation of $239,885, recruitment and
relocation costs of $141,655 for new employees, marketing support, advertising
and industry show expenses of $124,824 and salaries and benefits of
$64,710.




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





●
              Customer-funded
      RD&E costs incurred,  primarily related to the SBIR
      Contract, are included in “Costs of Revenues”, and totaled $58,912 and
      $61,141 for the three months ended September 30, 2008 and 2007,
      respectively, and $98,082  and $230,790 for the nine month
      periods ended September 30, 2008 and 2007, respectively. The decrease
      in customer-funded RD&E expenditures for the three months ended
      September 30, 2008 relative to 2007 primarily consists of a decrease of
      $20,087 related to the SBIR Contract, offset by an increase of $11,900
      from Spectral Systems.  The decrease in customer-funded RD&E
      expenditures for the nine months ended September 30, 2008 relative to 2007
      primarily consists of a decrease of $132,707 related to the SBIR
      Contract.
 
 ●
              Company-funded
      RD&E costs associated with product development are shown in “Operating
      Expenses” and totaled $349,408 and $63,431 for the three months ended
      September 30, 2008 and 2007, respectively, and $1,293,998 and
      $479,609 for the nine months ended September 30, 2008 and 2007,
      respectively. The increase in 2008 is primarily due to increased product
      development expenditures related to the DP-LIBS and UV
    laser.





Total
RD&E expenditures for the three month periods were $408,320 and $124,572 for
2008 and 2007, respectively, and $1,392,080 and $710,399 for the nine month
periods in 2008 and 2007, respectively. Total RD&E expenditures as a
percentage of revenues were 574% and 134% for the three months ended
September 30, 2008 and 2007, respectively, and 490% and 164% for the
nine months ended September 30, 2008 and 2007, respectively. The RD&E
expenditures as a percentage of revenues have been historically higher than that
for a commercially oriented company because much of the Company’s revenues have
been R&D contract revenues. In addition, the Company’s revenues have been
declining.




Discontinued Operations. The
income/ (loss) from operations of discontinued operations was $0 and $(108,766)
for the three months ended September 30, 2008 and 2007, respectively and $0
and $576,616 for the nine months ended September 30, 2008 and 2007,
respectively. The income from operations of discontinued operations is related
to the Vermont Operations, which was discontinued as of September 30,
2007.




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




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




Interest and Other Expense.
Interest and other expense for the three months ended September 30, 2008 and
2007 was $1,266,806 and $5,883,261, respectively, and for the nine months ended
September 30, 2008 and 2007 was $3,785,359 and $7,331,001, respectively.
Interest and other expense was $4,616,455 lower for the three months ended
September 30, 2008 compared to 2007 principally due to the $5,590,000 derivative
liability recorded in 2007 related to warrants attached to the $750,000 and $7.5
million Term Notes from Laurus and higher cash interest of $73,238, principally
due to greater borrowings under the term notes, offset largely by amortization
of debt discount of $1,011,720 in 2008 as compared to $93,750 in
2007.  Interest expense was $3,545,642 lower for the nine months ended
September 30, 2008 compared to 2007 principally due to the $6,587,481 derivative
liability recorded in 2007 related to warrants attached to the $750,000 and $7.5
million Term Notes from Laurus, offset largely by amortization of debt discount
of $3,034,890 in 2008 compared to $187,500 in 2007 and an increase in cash
interest expense of $199,012 largely due to the greater utilization of the
Company’s $7.5 million Term Note. Included in non-cash interest expense for the
three months and nine months ended September 30, 2008 and 2007 is $21,180,
$72,618 and $63,540, $217,854 respectively, related to the beneficial conversion
feature and fair value of warrants issued in connection with the Working Capital
Line, and the $750,000 and $7.5 million Term Notes described below. These
amounts were charged to expense using the effective yield method over the period
from the issuance date to the earlier of the maturity date of the debt or the
conversion dates.
 
 Preferred Stock
Dividends.  Included in the loss applicable to common
shareholders in the accompanying Consolidated Statements of Operations for the
three months ended September 30, 2008 and 2007 are deemed preferred stock
dividends of $205,678 and $578,467, respectively. The amounts for the three
months ended September 30, 2008 and 2007 consist of $106,338 and $159,243 of
preferred stock dividends paid or payable in cash and $99,340 and $419,224 of
the discount representing the beneficial conversion feature of the redeemable
convertible preferred stock, the fair value of warrants issued in connection
with the preferred stock and the difference between the fair value of the
preferred stock immediately prior to and after certain prior amendments to the
preferred stock.


22







Included in the loss applicable
to common shareholders in the accompanying Consolidated Statements of Operations
for the nine months ended September 30, 2008 and 2007 are deemed preferred stock
dividends of $736,897and $1,404,850, respectively. The amounts for the
nine months ended September 30, 2008 and 2007 consist of $339,567 and $481,528
of preferred stock dividends paid or payable in cash and $397,330 and $923,322
of the discount representing the beneficial conversion feature of the redeemable
convertible preferred stock, the fair value of warrants issued in connection
with the preferred stock and the difference between the fair value of the
preferred stock immediately prior to and after certain prior amendments to the
preferred stock.




Change in fair
value of derivative liability.The major factor in the increased
income for the three months ended September 30, 2008 compared to 2007 was the
relatively greater reduced change in the derivative liability of$6,734,696. This was due to the effect of the
decrease in the stock price from $0.21 to $0.12 per share during the quarter
ended September 30, 2008 as compared to the decrease in the stock price from
$0.14 to $0.07 per share during the quarter ended September 30, 2007. The major
factor in the increased loss for the nine months ended September 30, 2008
compared to 2007 was the relatively greater increased change in the derivative
liability of $(16,681,506). This was due to the effect of the
increase in the stock price from $0.04 to $0.12 per share during the nine months
ended September 30, 2008 as compared to the decrease in the stock price from
$0.17 to $0.07 per share during the nine months ended September 30,
2007.





Liquidity and Financial
Condition





General.Cash and cash
equivalents at September 30, 2008 and December 31, 2007 were $159,833 and
$174,879, respectively. In the nine months ended September 30, 2008, we funded
our operations primarily from borrowings under the term notes. The decrease in
cash and cash equivalents during the nine months ended September 30, 2008 of
$15,046 resulted from many factors, principally cash used in operations of
$4,359,850 which was principally related to net loss, net of non-cash items of
$(4,506,428). This was largely offset by $4,491,313 net cash provided by
financing activities comprised of a decrease in restricted cash of $3,069,297
and borrowings of $1,687,250 on term notes and issuance of common stock of
$84,360, offset by payment of preferred dividends of $349,594.




Working
capital deficit as of September 30, 2008 and December 31, 2007 was
$22,734,291 and $6,384,787, respectively. The $16,349,504 decrease in working
capital is primarily due to the $9,881,959 increase in the Company’s derivative
liabilities and the $6,290,368 increase in the short-term portion of the term
notes.




Our cash
requirements have been and will continue to be significant. JMAR’s operations
will continue to use cash in 2008 for 1) marketing; 2) product development
efforts; 3) corporate costs, primarily related to the cost of being a public
company; 4) interest and preferred stock dividends and 5) other working capital
needs.





The
financing provided by the $7.5 million Term Note has funded the Company’s
operations through late September, 2008.





In
September 2008, the Company accepted interim financing of $1,750,000 from Laurus
(the “$1.75 million Term Note”).  Based on operating budget
projections and discussions with Laurus, the Company anticipates receiving
additional financing that will cover continuing operations through year-end and
beyond.





The
Company will require drawdowns through the near term under the $1.75 million
Term Note to continue the marketing and development of emerging new products and
for working capital requirements. There are no assurances that funds will be
available under the $1.75 million Term Note, due to Laurus’ requirement to
approve every drawdown.  The Company is continuing to pursue other
opportunities to raise additional funds in the future.





Management
believes, but cannot assure, that the Company will be able to raise those
additional funds through equity or other financings to fund future
operations.  This belief is derived from the Company’s historical
access to equity and debt markets. See further discussion in Note 1 in the
accompanying Notes to Consolidated Financial Statements and “Risk Factors” in
Part II - Item 1A below.




Working Capital Line  In
March 2003, the Company entered into a Revolving Fixed Price Convertible
Note (Working Capital Line) with Laurus Master Fund (Laurus). The term of the
Working Capital line expired on March 21, 2006 and was replaced by a new
line of credit facility (2006 Working Capital Line). The 2006 Working Capital
Line allowed the Company to borrow from time-to-time up to 90% of eligible
accounts receivable and up to 50% of eligible inventory up to $500,000, up to an
aggregate maximum of $3 million. Upon approval from 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 (7 percent at September 30,
2008) on the 2006 Working Capital Line is equal to the prime rate plus
2 percent. The 2006 Working Capital Line matures in August 2009. As of
September 30, 2008, there was $649,911 outstanding under the 2006 Working
Capital Line, including a $500,000 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.  The
warrants were vested immediately.  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 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.





At
September 30, 2008 and December 31, 2007, the unamortized discount and fees of
$135,167 and $141,186, respectively, were offset against borrowings on the
Working Capital Line in the accompanying consolidated balance sheets. The
discount is being amortized over the life of the 2006 Working Capital Line,
resulting in $21,180 and $63,450 of interest expense for the three and nine
months ended September 30, 2008 and $93,750 and $187,500 for the three and nine
months ended September 30, 2007, respectively. Also included in the discount are
other fees paid to Laurus, including annual renewal fees




23


Term Notes   On
April 13, 2007, the Company and Laurus entered into a Securities Purchase
Agreement which provided for the loan of $750,000 to the Company evidenced by a
Secured Promissory Note (“the “750,000 Note”), together with a Warrant to
purchase 7,597,750 shares of Common Stock. The terms of this transaction
provided for the following: 1) the $750,000 Note accrues interest at the rate of
prime rate plus 2%, with interest payable monthly in arrears which commenced on
May 1, 2007, 2) the principal and all unpaid interest is due on August 31,
2009, 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 net share 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. Based on the registration rights
associated with the underlying shares of the warrant, the Company has recorded
the fair value of the warrants as derivative liabilities in accordance with EITF
No. 00-19.  The estimated fair value was $625,147 at September 30,
2008.





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 warrants have a term of ten
years with immediate vesting and an exercise price of $0.01.  Based on
the registration rights associated with the underlying shares of the warrant,
the Company has recorded the estimated fair value of the warrants of $13,090,000
based on the Black Scholes option pricing model as debt discount and derivative
liabilities in accordance with EITF No. 00-19.  The estimated fair
value was $14,280,000 at September 30, 2008. At September 30, 2008 and December
31, 2007, the unamortized discount and fees of $1,250,000 and $4,062,500,
respectively, were offset against borrowings in the accompanying consolidated
balance sheets. The discount is being amortized over the life of the September
2007 SPA, resulting in $937,500 and $2,812,500 of interest expense for the three
and nine months ended September 30, 2008 and $937,500 and $1,250,000 for the
three and nine months ended September 30, 2007, respectively.





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 of the proceeds 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.





On
September 24, 2008, the Company entered into a Securities Purchase Agreement
with Laurus (the “September 2008 SPA"). Pursuant to the September 2008
SPA, Laurus completed a loan to the Company totaling $1,750,000 evidenced
by a Secured Term Note (the “$1.75 million Term Note"). The maturity date of the
$1.75 million Term Note is August 31, 2009. Interest on the $1.75 million Term
Note is payable monthly, with interest payable at 10% per annum and an
additional 5% accruing monthly and payable at maturity. The $1.75 million Term
Note was disbursed as follows: 1) $380,000 was disbursed directly to the
Company, 2) $1,307,250of the
proceeds was funded and placed in a restricted account, 3) Laurus was paid a
closing fee of $61,250, and 4) a $1,500 fee was paid to the escrow agent. 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.


24


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




Letter of Credit.In
connection with the Company’s lease of its Rancho Bernardo facility, a
commercial bank previously issued a letter of credit currently in the amount of
$78,645 that is expiring in November.  The Company will be replacing
the letter of credit starting in November through security of a bank account in
favor of the landlord that will increase to $53,645by January 2009. In the
future, as the total obligation under the lease reduces, funds will be released
to the Company from the account in accordance with the security provision in the
lease.




Cash Used in Operations. Cash
used in operating activities was $2,586,092 higher in the nine months ended
September 30, 2008 as compared to the nine months ended September 30, 2007, due
to a greater net loss of $16,779,175 and a relatively higher use of cash
for working capital items of $437,818, offset by increases in non cash items of
$ 13,602,810 and the change of $1,028,091 in the combined income/(loss) and net
assets and liabilities of discontinued operations.




Cash Used in Investing
Activities. In the nine months ended September 30, 2008, cash used in
investing activities was $146,509 compared to a use of $41,990 in the nine
months ended September 30, 2007, principally due to the $74,840 increase in
purchase of property and equipment and $20,656 increase in addition to
intangible assets (patents).




Cash Provided by (Used in) Financing
Activities. In the nine months ended September 30, 2008, cash provided by
financing activities was $4,491,313 compared to $1,267,457 in the nine months
ended September 30, 2007, principally due to the decrease in restricted cash of
$3,069,297 plus borrowings on term notes of $1,687,250 in the nine months ended
September 30, 2008 as compared to the increase in restricted cash of $6,437,408
offset by borrowings on term notes of $7,107,949 in the nine months ended
September 30, 2007. Cash payments of preferred stock dividends were $349,594 as
compared to $430,861 in the nine months ended September 30, 2008 and 2007,
respectively. Net proceeds from the sale of common stock were $84,360 and
$384,182 in the nine months ended September 30, 2008 and 2007,
respectively.




Commitments




a.
Leases




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




Year
      Ending December 31,20       2008
            
            $
            88,55820       2009
            
            
            360,5722         2010
            
            
            374,790201     2011
            
            
            389,57620       2012
            
            
            335,678Th    Thereafter
            
            
            —$
            1,549,174




Related
rent expense was $217,512 and $199,988 for the nine months ended September 30,
2008 and 2007, respectively.




b.
Deferred Compensation




Pursuant
to a 2002 employment agreement with a former executive, the Company recorded a
discounted liability for deferred compensation. The unamortized amount included
in notes payable and other long-term liabilities on the accompanying Balance
Sheet at September 30, 2008 is $138,000.




25


Included
in “Selling, general and administrative” in the accompanying Statement of
Operations are $6,770, $10,679, $20,247 and $48,440 for the three and
nine months ended September 30, 2008 and 2007, respectively, for the
amortization of the discounts recorded against the deferred compensation
obligations. Total deferred compensation obligations for 2008 (remaining three
months) and 2009 (the termination of the obligation) are $68,000 and $70,000,
respectively. The Company has accounted for this individual deferred
compensation arrangement in accordance with Accounting Principles Board (APB)
Nos. 12 and 21.




Preferred
Stock Redemption Obligations




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







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





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




Working
Capital Line





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




$750,000
Note




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




$7.5
million Term Note




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





$1.75
million Term Note





The terms
of $1.75 million Term Noteare described in
“Liquidity and Financial Condition” above.  As of September 30, 2008, $1.75
million was outstanding under the $1.75 million Term Note.





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.




26





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




Revenues




For the
three months ended September 30, 2008 and 2007, approximately 100% and 57%,
respectively, of the Company’s revenues were contract revenues, with the
remainder BriteLight sales, product sales, and field service revenues from
Biosentry. For the nine months ended September 30, 2008 and 2007, approximately
48.1% and 55.8%, respectively, of the Company’s revenues were contract revenues,
with the remainder BriteLight sales, product sales, and field service revenues
from Biosentry. Contract revenues are recognized based on the percentage of
completion method wherein income is recognized pro-rata over the life of the
contract based on the ratio of total incurred costs to anticipated total costs
of the contract. Actual costs could differ from these estimated costs.
Reimbursable or recoverable general and administrative (G&A) costs are
charged to G&A expense as incurred. Estimated losses are fully charged to
operations when identified. Product revenues are recognized upon the later of
when the product is shipped or when additional contractual requirements related
to the sale are completed.





Intangible
Assets





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




Beneficial
Conversion Feature and Warrant Valuation




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




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




27





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




In
connection with the issuance of warrants with certain notes payable, the Company
was required to register the underlying shares. The Company determined that the
registration rights are an embedded derivative instrument pursuant to SFAS No.
133, Accounting for
Derivative   Instruments and Hedging
Activities, as amended. Under the provisions of Emerging Issues Task
Force (“EITF”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock,
the accounting treatment of these derivative financial instruments required that
the Company record the derivatives at their fair values as of the inception date
of the warrant agreements and at fair value as of each subsequent balance sheet
date.




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.




28


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
$1.75 million, $7.5 million and $750,000 Term Notes and the Working Capital
Line and Preferred Stock, all of which bear interest and dividends,
respectively, based on the prime rate. As of September 30, 2008, we had
$1,750,000, $7,500,000 and $750,000 under our Term Notes, $649,911 outstanding
under our 2006 Working Capital Line and $7,684,251 of Preferred Stock
outstanding. An immediate change of one percentage point in the prime rate would
have caused an increase or decrease in interest and dividends, net of money
market interest, of approximately $170,000 on an annual basis.




Item 4T.    Controls and
Procedures.




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified by the SEC
and that such information is accumulated and communicated to management,
including our CEO and CFO, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, we recognize that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.




Management,
with participation by our CEO and CFO, has designed the Company’s disclosure
controls and procedures to provide reasonable assurance of achieving the desired
objectives. As required by SEC Rule 13a-15(b), in connection with filing
our Quarterly Report on Form 10-Q, management conducted an evaluation, with the
participation of our CEO and CFO, of the effectiveness of the design and
operation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as of September 30, 2008, the end of the period covered by the
report.




Based
upon that evaluation as of September 30, 2008, and the evaluation conducted
by management in connection with the audit of the Company’s financial statements
for the year ended December 31, 2007, we identified material weaknesses in
our internal control over financial reporting which still existed as of
September 30, 2008. A material weakness is “a significant deficiency, or a
combination of significant deficiencies, such that there is a reasonable
possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected by us in a timely manner.” As a
result of these material weaknesses, our CEO and CFO concluded that our
disclosure controls and procedures were not effective at the reasonable
assurance level as of September 30, 2008.


29





As of
December 31, 2007, we identified the following control deficiencies and the
following remediations have been taken as of September 30, 2008:




·
            As a small company, we
      historically employed a very small staff in our accounting and finance
      department. As a result, we did not have a sufficient complement of
      personnel with an appropriate level of accounting knowledge and expertise
      during the year ended December 31, 2007.  As of the date of this
      Report, we have added an additional executive to aid in the transaction
      approval process, and we have hired additional accounting staff to aid in
      the segregation of duties. Our existing staff has gained
      accounting knowledge through additional experience however we feel a
      material weakness still exists as of September 30, 2008 due to the need
      for greater experience with public company accounting and
      reporting.





·
            As of December 31, 2007 we were
      in the process of implementing appropriate policies and procedures to
      allow for timely completion of financial control and reporting
      processes.  As of September 30, 2008, the Company has added
      additional policies, additional accounting personnel and has added review
      procedures by the CFO and CEO to contribute to the timely completion of
      financial control and reporting
  processes.





·
            As of December 31, 2007 there was
      a need for a stronger internal control environment.  As of
      September 30, 2008, the Company has added additional corporate control
      policies, additional accounting personnel and has added review procedures
      by the CFO and CEO to develop a stronger internal control
      environment.





·
            As of December 31, 2007 there
      were weaknesses identified in the Company’s revenue recognition and sales
      cut-off procedures.  As of September 30, 2008, the Company has
      added additional corporate control policies, additional accounting
      personnel and has added review procedures by the CFO and CEO to complement
      their revenue recognition and sales-cut off
    procedures.




Each of
these control deficiencies has a reasonable possibility of resulting in a
misstatement of account balances or disclosures that would result in a material
misstatement to our financial statements that would not be prevented or
detected. Accordingly, we have determined that each of the control deficiencies
described above constitutes a material weakness.




In light
of these material weaknesses, we performed additional analyses and procedures in
order to conclude that our consolidated financial statements for the year ended
December 31, 2007, as well as our condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q for the three and
nine month periods ended September 30, 2008, were fairly stated in
accordance GAAP for such financial statements. Accordingly, management
believes that despite our material weaknesses, our consolidated financial
statements for the year ended December 31, 2007 as well as our condensed
consolidated financial statements included in this Quarterly Report on
Form 10-Q, are fairly stated, in all material respects, in accordance with
GAAP.




Changes
in Internal Control Over Financial Reporting





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




30




PART
II — OTHER INFORMATION





Item 1. Legal Proceedings




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





Item 1A. Risk
Factors




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




Our
cash requirements are significant and the failure to raise additional capital
will have a significant adverse effect on the Company’s financial condition and
its operations.




Our cash
requirements have been and will continue to be significant. Our net cash used
from continuing operations for the nine months ended September 30, 2008 and for
the years ended December 31, 2007 and 2006 was $4,834,809, $2,600,442 and
$12,440,650, respectively. These negative cash flows are primarily related to
operating losses and fluctuations in working capital items. As disclosed
elsewhere in this report, we will continue to use cash in 2008 and 2009 and the
Company will require additional borrowings under its $1.75 million Term Note and
additional financing for working capital requirements through 2008 and 2009, to
continue the development of some of our emerging new products and to continue
our progression toward commercialization of all products. Although we have been
able to draw down under the $1.75 million Term Note to date there is no
assurance that Laurus will continue to release additional funds beyond November
2009.  The Company is continuing to pursue further financing with
Laurus and other opportunities to raise additional funds in the future. Although
the Company has been successful in raising funds in the past, there can be no
assurance that we will be able to successfully raise additional funds in
the future. The failure to raise additional capital will have a significant
adverse effect on the Company’s financial condition and its
operations.




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




Our
revenues, exclusive of discontinued operations, for the nine months ended
September 30, 2008 and for the years ended December 31, 2007 and 2006 were
$284,106, $869,662 and $1,998,183, respectively. Our net loss for the nine
months ended September 30, 2008 and for the years ended December 31, 2007 and
2006 was $19,406,534, $1,623,906 and $13,106,681, respectively. Failure to
achieve significant sales of our new products in the future and continued losses
will further reduce our shareholders’ equity and will have a significant adverse
impact on our stock price.




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





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





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




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




31





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





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




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




As of September 30, 2008, there
were approximately 190,000,000 shares of common stock subject to
issuance upon exercise of outstanding options and warrants. In addition, as of
September 30, 2008, our Series G, I and J Preferred Stock is convertible into a
total of 20,065,472 shares of Common Stock at conversion prices ranging from
$0.1022 to 2.00 per share, subject to a contractual limitation on total
beneficial ownership by Laurus of 9.99% of our Common Stock.




These
issuances will result in substantial dilution.




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




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





None





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




At the
Company’s Annual Meeting of Shareholders held on August 22, 2008, the following
matters were voted on:





(a)
            
            The
      following directors were elected: C. Neil Beer (43,673,266 affirmative
      votes and 1,387,530 votes withheld); Charles A. Dickinson (43,629,929
      affirmative votes and 1,430,867 votes withheld); J. Paul Gilman
      (43,649,850 affirmative votes and 1,411,946 votes withheld); James B.
      McCarthy (43,762,960 affirmative votes and 1,297,836 votes withheld); and
      Richard J Naughton (43,684,861 affirmative votes and 1,735,935 votes
      withheld).(b)
            
            The
      proposal to ratify the selection of Singer Lewak Greenbaum & Goldstein
      LLP as the Company’s independent auditor for the fiscal year ending
      December 31, 2007 was approved with 44,048,497 affirmative votes,
      893,502 negative votes and 118,797 abstaining votes.


Item 6.
Exhibits.


Exhibit
      31.1
            
            Certification
      of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
    2002.Exhibit
      31.2
            
            Certification
      of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
    2002.Exhibit
      32.1
            
            Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act 2002.






32





SIGNATURES




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




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







32