UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2007 or oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 001-32438 JMG Exploration, Inc. (Exact Name of Registrant as Specified in its Charter) Nevada20-1373949(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification Number)180 South Lake Ave.
Seventh FloorPasadena, California91101(Address of principal executive offices)(Zip Code) Registrants telephone number, including area code:(626) 792-3842Former name, former address and former fiscal year, if changed from last report.
Not applicable 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o           Accelerated filer o            Non-accelerated filer þ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ The number of shares outstanding of Registrants common stock, par value $0.01, as of May 11, 2007, was 5,188,409.   JMG Exploration, Inc.Index to Form 10-Q Quarterly Report
to the Securities and Exchange Commission PageNo.Part I  Financial InformationItem 1Consolidated Financial Statements3 - 7Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006.3Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2007 and 2006 (restated).4Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2007 and 2006 (restated).5Consolidated Statements of Shareholders Equity (unaudited) for the three months ended March 31, 2007 and 2006 (restated).6Consolidated Statements of Comprehensive Loss (unaudited) for the three months ended March 31, 2007 and 2006 (restated).7Notes to Consolidated Financial Statements (unaudited)8 - 15Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations16 - 22Item 3Quantitative and Qualitative Disclosures About Market Risk22Item 4TControls and Procedures22Part II Other InformationItem 1Legal Proceedings24Item 1ARisk Factors24Item 2Unregistered Sales of Equity Securities and Use of Proceeds24Item 3Defaults Upon Senior Securities24Item 4Submission of Matters to a Vote of Security Holders24Item 5Other Information24Item 6Exhibits24    2   PART I. FINANCIAL INFORMATION  ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS  JMG Exploration, Inc. CONSOLIDATED BALANCE SHEETS  As ofMarch 31
2007December 31
2006ASSETS(unaudited)CurrentCash and cash equivalents$      4,268,852$ 567,426Accounts receivable863,0691,331,667Prepaid expenses37,78248,0625,169,7031,947,155Other assets73,13630,000Oil and gas properties (accounted for under the successful efforts method of accounting), net of depreciation, depletion and amortization4,871,8634,928,393Oil and gas properties held for resale (accounted for under the successful efforts method of accounting), net of depreciation, depletion and amortization-3,107,876Other property and equipment, net of depreciation56,212102,179$ 10,170,914$ 10,115,603LIABILITIES AND STOCKHOLDERS EQUITYCurrentAccounts payable$     310,162$    715,751Accrued liabilities546,160990,484Due to JED Oil Inc.1,896,9571,426,449Promissory note payable-1,500,000Total current liabilities2,753,2794,632,684Asset retirement obligations67,601111,0962,820,8804,743,780Stockholders equityShare capitalCommon stock - $.001 par value; 25,000,000 shares authorized; 5,188,409 shares issued and outstanding5,1885,188Preferred stock - $.001 par value; 10,000,000 shares authorized; no shares issued and outstanding at March 31, 2007 and 2005.--Additional paid-in capital24,827,82624,765,383Share purchase warrants2,184,4522,184,452Accumulated deficit(19,643,849)(21,564,715)Accumulated other comprehensive earnings(23,583)(18,485)7,350,0345,371,823$ 10,170,914$ 10,115,603  The accompanying notes are an integral part of these consolidated financial statements.   3   JMG Exploration, Inc.CONSOLIDATED STATEMENTS OF OPERATIONS  (unaudited)  For theThree month period ended
March 31,20072006Revenue(restated) (1)Gross Revenue$   194,412633,611Less royalties(62,692)(180,876)131,720452,735ExpensesGeneral and administrative290,257293,363Production expenses63,810135,462Geophysical and geological expense--Depletion, depreciation and impairment235,8931,007,695Accretion on asset retirement obligation2,3291,671529,8461,438,191Net loss from operations(460,569)(985,456)Other Income and ExpenseGain on sale of oil and gas properties2,370,546-Interest income16,965-Interest expense(19,445)(23,897)other13,369-2,381,435(23,897)Net income (loss)1,920,866(1,009,353)Less:  deemed dividend on warrant extension-(552,846)Net income (loss) applicable to common shareholders$ 1,920,866$ (1,562,199)Basic weighted average shares outstanding5,188,4095,036,049Net income (loss) for the period per share, basic and diluted$ 0.37$ (0.31)(1)
See Note 2  Restatement of 2006 interim Financial Statements The accompanying notes are an integral part of these  consolidated financial statements.  4   JMG Exploration, Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  Three month period ended
March 31,For the20072006OPERATIONS(restated) (1)Net income (loss) for the period$ 1,920,866$ (1,009,353)Adjustments to reconcile net loss to cash flows from operating activities:Stock-based compensation62,44324,868Depletion, depreciation and accretion238,2231,009,366Gain on sale of property and equipment(2,370,546)-Other changes:Decrease in accounts receivable468,598791,089Decrease (increase) in prepaid expenses10,280(126,938)Decrease  in accounts payable  and accrued liabilities(849,913)(1,844,389)Increase (decrease) in due to JED Oil Inc.470,508(146,349)Increase (decrease) in asset retirement obligation(43,495)-Cash used in operating activities(93,036)(1,301,706)INVESTINGProceeds on disposition of property5,454,437-Purchase of property and equipment(155,236)(1,097,006)Decrease (increase) in Other Property & Equipment43,495-Decrease (increase) in other assets(43,136)-Cash used in investing activities5,299,560(1,097,006)FINANCINGBorrowing under Promissory Note-1,500,000Payment on Promissory Note(1,500,000)-Issue of common shares, net of issue costs-417,873Cash provided by financing activities(1,500,000)1,917,873Effect of foreign exchange on cash and cash equivalents(5,098)(17,990)Net increase (decrease) in cash and cash equivalents3,701,426(498,829)Cash and cash equivalents, beginning of period567,4261,150,965Cash and cash equivalents, end of period$    4,268,852$   652,136(1)
See Note 2  Restatement of 2006 interim Financial Statements  The accompanying notes are an integral part of these consolidated financial statements.   5   JMG Exploration, Inc.  STATEMENTS OF CONSOLIDATED STOCKHOLDERS EQUITY  (unaudited)  Common StockPreferred
StockAdditional
Paid-in
CapitalShare Purchase WarrantsAccumu-lated DeficitAccumu-lated
Other Compre-hensive LossTotalNo. SharesAmt#$$$$$$$Balance at December 31, 2005 (restated) (1)4,997,5784,997-19,947,1032,248,663(9,037,083)(2,697)13,160,983Warrants exercised for common stock137,371137-731,367(64,211)--667,293Exercise of stock options53,46054-201,902---201,956Stock based compensation---1,993,629---1,993,629Extension of Warrant Expiration Dates to January 15, 2007---552,846-(552,846)--Extension of Warrant Expiration Dates to January 15, 2008---1,338,536-(1,338,536)--Net loss for the year ended December 31, 2006-----(10,636,250)-(10,636,250)Foreign exchange translation------(15,788)(15,788)Balance at December 31, 20065,188,4095,188-24,765,3832,184,452(21,564,715)(18,485)5,371,823Stock based compensation62,44362,443Net income for the three months ended March 31, 2007-----1,920,866-1,920,866Foreign exchange translation------(5,098)(5,098)Balance at March 31, 2007 (unaudited)5,188,4095,188-24,827,8262,184,452(19,581,406)(23,583)7,350,034(1)
See Note 2  Restatement of 2006 interim Financial Statements  The accompanying notes are an integral part of these consolidated financial statements.  6   JMG Exploration, Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS  (unaudited)  Three month period ended
March 31,20072006(restated) (1)Net income (loss) for the period$ 1,920,866$ (1,009,353)Other comprehensive income:Foreign exchange translation adjustment(5,098)(17,990)Comprehensive loss for the period$ 1,915,768$ (1,027,343)(1)
See Note 2  Restatement of 2006 interim Financial Statements  The accompanying notes are an integral part of these consolidated financial statements.   7   JMG Exploration, Inc. Notes to Consolidated Financial Statements  1.    INCORPORATION, NATURE OF OPERATIONS, AND GOING CONCERN JMG Exploration, Inc. (JMG or the Company) is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids in Canada and the United States. Currently, all of the Companys proved reserves are located in the United States. JMG was incorporated with nominal share capital under the laws of the State of Nevada on July 16, 2004 and commenced operations in August 2004. The Companys future financial condition and results of operations will depend upon prices received for its oil and natural gas production and the costs of finding, acquiring, developing and producing reserves.  Prices for oil and natural gas are subject to fluctuations in response to change in supply, market uncertainty and a variety of other factors beyond the Companys control. These factors include worldwide political instability, the foreign supply of oil and natural gas, the price of foreign imports, the level of consumer demand, and the price and availability of alternative fuels. In the event sufficient capital is not available to fund development and exploratory drilling opportunities the Company will explore a range of strategic alternatives, including a possible sale of the Company or a merger with another party. On April 27, 2007, JMG entered into a non-binding Letter of Intent with Iris Computers Ltd., a distributor of computer hardware and software in India, regarding a potential business combination. The transaction is subject to a 60 day due diligence period and provides for a No-Shop Period until June 26, 2007, during which period the parties have agreed not to enter into an agreement or consummate a transaction with any other party, which would preclude the consummation of the transaction. Although no assurance can be given that the parties can reach agreement and proceed to a closing, if the proposed business combination is completed, the current JMG shareholders, immediately post-closing, would own approximately 37.5% of the combined entities, without giving effect to JMG's outstanding options and warrants. JMG's oil and gas assets will not be included in this transaction and will be sold or merged separately for the benefit of shareholders of a future record date. JMG has not realized a profit from operations since its incorporation on July 16, 2004.  These conditions raise substantial doubt about the Companys ability to continue as a going concern. The recovery of the Companys assets and its ability to continue operations is dependent on successful production of economic quantities of hydrocarbons, or obtaining additional financing to fund its exploration activity.  The sale of certain properties on January 30, 2007 provided additional cash flow towards the Companys ongoing operations, however, as of March 31, 2007, we had an accumulated deficit of $19,581,406, and have insufficient working capital to fund development and exploratory drilling opportunities. Accordingly, the Companys consolidated financial statements are presented on a going concern basis. These financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern.  2.  RESTATEMENT OF 2006 INTERIM FINANCIAL STATEMENTS The unaudited financial statements for the first three quarters of 2006 have been restated due changes to depletion and impairment calculations. The Companys calculation of depreciation, depletion and amortization was incorrect because of a clerical error which resulted in depletion being calculated with respect to proved and probable reserves instead of proved reserves. The unaudited financial statement for the first three quarters of 2006 have also been restated to reflect deemed dividends resulting from the extension of warrant expiration dates. On February 24, 2006 the Company extended the expiration dates of its outstanding warrants to January 15, 2007. A total of 375,187 $6.00 warrants and 1,739,500 $4.25 warrants were to expire on December 31, 2006, and 1,854,235 $5.00  8   warrants were to expire on August 24, 2006. A deemed dividend of $552,846 for this extension of the warrant expiration dates was calculated using the Black-Scholes option-pricing model and was not reflected in the 2006 unaudited quarterly financial statements.  The effects of the depletion and impairment restatement of $801,396 and the warrant deemed dividend of $552,846 on expenses, net loss for the period, net loss applicable to common shareholders, and basic and diluted earnings per share for the three month period ended March 31, 2006 are as follows:  For the three month period ended March 31, 2006As Originally ReportedRestatement AdjustmentsAs Restated(unaudited)(unaudited)(unaudited)Expenses$   660,692$   801,396$     1,462,088Net loss for the period$  (207,957)$  (801,396)$  (1,009,353)Net loss applicable to common shareholders$  (207,957)$  (1,354,242)$  (1,562,199)Net loss for the period per share: basic and diluted$(0.04)$(0.27)$(0.31)  The effects of the depletion and impairment restatement of $801,396 and the warrant deemed dividend of $552,846 on property and equipment, total assets, accumulated deficit and shareholders equity as of  March 31, 2006 are as follows.  March 31, 2006As Originally ReportedRestatement AdjustmentsAs RestatedProperty and equipment$   15,779,130$     (801,396)$   14,977,734Total assets$   19,114,716$     (801,396)$   18,313,320Accumulated deficit$   (6,743,785)$  (1,354,242)$   (8,098,027)Shareholders equity$   15,118,219$     (801,396)$   14,316,823   3. SIGNIFICANT ACCOUNTING POLICIES  These interim consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods, on a basis that is consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements and the summary of significant accounting policies and notes thereto included in the Companys audited financial statements for the years ended December 31, 2006 and 2005. Critical accounting estimates In the preparation of the financial statements, it was necessary to make certain estimates that were critical to determining our assets, liabilities and net income. None of these estimates affect the determination of cash flow but do have a significant impact in the determination of net income. The most critical of these estimates is the reserves estimations and the resulting effect on various income statement and balance sheet measures. JMG engaged an independent engineering firm to evaluate 100% of our oil reserves and prepare a report thereon. Their report was utilized in the calculations of depletion and depreciation expense. The estimation of the reserve volumes and future net revenues set out in the report is complex and subject to uncertainties  9   and interpretations. Judgments are based upon engineering data, projected future rates of production, forecasts of commodity prices, and the timing of future expenditures. Inevitably the estimates of reserve volumes and future net revenues will vary over time as new data becomes available and estimates of future net revenues do not represent fair market value. The following significant accounting policies outline the major policies involving critical estimates. Successful-efforts method of accounting Our business is subject to special accounting rules that are unique to the oil and gas industry. There are two allowable methods of accounting for oil and gas business activities: the successful-efforts method and the full-cost method. Under the successful-efforts method, costs such as geological and geophysical, exploratory dry holes and delay rentals are expensed as incurred whereas under the full-cost method these types of charges are capitalized. Under the successful-efforts method of accounting, all costs of property acquisitions and drilling of exploratory wells are initially capitalized. If a well is unsuccessful, the capitalized costs of drilling the well, net of any salvage value, are charged to expense. If a well finds oil and natural gas reserves that cannot be classified as proved within a year after discovery, the well is assumed to be impaired and the capitalized costs of drilling the well, net of any salvage value, are charged to expense. The capitalized costs of unproven properties are periodically assessed to determine whether their value has been impaired below the capitalized cost, and if such impairment is indicated, a loss is recognized. We consider such factors as exploratory results, future drilling plans and lease expiration terms when assessing unproved properties for impairment. For each field, an impairment provision is recorded whenever events or circumstances indicate that the carrying value of those properties may not be recoverable from estimated future net revenues. The impairment provision is measured as the excess of carrying value over the fair value. Fair value is defined as the present value of the estimated future net revenue from total proved and risked-adjusted probable reserves over the economic life of the reserves, based on year end oil and gas prices, consistent with price and cost assumptions used for acquisition evaluations. Geological and geophysical costs and costs of retaining undeveloped properties are expensed as incurred. Expenditures for maintenance and repairs are charged to expense, and renewals and betterments are capitalized. Upon disposal, the asset and related accumulated depreciation and depletion are removed from the accounts, and any resulting gain or loss is reflected currently in income or loss. Costs of development dry holes and proved leaseholds are depleted on the unit-of-production method using proved developed reserves on a field basis. The depreciation of capitalized production equipment, drilling costs and asset retirement obligations is based on the unit-of-production method using proved developed reserves on a field basis. To economically evaluate our future proved oil and natural gas reserves, if any, independent engineers must make a number of assumptions, estimates and judgments that they believe to be reasonable based upon their expertise and professional guidelines. Were the independent engineers to use differing assumptions, estimates and judgments, then our financial condition and results of operations could be affected. We would have lower revenues in the event revised assumptions, estimates and judgments resulted in lower reserve estimates, since the depletion and depreciation rate would then be higher. A write-down of excess carrying value also might be required. Similarly, we would have higher revenues and net profits in the event the revised assumptions, estimates and judgments resulted in higher reserve estimates, since the depletion and depreciation rate would then be lower. Proved Oil and Gas Reserves Proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves. The estimated quantities of proved crude oil, natural gas liquids and natural gas are derived from geological and engineering data that demonstrate with reasonable certainty the amounts that can be recovered in future years from known reservoirs under existing economic and operating conditions. Reserves are considered proved if they can be produced economically as demonstrated by either actual production or conclusive formation tests. The oil and gas reserve estimates are made using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as  10   a result of changes in prices, costs, fiscal regimes, reservoir performance or a change in the Companys plans. Long-lived assets When assets are placed into service, we make estimates with respect to their useful lives that we believe are reasonable. However, factors such as competition, regulation or environmental matters could cause us to change our estimates, thus impacting the future calculation of depreciation and depletion. We evaluate long-lived assets for potential impairment by identifying whether indicators of impairment exist and, if so, assessing whether the long-lived assets are recoverable from estimated future undiscounted cash flows. The actual amount of impairment loss, if any, to be recorded is equal to the amount by which a long-lived assets carrying value exceeds its fair value. Estimates of future discounted cash flows and fair value of assets require subjective assumptions with regard to future operating results and actual results could differ from those estimates. Asset Retirement Obligations We have adopted SFAS No. 143, Accounting for Asset Retirement Obligationsfrom inception. The net estimated costs are discounted to present values using a credit-adjusted, risk-free rate over the estimated economic life of the properties. These costs are capitalized as part of the cost of the related asset and amortized. The associated liability is classified as a long-term liability and is adjusted when circumstances change and for the accretion of expense which is recorded as a component of depreciation and depletion. Stock-based compensation Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method.  Under that transition method, compensation cost recognized effective January 1, 2006 includes:  (a) compensation cost for share-based options granted to employees and directors 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 Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of  Statement 123(R).  Results for prior periods have not been restated. Prior to January 1, 2006, the Company accounted for the stock options granted to employees and directors under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation and for the stock options granted to consultants under the recognition and measurement provisions of FASB Statement No. 123.  No stock-based employee and directors compensation cost was recognized in the Statement of Operations and Deficit for the year ended December 31, 2005 nor for the period from the date of incorporation on July 16, 2004 to December 31, 2004, as all options granted to employees and directors under that plan had an exercise price equal to the market value of the Companys common stock on the date of grant. Contingencies In the future, we may be subject to adverse proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We will be required to assess the likelihood of any adverse judgments or outcomes of these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to developments in each matter or changes in approach such as a change in settlement strategy in dealing with these potential matters  Cash and Cash Equivalents The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits.  Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000.  The company has not experienced any losses in such accounts and does not believe that it is exposed to any significant credit risk on cash.   11   Income (loss) per Common Share Income (loss) per share (EPS) is computed based on weighted average number of common shares outstanding and excludes any potential dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, which would then share in the earnings of the Company. The shares issuable upon the exercise of stock options and warrants are excluded from the calculation of net loss per share for the three months ended March 31, 2007 and 2006 because their effect would be antidilutive. The following shares were accordingly excluded from the net income/loss per share calculation.  Three month period ended
March 31,20072006(unaudited)(unaudited)Stock warrants4,062,5513,920,668Stock options890,833446,750Total share excluded4,953,3844,367,418  Income Taxes The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. No adjustments were required as a result of the adoption of FIN 48. The Company files income tax returns in the U.S. federal jurisdiction and various states. There are currently no income tax examinations underway for these jurisdictions, although the tax years ended December 31, 2006, 2005 and 2004 are all still open for examination. The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).  SFAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities.  Where it is more likely than not that a tax benefit will not be realized, a valuation allowance is recorded to reduce the deferred tax asset to its realizable value. A valuation allowance has been provided against the Companys net deferred tax assets as the Company believes that it is more likely than not that the net deferred tax assets will not be realized.  As a result of this valuation allowance, the effective tax rate for the first quarter of 2007 and for the year ended December 31, 2006 is zero percent. Allowance for Doubtful Accounts Trade accounts receivable are recorded at net realizable value. If the financial condition of JMGs customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Delinquent trade accounts receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The allowance is determined through an analysis of the past-due status of accounts receivable and assessments of risk that are based on historical trends and an evaluation of the impact of current and projected economic conditions. The allowance for doubtful accounts as of March 31, 2007 (unaudited) and December 31, 2006 was $135,000. Fair Value of Financial Instruments The estimated fair values for financial instruments are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. For certain of JMGs financial instruments, including cash, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their maturities.  12   New Accounting Pronouncements In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). It became effective for the Company on January 1, 2007. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on measurement, classification, interim accounting and disclosure. We adopted FIN 48 effective January 1, 2007.  In September 2006, FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. Where applicable, this statement simplifies and codifies fair value related guidance previously issued within GAAP. Although this statement does not require any new fair value measurements, its application may, for some entities, change current practice. SFAS No. 157 will be effective for the Company beginning January 1, 2008. The adoption of SFAS No. 157 is not expected to have a material impact on our financial statements. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 applies to all entities and is effective for fiscal years beginning after November 15, 2007. Adoption of SFAS No. 159 is not required for these financial statements, and we are currently determining the impact, if any, that SFAS No. 159 will have on our future financial statements.  4.  PROPERTY AND EQUIPMENT Depletion and depreciation expense was $235,893 and $1,007,695 for the three months ended March 31, 2007 and 2006. Undeveloped land and other assets not related to petroleum and natural gas properties were excluded from the depletion calculation. Oil and gas properties (accounted for under the successful efforts method of accounting)  March 31, 2007December 31, 2006(unaudited)Petroleum and natural gas properties$  6,117,224$   5,961,987Undeveloped Properties4,086,7214,086,722Accumulated depletion, depreciation and amortization(5,332,082)(5,120,316)$  4,871,863$  4,928,393   13   Oil and gas properties held for resale (accounted for under the successful efforts method of accounting)  March 31, 2007December 31, 2006(unaudited)Petroleum and natural gas properties$                  -$  10,231,212Undeveloped Properties2,174,170Accumulated depletion, depreciation and amortization(9,297,506)$                 -$   3,107,876  Other property and equipment  March 31, 2007December 31, 2006(unaudited)Property and Equipment$  73,403$  119,227Accumulated depreciation(17,191)(17,048)$  56,212$  102,179   5.  PROMISSORY NOTE On February 8, 2006 a promissory note was issued to an unrelated third party, for a total of $1,500,000. The terms of the agreement call for interest calculated at 12% per annum payable on a monthly basis.  The promissory note was repayable on March 30, 2006, however, repayment was extended to December 31, 2006.  All other terms of the original agreement remain the same.  The note was paid in full in February 2007.  6.  RELATED PARTY TRANSACTIONS  JED Oil Inc. On August 1, 2004 the Company entered into a technical services agreement with JED Oil Inc. (JED). Under the Agreement, JED provides all required personnel, office space and equipment, at standard industry rates for similar services. JED is considered an affiliate, because of its ownership interest in us and because two of our directors are directors of JED. This agreement was terminated on January 1, 2006; it was replaced by a joint services agreement, which operates to provide the above services on an as needed basis.  Pursuant to this agreement, for the three months ended March 31, 2007, JED charged JMG $155,236 for capital expenditures, $66,424 for well operating costs , $217,109 for payments to JMGs partners paid by JED, and $4,333 in miscellaneous costs. There were no transactions under this agreement during the three month period ended March 31, 2006.  In connection with these transactions the total amount payable to JED was $1,896,957 at March 31, 2007.   14   Skeehan & Company  Joseph Skeehan, the Chief Executive Officer, President and a director of JMG is also the owner of Skeehan & Company, a professional service corporation that engages in accounting, finance and consulting services to small to mid-sized companies and organizations primarily in Southern California since 1980. In conjunction with the maintenance of accounting records and the preparation of financial statements and regulatory filings, Skeehan & Company was paid a total of $3,038 during the three months ended March 31, 2007.  7. ASSET RETIREMENT OBLIGATION As of March 31, 2007, the estimated present value of the Companys asset retirement obligation was $67,601 based on estimated future cash requirements of $116,133, determined using a credit adjusted risk free interest rate of 8.5% over the economic life of the properties, an inflation rate of 2.0%, and an estimated life until repayment of 5-10 years. Accretion of $2,329 was recorded for the three months ending March 31, 2007.  Asset retirement obligations at December 31, 2006$111,096Liabilities incurred-Liabilities settled(45,824)Accretion expense2,329Asset retirement obligations at March 31, 2007$67,601   15   ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  The following Managements Discussion and Analysis of financial results as provided by the management of JMG Exploration, Inc. (JMG) should be read in conjunction with the unaudited consolidated financial statements and notes for the three months ended March 31, 2007, the audited financial statements and accompanying notes for the years ended December 31, 2006 and 2005 and the managements discussion and analysis for the years ended December 31, 2006 and 2005.  FORWARD-LOOKING STATEMENTS This report includes forward-looking statements. All statements other than statements of historical facts contained herein, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words believe, may, will, estimate, continue, anticipate, intend, should, plan, expect and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions as described in Risk Factors in our annual report on Form 10-K for the year ended December 31, 2006. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Statements relating to reserves are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future. Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this Form 10-Q are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except in accordance with applicable securities laws. The forward-looking statements contained in this Form 10-Q are expressly qualified by this cautionary statement. In the presentation of the Form 10-Q, JMG uses terms that are universally applied in analyzing corporate performance within the oil and gas industry for which regulators require that we provide disclaimers. Barrel of Oil Equivalent (BOE) The oil and gas industry commonly expresses production volumes and reserves on a barrel of oil equivalent basis (BOE) whereby natural gas volumes are converted at the ratio of six thousand cubic feet to one barrel of oil. The intention is to sum oil and natural gas measurement units into one basis for improved analysis of results and comparisons with other industry participants. Throughout this Form 10-Q, JMG has used the 6:1 BOE measure which is the approximate energy equivalency of the two commodities at the burner tip. BOE does not represent a value equivalency at the plant gate, which is where JMG sells its production volumes, and therefore may be a misleading measure if used in isolation.  Overview In August 2004, we completed two private placements totaling $8.8 million, issuing 250,000 shares of common stock and 1,950,000 shares of convertible preferred stock, and commenced exploration activities. Upon the closing of the initial public offering on August 3, 2005, the Company issued 2,185,000 shares of common stock at a price of $5.00 and 2,185,000 warrants at a price of $0.10 for gross proceeds of $11,143,500. The warrants associated with the initial public offering are exercisable at $5.00, until one year from the statement of registration, and have been extended through January 15, 2008. The Company trades on the Archipelago Exchange under the symbols JMG (common stock) and JMG+ (stock warrants).  16    During 2005, we made direct property acquisitions and commenced developing the oil and natural gas properties of others under arrangements in which we financed the cost of exploration drilling in exchange for interests in the oil or natural gas revenue generated by the properties. Such arrangements are commonly referred to as farm-ins to us, or farm-outs by the property owners to us.  In 2006 we continued drilling for oil and natural gas. We drilled eight horizontal oil wells in the Midale in North Dakota and four vertical gas wells in the Pinedale area of Wyoming.  On January 30, 2007, JMG completed the first closing of the sale of its oil and gas assets in North Dakota where it has been targeting the Bakken zone, for consideration of $5,454,437, subject to adjustment, to Samson Resources Company pursuant to a Purchase and Sale Agreement effective as of December 20, 2006, among JMG, JED Oil (USA) Inc. and Samson. The sales exclude the North Dakota lands where JMG has been developing its Midale play.   Results of operations Revenue.Our revenue is dependent upon success in finding and developing oil and natural gas reserves. Our ownership interest in the production from these properties is measured in BOE per day, a term that encompasses both oil and natural gas production. Revenues were $131,720 and $452,735 for the three month periods ended March 31, 2007 and 2006. The decrease in revenue was principally due to the sale of oil and gas assets in North Dakota.  Critical to our revenue stream is the market price for crude oil. Commodity benchmark prices for crude oil is as follows: March 31,
2007December 31,
2006West Texas Intermediate grade crude oil, per barrel$ 60.56$  61.05  We may use derivative financial instruments when we deem them appropriate to hedge exposure to changes in the price of crude oil, fluctuations in interest rates and foreign currency exchange rates. JMG currently does not have any financial derivative contracts or fixed price contracts in place. General and administrative expense.General and administrative expense relates to compensation and overhead for executive officers and fees for general operational and administrative services. We have contracted out all field personnel and equipment necessary for exploration activities, and for related administrative functions.  General and administrative expenses were $227,814 and $293,363 for the three month periods ended March 31, 2007 and 2006.  Expenses consist principally of salaries, consulting fees and office costs relating to the preparation and planning of our exploratory wells that commenced drilling this year, and planning for future drilling activities, and normally fluctuate according to development activity.  The decrease in general and administrative expense of  $65,549 from 2006 was principally due to stock based compensation expense. The Company has a stock option plan under which employees, directors and consultants are eligible to receive grants. The Corporation accounts for the stock option granted to consultants using the fair value recognition provisions of SFAS No. 123. Stock based compensation expense for the three-month period ended March 31, 2007 was $62,443.Stock based compensation expense for the three month period ended March 31, 2006 was $24,868. The Company has adopted Statement 123(R) using the modified-prospective method, therefore for the three month period ended March 31, 2006 the share-based payment was a result of expensing the stock options for employees as well as consultants on a straight line basis using the Black-Scholes option pricing model.  Production expense.Production costs include operating costs associated with field activities and geophysical and geological expense. Under the successful-efforts method, costs such as geological and geophysical, exploratory dry holes and delay rentals are expensed as incurred. Production expenses for the three month period ended March 31, 2007 and 2006 were $63,810 and $135,462.  17   Geophysical and geological expense.There were no geophysical and geological expenses for the three month period ended March 31, 2007 or 2006. Under the successful-efforts method, costs such as geological and geophysical, exploratory dry holes and delay rentals are expensed as incurred. Depletion, depreciation and impairment expense.Depletion, depreciation and impairment expense were $235,893 and $1,007,695 for the three months ending March 31, 2007 and 2006. This decrease was due to impairment charges of $4,863,820 recorded in the year ended December 31, 2006 that reduced the depletable cost basis and the sale of oil and gas assets in North Dakota effective January 2007. Accretion expense.As of March 31, 2007, the estimated present value of the Companys asset retirement obligation was $67,601 based on estimated future cash requirements of $116,133, determined using a credit adjusted risk free interest rate of 8.5% over the economic life of the properties, an inflation rate of 2.0%, and an estimated life until repayment of 5-10 years. Accretion of $2,329 was recorded for the three months ending March 31, 2007. As of March 31, 2006, the estimated present value of the Companys asset retirement obligation was $80,313 based on estimated future cash requirements of $216,000, determined using a credit adjusted risk free interest rate of 8.5% over the economic life of the properties, an inflation rate of 2.0%, and an estimated life until repayment of 5-10 years. Accretion of $1,671 was recorded for the three months ending March 31, 2006.  Gain on sale of oil and gas properties.On November 3, 2006, JMG signed an Offer Letter to sell its working interests in the Bakken lands and wells in North Dakota to an arms length party for approximately $5,454,437, subject to adjustment. The transaction was effective October 1, 2006 and closing of the transaction, following normal title and environmental due diligence, occurred January 30, 2007. The properties included in this sale are classified as Oil and gas properties held for resale on the balance sheet as of December 31, 2006. Interest income. Interest for the periods ending March 31, 2007 was $16,965. Interest expense has decreased due to the repayment of the promissory note and interest by an unrelated industry partner on June 28, 2005. Total interest from incorporation July 16, 2004 to March 31, 2006 was $185,091. Deemed dividend on warrant extension.On February 24, 2006 the Company extended the expiration dates of its outstanding warrants to January 15, 2007. A total of 375,187 $6.00 warrants and 1,739,500 $4.25 warrants were to expire on December 31, 2006, and 1,854,235 $5.00 warrants were to expire on August 24, 2006. A deemed dividend of $552,846 for this extension of the warrant expiration dates was calculated using the Black-Scholes option-pricing model. Income taxes.The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. No adjustments were required as a result of the adoption of FIN 48. The Company files income tax returns in the U.S. federal jurisdiction and various states. There are currently no income tax examinations underway for these jurisdictions, although the tax years ended December 31, 2006, 2005 and 2004 are all still open for examination. The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109).  SFAS 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities.  Where it is more likely than not that a tax benefit will not be realized, a valuation allowance is recorded to reduce the deferred tax asset to its realizable value. A valuation allowance has been provided against the Companys net deferred tax assets as the Company believes that it is more likely than not that the net deferred tax assets will not be realized.  As a result of this valuation allowance, the effective tax rate for the first quarter of 2007 and for the year ended December 31, 2006 is zero percent.   18   Liquidity and capital resources At March 31, 2007, we had $4,268,852 in cash and cash equivalents. Since our incorporation, we have financed our operating cash flow needs through private and public offerings of equity securities. We have no plans for any future issues of equity securities other than in conjunction with the exercise of outstanding warrants, and pursuant to our employee equity compensation plan. Any additional exploration activities are dependent upon the exercise of our outstanding warrants, which are summarized in the table below. In the event funds from the exercise of warrants are unavailable, we will delay our exploration activities until alternative sources of capital such as production revenue and farm out agreements on our properties or sale of our properties. Warrant summary  Number
of warrants
outstandingExercise priceMaximum proceedsExpiration DateWarrants issued in the preferred stock private placement369,249$6.002,215,49401/15/2008Warrants issued upon conversion of preferred stock1,739,500$4.257,392,87501/15/2008Warrants issued our initial public offering1,763,802$5.008,823,01001/15/2008Warrants issued to our underwriters190,000$7.001,330,00008/03/2010Total4,062,551various19,761,379various  As of March 31, 2007, we had an accumulated deficit of $19,581,406 and have insufficient working capital to fund development and exploratory drilling opportunities. We have operating and liquidity concerns due to our significant net losses and negative cash flows from operations. As a result of these and other factors there is substantial doubt about our ability to continue as a going concern. JMG is presently exploring a range of strategic alternatives, including a possible sale or merger with another party.  Cash flow used in operations.Cash utilized by operating activities was $93,036 and $1,301,706 for the three months ended March 31, 2007 and 2006. The use of cash in 2007 was principally attributable to net income of $1,920,866 which was decreased by the gain on sale of property and equipment of $2,370,546 and the cash requirements related to the decrease in accounts payable of $849,913. These cash requirements were offset by a decrease in accounts receivable of $468,598 which provided cash and depletion, depreciation and accretion expense of $238,223, an increase in due to JED Oil of $470,508 and a decrease in prepaid expenses of $10,280 which did not utilize cash.  The use of cash in 2006 was principally attributable to the net loss of $1,009,353 which was increased by the cash requirements related to the decrease in accounts payable of $1,844,389, the decrease in accounts payable to JED of $146,349 and the increase in prepaid expenses and deposits of $126,938. These cash requirements were offset by a decrease in accounts receivable of $791,089 which provided cash and depletion, depreciation and accretion expense of $1,009,366 and stock-based compensation of $24,868 which did not utilize cash.  Cash flow used in investing activities.Cash provided (utilized) by investing activities was $5,299,560 and $(1,097,006) for the three months ended March 31, 2007 and 2006. Cash provided by investing activities in 2007 was principally attributable to proceeds of $5,454,437 from the sale of oil and gas property, offset by equipment required for ongoing production activities of $155,236. Cash utilized by investing activities in 2006 was entirely attributable to equipment requirements for drilling and development of oil and gas properties.   19   Cash flow used in financing activities.Cash provided (utilized) by financing activities was $(1,500,000) and $1,917,873 for the three months ended March 31, 2007 and 2006. The cash utilized in 2007 was due to the repayment of a $1,500,000 promissory note that originated in the same period in 2006. In 2006 the cash provided was due to the proceeds from this promissory note and $417,873 in proceeds from warrants that were exercised during the period.  Changes in critical accounting estimates  Stock-based compensation Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective-transition method.  Under that transition method, compensation cost recognized effective January 1, 2006 includes:  (a) compensation cost for share-based options granted to employees and directors 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 Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of  Statement 123(R).  Results for prior periods have not been restated. Prior to January 1, 2006, the Company accounted for the stock options granted to employees and directors under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation and for the stock options granted to consultants under the recognition and measurement provisions of FASB Statement No. 123.  No stock-based employee and directors compensation cost was recognized in the Statement of Operations and Deficit for the year ended December 31, 2005 nor for the period from the date of incorporation on July 16, 2004 to December 31, 2004, as all options granted to employees and directors under that plan had an exercise price equal to the market value of the Companys common stock on the date of grant.  Contingencies In the future, we may be subject to adverse proceedings, lawsuits and other claims related to environmental, labor, product and other matters. We will be required to assess the likelihood of any adverse judgments or outcomes of these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue. The required reserves may change in the future due to developments in each matter or changes in approach such as a change in settlement strategy in dealing with these potential matters.  Contractual obligations and commitments  Our exploration prospects have several phases of possible development. Costs cannot be estimated at this time, as they are dependent upon the results of the exploration activities. In the event the results of the initial exploration are positive, our investment in subsequent exploration phases could be substantial. In the event the results of the initial exploration are not positive, there may be no further expenditures on the prospect. Related Party Transactions  JED Oil Inc.On August 1, 2004 the Company entered into a technical services agreement with JED Oil Inc. (JED). Under the Agreement, JED provides all required personnel, office space and equipment, at standard industry rates for similar services. JED is considered an affiliate, because of its ownership interest in us and because two of our directors are directors of JED. This agreement was terminated on January 1, 2006; it was replaced by a joint services agreement, which operates to provide the above services on an as needed basis.  Pursuant to this agreement, JED charged JMG $200,588 in capital expenditures and $73,946 in operating costs for wells operated by JED during the three months ended March 31, 2007. There were no transactions under this agreement during the three month period ended March 31, 2006.  20    In connection with these transactions the total amount payable to JED was $1,896,957 at March 31, 2007.  Skeehan & Company.Joseph Skeehan, the Chief Executive Officer, President and a director of JMG is also the owner of Skeehan & Company, a professional service corporation that engages in accounting, finance and consulting services to small to mid-sized companies and organizations primarily in Southern California since 1980. In conjunction with the maintenance of accounting records and the preparation of financial statements and regulatory filings, Skeehan & Company was paid a total of $3,038 during the three months ended March 31, 2007.  Restatement of 2006 interim Financial Statements The unaudited financial statements for the first three quarters of 2006 have been restated due changes to depletion and impairment calculations. The Companys calculation of depreciation, depletion and amortization was incorrect because of a clerical error which resulted in depletion being calculated with respect to proved and probable reserves instead of proved reserves. The unaudited financial statement for the first three quarters of 2006 have also been restated to reflect deemed dividends resulting from the extension of warrant expiration dates. On February 24, 2006 the Company extended the expiration dates of its outstanding warrants to January 15, 2007. A total of 375,187 $6.00 warrants and 1,739,500 $4.25 warrants were to expire on December 31, 2006, and 1,854,235 $5.00 warrants were to expire on August 24, 2006. A deemed dividend of $552,846 for this extension of the warrant expiration dates was calculated using the Black-Scholes option-pricing model and was not reflected in the 2006 unaudited quarterly financial statements.  The effects of the depletion and impairment restatement of $801,396 and the warrant deemed dividend of $552,846 on expenses, net loss for the period, net loss applicable to common shareholders, and basic and diluted earnings per share for the three month period ended March 31, 2006 are as follows:  For the three month period ended March 31, 2006As Originally ReportedRestatement AdjustmentsAs Restated(unaudited)(unaudited)(unaudited)Expenses$   660,692$   801,396$     1,462,088Net loss for the period$  (207,957)$  (801,396)$  (1,009,353)Net loss applicable to common shareholders$  (207,957)$  (1,354,242)$  (1,562,199)Net loss for the period per share: basic and diluted$(0.04)$(0.27)$(0.31)  The effects of the depletion and impairment restatement of $801,396 and the warrant deemed dividend of $552,846 on property and equipment, total assets, accumulated deficit and shareholders equity as of  March 31, 2006 are as follows.  March 31, 2006As Originally ReportedRestatement AdjustmentsAs RestatedProperty and equipment$   15,779,130$     (801,396)$   14,977,734Total assets$   19,114,716$     (801,396)$   18,313,320Accumulated deficit$   (6,743,785)$  (1,354,242)$   (8,098,027)Shareholders equity$   15,118,219$     (801,396)$   14,316,823  Outlook and Proposed Transactions As of March 31, 2007, we had an accumulated deficit of $19,581,406 and have insufficient working capital to fund development and exploratory drilling opportunities. We have operating and liquidity concerns due to our significant net losses and negative cash flows from operations. As a result of these and other factors  21   there is substantial doubt about our ability to continue as a going concern. JMG is presently exploring a range of strategic alternatives, including a possible sale or merger with another party.  Subsequent Events  On April 27, 2007, JMG entered into a non-binding Letter of Intent with Iris Computers Ltd., a distributor of computer hardware and software in India, regarding a potential business combination. The transaction is subject to a 60 day due diligence period and provides for a No-Shop Period until June 26, 2007, during which period the parties have agreed not to enter into an agreement or consummate a transaction with any other party, which would preclude the consummation of the transaction. Although no assurance can be given that the parties can reach agreement and proceed to a closing, if the proposed business combination is completed, the current JMG shareholders, immediately post-closing, would own approximately 25% of the combined entities, without giving effect to JMG's outstanding options and warrants. JMG's oil and gas assets will not be included in this transaction and will be sold or merged separately for the benefit of shareholders of a future record date.   Item 3. Quantitative and Qualitative Disclosures About Market Risk  We are exposed to all of the normal market risks inherent within the oil and natural gas industry, including commodity price risk, foreign-currency rate risk, interest rate risk and credit risk. We plan to manage our operations in a manner intended to minimize our exposure to such market risks.  Credit Risk.Credit risk is the risk of loss resulting from non-performance of contractual obligations by a customer or joint venture partner. A substantial portion of our accounts receivable are expected to be with customers in the energy industry and are subject to normal industry credit risk. We intend to assess the financial strength of our customers and joint venture partners through regular credit reviews in order to minimize the risk of non-payment.  Market Risk.We are exposed to market risk from changes in currency exchange rates. As JED is based in Canada, we may be adversely affected by changes in the exchange rate between U.S. and Canadian dollars as most of our operating expenses, drilling expenses and general overhead expenses will be billed by JED in Canadian dollars. The price we will receive for oil and natural gas production from operations in Canada, if any, will be based on a benchmark expressed in U.S. dollars, which is the standard for the oil and natural gas industry worldwide. Changes to the exchange rate between U.S. and Canadian dollars can adversely affect us. When the value of the U.S. dollar increases, we will receive higher revenue from any Canadian prospects and when the value of the U.S. dollar declines, we will receive lower revenue from any Canadian prospects on the same amount of production sold at the same prices.  Interest Rate Risk.Interest rate risk will exist principally with respect to any future indebtedness that bears interest at floating rates. At March 31, 2007, we had no long-term indebtedness and do not contemplate utilizing indebtedness as a means of financing our exploration activities.  Item 4T. Controls and Procedures  Controls and Procedures  Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of March 31, 2007, management conducted an assessment of the effectiveness of the design and operation of the Companys disclosure controls. Based on this assessment, management has determined that the Companys disclosure controls as of March  31, 2007 were ineffective because of the material weakness discussed below.  22   The required certifications of our principal executive officer and principal financial officer are included as exhibits to this Quarterly Report. The disclosures set forth below contain information concerning the evaluation of our disclosure controls and procedures and changes in internal control over financial reporting referred to in those certifications. Those certifications should be read in conjunction with this section for a more complete understanding of the matters covered by the certifications. A material weakness is a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A material weakness was identified during the audit of our December 31, 2006 financial statements. Our current auditors, Hein & Associates LLP, informed us of their concern that there was a lack of personnel with sufficient knowledge of US generally accepted accounting principles and SEC reporting requirements to ensure proper and timely evaluation of the Companys activities and transactions. To mitigate this weakness, the Company engaged consultants to assist with the preparation of the financial statements and other accounting issues. The Company did not retain outside experts to review its disclosure controls and procedures or its internal controls and consequently, no reports or recommendations regarding our controls were requested or prepared. A material weakness was previously identified in the fourth quarter of 2005 when the Company was informed by our previous auditors, Ernst &Young LLP, of their concern relating to the ability of the Companys accounting group to meet the Companys ongoing reporting requirements. Specifically, the auditors felt JMG did not have sufficient staff with a knowledge of U.S. accounting principles and sufficiently trained staff to ensure appropriate internal controls existed. To mitigate this weakness, the Company engaged consultants to assist with the preparation of the financial statements and other accounting issues. We contracted with four individuals to increase our staffing and to assist with the preparation of the financial statements, the SEC reports and other accounting issues. The Company took additional actions to reduce or eliminate the weakness in internal controls by using alternate staff for the financial reporting process, by engaging in more regular and substantive communication with JED on accounting matters, by proactively accessing and reviewing transactions on a periodic basis directly within JMGs accounting system, and by continuing to work with independent experts pertaining to disclosure matters. The Company did not retain outside experts to review its disclosure controls and procedures or its internal controls and consequently, no reports or recommendations regarding our controls were requested or prepared. By taking remedial actions through the hiring of consultants, management believes that the consolidated financial statements for all periods presented in this Form 10-Q present fairly, in all material respects, our financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles. Changes in Internal Control Over Financial Reporting There was no change in JMGs internal control over financial reporting during the first quarter of 2007 that has materially affected, or is reasonably likely to materially affect, JMGs internal control over financial reporting.   23   Part II. Other Information  Item 1. Legal Proceedings  There are no material outstanding or threatened legal claims by or against us.  Item 1A. Risk Factors There have been no material changes to the information included in response to Item 1A. Risk Factors in our 2006 Annual Report on Form 10-K.   Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities None   Item 3. Defaults Upon Senior Securities None   Item 4. Submission of Matters to a Vote of Security Holders None   Item 5. Other Information None   Item 6. Exhibits (a) Exhibitsrequired by Item 601 of Regulation S-K are as follows:  Exhibit 31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended  Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended  Exhibit 32.1  Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Exhibit 32.2  Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   24   SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  JMG Exploration, IncDate: July 26, 2007/s/ Joseph W. SkeehanJoseph W. SkeehanChief Executive Officer and President/s/ Donald P. WellsDonald P. WellsChief Financial Officer   25