**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-Q**

**(Mark One)**

**x****                             ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For theQuarterly Period Ended June 30, 2007**

**or**

** **

**o****                                ****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**CommissionFile No. 001-32438**

**JMGExploration, Inc.**

(ExactName of Registrant as Specified in its Charter)

 

| **Nevada**                                |   | **20-1373949**          |
|-------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer        |
| incorporation or  organization)           |   | Identification  Number) |
|                                      |   |                    |
| **180  South Lake Ave.**                  |   | ** **              |
| **Seventh  Floor**                        |   | ** **              |
| **Pasadena,  California**                 |   | **91101**               |
| (Address of  principal executive offices) |   | (Zip Code)              |

Registrant’s telephonenumber, including area code:

**(626) 792-3842**

Former name, formeraddress and former fiscal year, if changed from last report.

**Not applicable**

** **

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes xNo o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|---------------------------|--------|----------------------|--------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o       No x

 

The number of sharesoutstanding of Registrant’s common stock, par value $0.01, as of July 31, 2007,was 5,188,409.

 

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**JMGExploration, Inc.**Index to Form 10-Q Quarterly Reportto the Securities and Exchange Commission 
|    | ** ** | ** **                                                                                                                                                                                    | ** ** | **Page No.** | ** ** |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
|    | ** ** | **Part I  Financial Information**                                                                                                                                                             | ** ** | ** **        | ** ** |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 1  |       | Consolidated Financial  Statements                                                                                                                                                            |       | 3 - 7             |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    |       | Consolidated Balance Sheets  as of June 30, 2007 (unaudited) and December 31, 2006.                                                                                                           |       | 3                 |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    |       | Consolidated Statements of  Operations (unaudited) for the three months ended March 31, 2007 and 2006 (restated)  and the six months ended June 30, 2007 and 2006 (restated).                 |       | 4                 |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    |       | Consolidated Statements of  Cash Flows (unaudited) for the three months ended March 31, 2007 and 2006  (restated) and the six months ended June 30, 2007 and 2006 (restated).                 |       | 5                 |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    |       | Consolidated Statements of  Shareholders’ Equity (unaudited) for the three months ended March 31, 2007  and 2006 (restated) and the six months ended June 30, 2007 and 2006  (restated). |       | 6                 |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    |       | Consolidated Statements of  Comprehensive Loss (unaudited) for the three months ended March 31, 2007 and  2006 (restated) and the six months ended June 30, 2007 and 2006 (restated).         |       | 7                 |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    |       | Notes to  Consolidated Financial Statements (unaudited)                                                                                                                                       |       | 8 - 13            |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 2  |       | Managements  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                         |       | 14 - 21           |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 3  |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                   |       | 21                |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 4T |       | Controls and  Procedures                                                                                                                                                                      |       | 21 - 22           |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    |       |                                                                                                                                                                                          |       |              |       |
|    | ** ** | **Part II Other  Information**                                                                                                                                                                | ** ** | ** **        | ** ** |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 1  |       | Legal Proceedings                                                                                                                                                                             |       | 23                |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 1A |       | Risk Factors                                                                                                                                                                                  |       | 23                |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 2  |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                  |       | 23                |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 3  |       | Defaults Upon  Senior Securities                                                                                                                                                              |       | 23                |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 4  |       | Submission of  Matters to a Vote of Security Holders                                                                                                                                          |       | 23                |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 5  |       | Other Information                                                                                                                                                                             |       | 23                |       |
|    |       |                                                                                                                                                                                          |       |              |       |
| Item 6  |       | Exhibits                                                                                                                                                                                      |       | 23                |       |

 

2

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**PART I. FINANCIALINFORMATION**

**ITEM 1. CONSOLIDATED FINANCIALSTATEMENTS**

**JMG Exploration,Inc.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                  | ** ** | **June 30,  2007** | ** ** | **December 31  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **(unaudited)**         | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                  |       |                    | ** ** | ** **                 | ** ** |
| **Current**                                                                                                                                                 |       |                    | ** ** | ** **                 | ** ** |
| Cash and cash  equivalents                                                                                                                                  |       | $                       | 4,263,283  |                       | $          | 567,426 |   |
| Accounts  receivable                                                                                                                                        |       | 675,234                 |       | 1,331,667                  |       |
| Prepaid expenses                                                                                                                                            |       | 53,676                  |       | 48,062                     |       |
| Total current assets                                                                                                                                        |       | 4,992,193               |       | 1,947,155                  |       |
| ** **                                                                                                                                                  |       |                    |       |                       |       |
| Other assets                                                                                                                                                |       | 73,136                  |       | 30,000                     |       |
| Oil and gas  properties (accounted for under the successful efforts method of accounting),  net of depreciation, depletion and amortization                 |       | 4,720,886               |       | 4,928,393                  |       |
| Oil and gas  properties held for resale (accounted for under the successful efforts method  of accounting), net of depreciation, depletion and amortization |       | —                  |       | 3,107,876                  |       |
| Other property  and equipment, net of depreciation                                                                                                          |       | 56,069                  |       | 102,179                    |       |
|                                                                                                                                                        |       | $                       | 9,842,284  |                       | $          | 10,115,603 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                              |       |                    |       |                       |       |
| **Current**                                                                                                                                                 |       |                    |       |                       |       |
| Accounts payable                                                                                                                                            |       | $                       | 170,351    |                       | $          | 715,751 |   |
| Accrued liabilities                                                                                                                                         |       | 625,393                 |       | 990,484                    |       |
| Due to JED Oil  Inc.                                                                                                                                        |       | 2,030,717               |       | 1,426,449                  |       |
| Promissory note  payable                                                                                                                                    |       | —                  |       | 1,500,000                  |       |
| Total current liabilities                                                                                                                                   |       | 2,826,461               |       | 4,632,684                  |       |
| Asset retirement  obligations                                                                                                                               |       | 69,969                  |       | 111,096                    |       |
| ** **                                                                                                                                                  |       | 2,896,430               |       | 4,743,780                  |       |
| **Stockholders’  equity**                                                                                                                              |       |                    |       |                       |       |
| Share capital                                                                                                                                               |       |                    |       |                       |       |
| Common stock - $.001 par value; 25,000,000 shares  authorized; 5,188,409 shares issued and outstanding                                                      |       | 5,188                   |       | 5,188                      |       |
| Preferred stock - $.001 par value; 10,000,000 shares  authorized; no shares issued and outstanding at March 31, 2007 and 2005.                              |       | —                  |       | —                     |       |
| Additional  paid-in capital                                                                                                                                 |       | 24,890,269              |       | 24,765,383                 |       |
| Share purchase  warrants                                                                                                                                    |       | 2,184,452               |       | 2,184,452                  |       |
| Accumulated  deficit                                                                                                                                        |       | (20,077,680             | )          | (21,564,715                | )          |
| Accumulated  other comprehensive earnings                                                                                                                   |       | (56,375                 | )          | (18,485                    | )          |
| Total stockholders’ equity                                                                                                                             |       | 6,945,854               |       | 5,371,823                  |       |
|                                                                                                                                                        |       | $                       | 9,842,284  |                       | $          | 10,115,603 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

3

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**JMG Exploration,Inc.CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)**
| ** **                                                     | ** ** | **For the three month period  ended June 30,** | ** ** | **For the six month period  ended June 30,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                                                     | ** ** | **2006**                                                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | ** **                                                                   | ** ** | **(restated) (1)**                                                    | ** ** | ** ** | ** ** | **(restated) (1)** | ** ** |
| **Revenue**                                                    |       |                                                                         |       |                                                                       |       |   |   |   |   |
| Gross Revenue                                                  |       | $                                                                            | 221,113    |                                                                       | $          | 633,611 |   | $ | 376,537 |   | $ | 1,282,919 |   |
| Less royalties                                                 |       | (53,562                                                                      | )          | (158,094                                                                   | )          | (77,267 | ) | (354,667 | ) |
| Net revenue                                                    |       | 167,551                                                                      |       | 475,517                                                                    |       | 299,270 |   | 928,252 |   |
| ** **                                                     |       |                                                                         |       |                                                                       |       |   |   |   |   |
| **Expenses**                                                   |       |                                                                         |       |                                                                       |       |   |   |   |   |
| General and  administrative                                    |       | 404,323                                                                      |       | 338,494                                                                    |       | 694,579 |   | 631,857 |   |
| Production  expenses                                           |       | 74,590                                                                       |       | 56,186                                                                     |       | 138,399 |   | 191,648 |   |
| Geophysical and  geological expense                            |       | —                                                                       |       | —                                                                     |       | — |   | — |   |
| Depletion,  depreciation and impairment                        |       | 151,117                                                                      |       | 839,743                                                                    |       | 387,010 |   | 1,847,208 |   |
| Accretion on  asset retirement obligation                      |       | 2,368                                                                        |       | 1,937                                                                      |       | 4,697 |   | 3,838 |   |
| Total expenses                                                 |       | 632,398                                                                      |       | 1,236,360                                                                  |       | 1,224,685 |   | 2,674,551 |   |
| Net loss from  operations                                      |       | (464,847                                                                     | )          | (760,843                                                                   | )          | (925,415 | ) | (1,746,299 | ) |
|                                                           |       |                                                                         |       |                                                                       |       |   |   |   |   |
| **Other  Income and Expense**                                  |       |                                                                         |       |                                                                       |       |   |   |   |   |
| Gain on sale of  oil and gas properties                        |       | —                                                                       |       | —                                                                     |       | 2,370,546 |   | — |   |
| Interest income                                                |       | 31,014                                                                       |       | —                                                                     |       | 47,979 |   | — |   |
| Interest expense                                               |       | —                                                                       |       | (89,975                                                                    | )          | (19,444 | ) | (113,872 | ) |
| other                                                          |       | —                                                                       |       | —                                                                     |       | 13,369 |   | — |   |
| Total other income and expense                                 |       | 31,014                                                                       |       | (89,975                                                                    | )          | 2,412,450 |   | (113,872 | ) |
| Net income  (loss)                                             |       | (433,833                                                                     | )          | (850,818                                                                   | )          | 1,487,035 |   | (1,860,171 | ) |
| Less: deemed  dividend on warrant extension                    |       | —                                                                       |       | —                                                                     |       | — |   | 552,846 |   |
| Net income  (loss) applicable to common shareholders           |       | $                                                                            | (433,833   | )                                                                          | $          | (850,818 | ) | $ | 1,487,035 |   | $ | (2,413,017 | ) |
|                                                           |       |                                                                         |       |                                                                       |       |   |   |   |   |
| Basic and  diluted weighted average shares outstanding         |       | 5,188,409                                                                    |       | 5,094,773                                                                  |       | 5,188,409 |   | 5,090,825 |   |
| ** **                                                     |       |                                                                         |       |                                                                       |       |   |   |   |   |
| Net income (loss) for  the period per share, basic and diluted |       | $                                                                            | (0.08      | )                                                                          | $          | (0.17 | ) | $ | 0.29 |   | $ | (0.47 | ) |

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(1)             SeeNote 2 — Restatement of 2006 interim Financial Statements

*Theaccompanying notes are an integral part of these  consolidated financial statements.*

4

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**JMG Exploration,Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                           | ** ** | **For the six month period  ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                                                   | ** ** | **2006** | ** ** |
| ** **                                                                           | ** ** | ** **                                                                 | ** ** | **(restated) (1)** | ** ** |
| **OPERATIONS**                                                                       |       |                                                                       |       |   |   |
| Net income  (loss) for the period                                                    |       | $                                                                          | 1,487,035  |   | $ | (1,860,171 | ) |
| Adjustments to  reconcile net income (loss) to cash flows from operating activities: |       |                                                                       |       |   |   |
| Stock-based compensation                                                             |       | 124,886                                                                    |       | 50,012 |   |
| Depletion, depreciation, impairment and accretion                                    |       | 391,708                                                                    |       | 1,851,046 |   |
| Gain on sale of property and equipment                                               |       | (2,370,546                                                                 | )          |   |   |
| Other changes:                                                                       |       |                                                                       |       |   |   |
| Decrease (increase) in accounts receivable                                           |       | 656,434                                                                    |       | (326,755 | ) |
| Decrease (increase) in prepaid expenses                                              |       | (5,614                                                                     | )          | (205,116 | ) |
| Increase (decrease) in accounts payable and accrued  liabilities                     |       | (910,489                                                                   | )          | 1,131,424 |   |
| Increase (decrease) in due to JED Oil Inc.                                           |       | 604,268                                                                    |       | (2,117,079 | ) |
| Increase (decrease) in asset retirement obligation                                   |       | (43,495                                                                    | )          | — |   |
| **Cash  used in operating activities**                                               |       | (65,813                                                                    | )          | (1,476,639 | ) |
| **INVESTING**                                                                        |       |                                                                       |       |   |   |
| Proceeds on  disposition of property                                                 |       | 5,454,437                                                                  |       |   |   |
| (Purchase) sale  of property and equipment                                           |       | (155,236                                                                   | )          | (841,162 | ) |
| Decrease  (increase) in Other Property & Equipment                               |       | 43,495                                                                     |       |   |   |
| Decrease  (increase) in other assets                                                 |       | (43,136                                                                    | )          |   |   |
| **Cash  provided by (used in) investing activities**                                 |       | 5,299,560                                                                  |       | (841,162 | ) |
| **FINANCING**                                                                        |       |                                                                       |       |   |   |
| Borrowing under  Promissory Note                                                     |       | —                                                                     |       | 1,500,000 |   |
| Payment on  Promissory Note                                                          |       | (1,500,000                                                                 | )          | — |   |
| Issue of common  shares, net of issue costs                                          |       | —                                                                     |       | 478,304 |   |
| **Cash  provided (used in) by financing activities**                                 |       | (1,500,000                                                                 | )          | 1,978,304 |   |
| Effect of  foreign exchange on cash and cash equivalents                             |       | (37,890                                                                    | )          | (15,024 | ) |
| **Net  increase (decrease) in cash and cash equivalents**                            |       | 3,695,857                                                                  |       | (354,521 | ) |
| **Cash  and cash equivalents, beginning of period**                                  |       | 567,426                                                                    |       | 1,150,965 |   |
| **Cash and cash equivalents, end  of period**                                        |       | $                                                                          | 4,263,283  |   | $ | 796,444 |   |

 

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(1)                                  SeeNote 2 — Restatement of 2006 interim Financial Statements

*The accompanying notes are an integral partof these consolidated financial statements.*

5

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JMG Exploration, Inc.STATEMENTS OF CONSOLIDATED STOCKHOLDERS’ EQUITY

**(unaudited)**
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Preferred** | ** ** | **Additional  Paid-in** | ** ** | **Share  Purchase** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|---------------|------------|-------------------------|------------|---------------------|------------|-----------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **No. Shares**   | ** ** | **Amt**       | ** ** | **Stock**               | ** ** | **Capital**         | ** ** | **Warrants**    | ** ** | **Deficit**                                 | ** ** | **Loss**   | ** ** | **Total** | ** ** |
| ** **                                                 | ** ** | **#**                 | ** ** | **$**         | ** ** | **$**                   | ** ** | **$**               | ** ** | **$**           | ** ** | **$**                                       | ** ** | **$**      | ** ** | **$** | ** ** |
| **Balance  at December 31, 2005 (restated) (1)**           |       | 4,997,578             |       | 4,997         |       | —                  |       | 19,947,103          |       | 2,248,663       |       | (9,037,083                                  | )          | (2,697     | )          | 13,160,983 |   |
| Warrants  exercised for common stock                       |       | 137,371               |       | 137           |       | —                  |       | 731,367             |       | (64,211         | )          | —                                      |       | —     |       | 667,293 |   |
| Exercise of stock  options                                 |       | 53,460                |       | 54            |       | —                  |       | 201,902             |       | —          |       | —                                      |       | —     |       | 201,956 |   |
| Stock based  compensation                                  |       | —                |       | —        |       | —                  |       | 1,993,629           |       | —          |       | —                                      |       | —     |       | 1,993,629 |   |
| Extension 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, 2006**                          |       | 5,188,409             |       | 5,188         |       | —                  |       | 24,765,383          |       | 2,184,452       |       | (21,564,715                                 | )          | (18,485    | )          | 5,371,823 |   |
| Stock based  compensation                                  |       | —                |       | —        |       | —                  |       | 124,886             |       | —          |       | —                                      |       | —     |       | 124,886 |   |
| Net income for  the six months ended June 30, 2007         |       | —                |       | —        |       | —                  |       | —              |       | —          |       | 1,487,035                                   |       | —     |       | 1,487,035 |   |
| Foreign exchange  translation                              |       | —                |       | —        |       | —                  |       | —              |       | —          |       |                                        |       | (37,890    | )          | (37,890 | ) |
| **Balance at June 30, 2007  (unaudited)**                  |       | 5,188,409             |       | 5,188         |       | —                  |       | 24,890,269          |       | 2,184,452       |       | (20,077,680                                 | )          | (56,375    | )          | 6,945,854 |   |

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(1)             See Note 2 — Restatement of 2006 interimFinancial Statements

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

6

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**JMG Exploration,Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**

**(unaudited)**
| ** **                               | ** ** | **Three month period ended  June 30,** | ** ** | **Six month period ended  June 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                                   | ** ** | **2006**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | ** **                                                 | ** ** | **(restated) (1)**                                  | ** ** | ** ** | ** ** | **(restated) (1)** | ** ** |
| Net income  (loss) for the period        |       | (433,833                                                   | )          | $                                                        | (850,818   | ) | 1,487,035 |   | $ | (1,860,171 | ) |
|                                     |       |                                                       |       |                                                     |       |   |   |   |   |
| **Other  comprehensive income:**         |       |                                                       |       |                                                     |       |   |   |   |   |
| Foreign exchange  translation adjustment |       | (32,792                                                    | )          | 2,966                                                    |       | (37,890 | ) | (15,024 | ) |
| Comprehensive loss for  the period       |       | (466,625                                                   | )          | $                                                        | (847,852   | ) | 1,449,145 |   | $ | (1,875,195 | ) |

 

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(1)                                  SeeNote 2 — Restatement of 2006 interim Financial Statements

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

7

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**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 exploresfor, develops and produces natural gas, crude oil and natural gas liquids inCanada and the United States. Currently, all of the Company’s proved reservesare located in the United States.

JMG wasincorporated with nominal share capital under the laws of the State of Nevadaon July 16, 2004 and commenced operations in August 2004.

The Company’sfuture financial condition and results of operations will depend upon pricesreceived 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 responseto change in supply, market uncertainty and a variety of other factors beyondthe Company’s control. These factors include worldwide political instability,the foreign supply of oil and natural gas, the price of foreign imports, thelevel of consumer demand, and the price and availability of alternative fuels.

In the eventsufficient capital is not available to fund development and exploratorydrilling opportunities the Company will explore a range of strategicalternatives, including a possible sale of the Company or a merger with anotherparty. On April 27, 2007, JMG entered into a non-binding Letter of Intent withIris Computers Ltd., a distributor of computer hardware and software in India,regarding a potential business combination. The transaction is subject to a 60day 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 orconsummate a transaction with any other party, which would preclude theconsummation of the transaction. The due diligence period and No-Shop periodwere subsequently extended to August 15, 2007. Although no assurance can begiven that the parties can reach agreement and proceed to a closing, if theproposed business combination is completed, the current JMG shareholders,immediately post-closing, would own approximately 37.5% of the combinedentities, without giving effect to JMG’s outstanding options and warrants. JMG’soil and gas assets will not be included in this transaction and will be sold ormerged separately for the benefit of shareholders of a future record date.

JMG hasnot realized a profit from operations since its incorporation on July 16, 2004. These conditions raise substantial doubt about the Company’s ability tocontinue as a going concern. The recovery of the Company’s assets and itsability to continue operations is dependent on successful production ofeconomic quantities of hydrocarbons, or obtaining additional financing to fundits exploration activity.  The sale of certain properties on January 30,2007 provided additional cash flow towards the Company’s ongoing operations,however, as of June 30, 2007, we had an accumulated deficit of $20,077,680, andhave insufficient working capital to fund development and exploratory drillingopportunities.  These financial statements do not include any adjustmentsrelated to the recoverability and classification of assets or the amounts andclassification of liabilities that may be necessary should the Company beunable to continue as a going concern.

**2. RESTATEMENT OF 2006 INTERIM FINANCIAL STATEMENTS**

The unauditedfinancial statements for the first three quarters of 2006 have been restateddue to changes to depletion and impairment calculations. The Company’scalculation of depreciation, depletion and amortization was incorrect becauseof a clerical error which resulted in depletion being calculated with respectto proved and probable reserves instead of proved reserves.

The unaudited financial statement for the first three quarters of 2006have also been restated to reflect deemed dividends resulting from theextension of warrant expiration dates. On February 24, 2006 the Companyextended 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 expireon 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 

8

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warrant expiration dates was calculated using the Black-Scholesoption-pricing model and was not reflected in the 2006 unaudited quarterlyfinancial statements.

The effects of thedepletion restatement of $650,604 and $1,452,000 and the warrant deemeddividend of $0 and $552,846 on expenses, net loss for the period, net lossapplicable to common shareholders, and basic and diluted earnings per share forthe three and six month periods ended June 30, 2006, respectively, are asfollows:
| ** **                                            | ** ** | **For the three month period ended  June 30, 2006** | ** ** | **For the six month period ended  June 30, 2006** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **As Originally  Reported**                                                       | ** ** | **Restatement  Adjustments**                                                         | ** ** | **As Restated** | ** ** | **As Originally  Reported** | ** ** | **Restatement  Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                            | ** ** | **(unaudited)**                                                                        | ** ** | **(unaudited)**                                                                      | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Expenses                                              |       | $                                                                                      | 675,731    |                                                                                 | $          | 650,604 |   | $ | 1,326,335 |   | $ | 1,336,423 |   | $ | 1,452,000 |   | $ | 2,788,423 |   |
| Net loss for the  period                              |       | $                                                                                      | (200,214   | )                                                                                    | $          | (650,604 | ) | $ | (850,818 | ) | $ | (408,171 | ) | $ | (1,452,000 | ) | $ | (1,860,171 | ) |
| Net loss  applicable to common shareholders           |       | $                                                                                      | (200,214   | )                                                                                    | $          | (650,604 | ) | $ | (850,818 | ) | $ | (408,171 | ) | $ | (2,004,846 | ) | $ | (2,413,017 | ) |
| Net loss for the period  per share: basic and diluted |       | $                                                                                      | (0.04      | )                                                                                    | $          | (0.14 | ) | $ | (0.17 | ) | $ | (0.08 | ) | $ | (0.39 | ) | $ | (0. 47) |   |

 

The effects of thedepletion and impairment restatement of $1,452,000, and the warrant deemeddividend of $552,846 on property and equipment, total assets, accumulateddeficit and shareholders’ equity as of June 30, 2006 are as follows.

|                           | ** ** | **June 30, 2006**      | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **As Originally  Reported** | ** ** | **Restatement  Adjustments** | ** ** | **As Restated** | ** ** |
| Property and  equipment   |       | $                                | 15,477,913 |   | $ | (1,452,000 | ) | $ | 14,025,913 |   |
| Total assets              |       | $                                | 19,036,883 |   | $ | (1,452,000 | ) | $ | 17,584,883 |   |
| Accumulated  deficit      |       | $                                | (7,722,532 | ) | $ | (2,004,846 | ) | $ | (9,727,378 | ) |
| Shareholders’ equity |       | $                                | 15,006,547 |   | $ | (1,452,000 | ) | $ | 13,554,547 |   |

 

**3.SIGNIFICANT ACCOUNTING POLICIES**

These interimconsolidated financial statements have been prepared by the Company withoutaudit pursuant to the rules and regulations of the Securities and ExchangeCommission, and reflect all adjustments which, in the opinion of management,are necessary for a fair statement of the results for the interim periods, on abasis that is consistent with the annual audited financial statements. All suchadjustments are of a normal recurring nature. Certain information, accountingpolicies, and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been omitted pursuant to such rules and regulations,although the Company believes that the disclosures are adequate to make theinformation presented not misleading. These financial statements should be readin conjunction with the audited financial statements and the summary ofsignificant accounting policies and notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2006.

****Income(loss) per Common Share****

Income (loss) per share (“EPS”)is computed based on weighted average number of common shares outstanding andexcludes any potential dilution. Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock wereexercised or converted into common stock or resulted in the issuance of commonstock, which would then share in the earnings of the Company. The 

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shares issuable upon theexercise of stock options and warrants are excluded from the calculation of netloss per share for the three and six months ended June 30, 2007 and 2006 becausetheir effect would be antidilutive in 2006 and 2007. The following shares wereaccordingly excluded from the net income/loss per share calculation.
| ** **           | ** ** | **Three month period ended  June 30,** | ** ** | **Six month period ended  June 30,** | ** ** |
|----------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **           | ** ** | **2007**                                                   | ** ** | **2006**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **           | ** ** | **(unaudited)**                                            | ** ** | **(unaudited)**                                          | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Stock warrants       |       | 4,062,551                                                  |       | 4,102,068                                                |       | 4,062,551 |   | 4,102,068 |   |
| Stock options        |       | 553,333                                                    |       | 392,500                                                  |       | 553,333 |   | 392,500 |   |
| Total share excluded |       | 4,615,884                                                  |       | 4,494,568                                                |       | 4,615,884 |   | 4,494,568 |   |

 

***Income Taxes.***The Companyadopted the provisions of FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes, on January 1, 2007. No adjustments were requiredas a result of the adoption of FIN 48.

The Company filesincome tax returns in the U.S. federal jurisdiction and various states. Thereare currently no income tax examinations underway for these jurisdictions,although the tax years ended December 31, 2006, 2005 and 2004 are all stillopen for examination.

The Companyprovides for income taxes in accordance with Statement of Financial AccountingStandards No. 109, Accounting for Income Taxes (“SFAS 109”).  SFAS 109 requires the recognition of deferredtax assets and liabilities for the expected future tax consequences oftemporary differences between the financial statement carrying amounts and thetax basis of the assets and liabilities. Where it is more likely than not that a tax benefit will not berealized, a valuation allowance is recorded to reduce the deferred tax asset toits realizable value.

A valuationallowance has been provided against the Company’s net deferred tax assets asthe Company believes that it is more likely than not that the net deferred taxassets will not be realized.  As a resultof this valuation allowance, the effective tax rate for the first quarter of2007 and for the year ended December 31, 2006 is zero percent.

***New Accounting Pronouncements***

In July 2006, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 48, Accounting forUncertainty in Income Taxes (FIN 48). It became effective for the Company onJanuary 1, 2007. FIN 48 clarifies the accounting for income taxes byprescribing a minimum recognition threshold that a tax position is required tomeet before being recognized in the financial statements. FIN 48 also providesguidance on measurement, classification, interim accounting and disclosure. Weadopted 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 frameworkfor measuring fair value, and expands disclosure requirements regarding fairvalue measurement. Where applicable, this statement simplifies and codifiesfair value related guidance previously issued within GAAP. Although thisstatement does not require any new fair value measurements, its applicationmay, for some entities, change current practice. SFAS No. 157 will be effectivefor the Company beginning January 1, 2008. The adoption of SFAS No. 157 is notexpected 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 andcertain other items at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. SFAS No.159 applies to all 

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entities and is effective for fiscal yearsbeginning after November 15, 2007. Adoption of SFAS No. 159 is not required forthese financial statements, and we are currently determining the impact, ifany, that SFAS No. 159 will have on our future financial statements.

**4.  PROPERTY ANDEQUIPMENT**

Depletion anddepreciation expense was $151,117 and $839,743 for the three months endedJune 30, 2007 and 2006, and $387,010 and $1,847,208 for the six monthsended June 30, 2007 and 2006. Undeveloped land and other assets notrelated to petroleum and natural gas properties were excluded from thedepletion calculation.

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**Oil andgas properties (accounted for under the successful efforts method ofaccounting)**

|                                                       | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **(unaudited)**             | ** ** | ** **                      | ** ** |
| Petroleum and  natural gas properties                 |       | $                           | 6,117,224  |                            | $          | 5,961,987 |   |
| Undeveloped  Properties                               |       | 4,086,721                   |       | 4,086,722                       |       |
| Accumulated  depletion, depreciation and amortization |       | (5,483,056                  | )          | (5,120,316                      | )          |
|                                                  |       | $                           | 4,720,889  |                            | $          | 4,928,393 |   |

 

**Oil andgas properties held for resale (accounted for under the successful effortsmethod of accounting)**

|                                                       | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **(unaudited)**             | ** ** | ** **                      | ** ** |
| Petroleum and  natural gas properties                 |       | $                           | —     |                            | $          | 10,231,212 |   |
| Undeveloped  Properties                               |       |                        |       | 2,174,170                       |       |
| Accumulated  depletion, depreciation and amortization |       |                        |       | (9,297,506                      | )          |
|                                                  |       | $                           | —     |                            | $          | 3,107,876 |   |

 

**Other property and equipment**

|                           | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **(unaudited)**             | ** ** | ** **                      | ** ** |
| Property and  Equipment   |       | $                           | 73,403     |                            | $          | 119,227 |   |
| Accumulated  depreciation |       | (17,334                     | )          | (17,048                         | )          |
|                      |       | $                           | 56,069     |                            | $          | 102,179 |   |

 

**5.  PROMISSORY NOTE**

OnFebruary 8, 2006 a promissory note was issued to an unrelated third party, fora total of $1,500,000. The terms of the agreement call for interest calculatedat 12% per annum payable on a monthly basis.  The promissory note wasrepayable 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.

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**6.  RELATED PARTY TRANSACTIONS**

***JEDOil Inc.***

On August 1, 2004the Company entered into a technical services agreement with JED Oil Inc. (“JED”).Under the Agreement, JED provides all required personnel, office space andequipment, at standard industry rates for similar services. JED is consideredan affiliate, because of its ownership interest in us and because two of ourdirectors are directors of JED. This agreement was terminated onJanuary 1, 2006; it was replaced by a joint services agreement, whichoperates to provide the above services on an as needed basis.

Pursuant to thisagreement, the Company entered into the following transactions with JED:

JED paid on behalf of theCompany a total of $16,852 for the three month period ended June 30, 2007 forcapital related expenditures and production expenses.

During the three monthsended June 30, 2007, the Company entered into the following transactions withJED:

JED paid on behalf of theCompany a total of $14,587 and nil for the three month period ended June 30,2007 and 2006 for operating costs and capital related expenditures.  In consideration for the assignment of JED’sinterest in certain oil and gas properties, JED charged the Company fordrilling and other costs related to those properties for the three month periodended June 30, 2007 and 2006, in the amount of $2,265 and $1,249,917.

JED paid on behalf of theCompany a total of $221,660 and nil for the six month period ended June 30,2007 and 2006 for operating costs and capital related expenditures. JED alsocharged the Company $217,109 for payments to JMG’s partners paid by JED, and$4,333 in miscellaneous costs.  Inconsideration for the assignment of JED’s interest in certain oil and gasproperties, JED charged the Company for drilling and other costs related tothose properties for the six month period ended June 30, 2007 and 2006, in theamount of $53,682 and $1,249,917.

In connection with thesetransactions the total amount payable to JED was $2,030,717 at June 30, 2007.

***Skeehan& Company***

Joseph Skeehan, the ChiefExecutive 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 andorganizations primarily in Southern California since 1980. In conjunction withthe maintenance of accounting records and the preparation of financialstatements and regulatory filings, Skeehan & Company was paid a total of$77,489 and $80,527 during the three and six month periods ended June 30, 2007.

**7. ASSETRETIREMENT OBLIGATION**

As of June 30,2007, the estimated present value of the Company’s asset retirement obligationwas $69,969 based on estimated future cash requirements of $116,133, determinedusing a credit adjusted risk free interest rate of 8.5% over the economic lifeof the properties, an inflation rate of 2.0%, and an estimated life untilrepayment of 5-10 years. Accretion of $2,368 and $4,697 was recorded for thethree and six month periods ending June 30, 2007.

| Asset retirement obligations  at December 31, 2006 |   | $       | 111,096 |   |
|----------------------------------------------------|--------|---------|---------|--------|
| Liabilities  incurred                              |   | —  |    |
| Liabilities  settled                               |   | (45,824 | )       |
| Accretion  expense                                 |   | 4,697   |    |
| Asset retirement  obligations at June 30, 2007     |   | $       | 69,969  |   |

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

The following Management’sDiscussion and Analysis of financial results as provided by the management ofJMG Exploration, Inc. (“JMG”) should be read in conjunction with the unauditedconsolidated financial statements and notes for the three and six month periodsended June 30, 2007, the audited financial statements and accompanying notesfor the years ended December 31, 2006 and 2005 and the managementsdiscussion and analysis for the years ended December 31, 2006 and 2005.

**FORWARD-LOOKINGSTATEMENTS**

This report includes forward-looking statements. All statements otherthan statements of historical facts contained herein, including statementsregarding our future financial position, business strategy and plans andobjectives 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, areintended to identify forward-looking statements. We have based theseforward-looking statements largely on our current expectations and projectionsabout future events and financial trends that we believe may affect ourfinancial condition, results of operations, business strategy and financialneeds. These forward-looking statements are subject to a number of risks,uncertainties and assumptions as described in “Risk Factors” in our annualreport on Form 10-K for the year ended December 31, 2006.

Other sections of this report may include additional factors that couldadversely affect our business and financial performance. Moreover, we operatein a very competitive and rapidly changing environment. New risk factors emergefrom time to time and it is not possible for our management to predict all riskfactors, nor can we assess the impact of all factors on our business or theextent to which any factor, or combination of factors, may cause actual resultsto differ materially from those contained in any forward-looking statements.

Statements relating to “reserves” are deemed to be forward-lookingstatements, as they involve the implied assessment, based on certain estimatesand assumptions, that the reserves described can be profitably produced in thefuture. Readers are cautioned that the foregoing lists of factors are notexhaustive. The forward-looking statements contained in this Form 10-Q are madeas of the date hereof and the Company undertakes no obligation to updatepublicly or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise, except in accordance with applicablesecurities laws. The forward-looking statements contained in this Form 10-Q areexpressly qualified by this cautionary statement.

In the presentation of the Form 10-Q, JMG uses terms that areuniversally applied in analyzing corporate performance within the oil and gasindustry for which regulators require that we provide disclaimers.

**Barrel of Oil Equivalent (BOE) —**Theoil and gas industry commonly expresses production volumes and reserves on a “barrelof oil equivalent” basis (“BOE”) whereby natural gas volumes are converted atthe ratio of six thousand cubic feet to one barrel of oil. The intention is tosum oil and natural gas measurement units into one basis for improved analysisof results and comparisons with other industry participants. Throughout thisForm 10-Q, JMG has used the 6:1 BOE measure which is the approximate energyequivalency of the two commodities at the burner tip. BOE does not represent avalue equivalency at the plant gate, which is where JMG sells its productionvolumes, and therefore may be a misleading measure if used in isolation.

**Overview**

In August 2004, wecompleted two private placements totaling $8.8 million, issuing 250,000shares of common stock and 1,950,000 shares of convertible preferred stock, andcommenced exploration activities. Upon the closing of the initial publicoffering on August 3, 2005, the Company issued 2,185,000 shares of commonstock at a price of $5.00 and 2,185,000 warrants at a price of $0.10 for grossproceeds of $11,143,500. The warrants associated with the initial publicoffering are exercisable at $5.00, until one year from the statement ofregistration, and have been extended through January 15, 2008. The Companytrades on the Archipelago Exchange under the symbols JMG (common stock) andJMG+ (stock warrants).

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During 2005, we madedirect property acquisitions and commenced developing the oil and natural gasproperties of others under arrangements in which we financed the cost ofexploration drilling in exchange for interests in the oil or natural gasrevenue generated by the properties. Such arrangements are commonly referred toas farm-ins to us, or farm-outs by the property owners to us.

In 2006 we continueddrilling for oil and natural gas. We drilled eight horizontal oil wells in theMidale in North Dakota and four vertical gas wells in the Pinedale area ofWyoming.

On January 30, 2007, JMGcompleted the first closing of the sale of its oil and gas assets in NorthDakota where it has been targeting the Bakken zone, for consideration of$5,454,437, subject to adjustment, to Samson Resources Company pursuant to aPurchase and Sale Agreement effective as of December 20, 2006, among JMG, JEDOil (USA) Inc. and Samson. The sales exclude the North Dakota lands where JMGhas been developing its Midale play.

**Resultsof operations**

***Revenue.***Our revenue is dependent uponsuccess in finding and developing oil and natural gas reserves. Our ownershipinterest in the production from these properties is measured in BOE per day, aterm that encompasses both oil and natural gas production. Revenues were$167,551 and $475,517 for the three month periods ended June 30, 2007 and 2006,and $299,270 and $928,252 for the six month periods ended June 30, 2007 and2006, respectively. The decrease in revenue was principally due to the sale ofoil and gas assets in North Dakota.

Critical to our revenuestream is the market price for crude oil. Commodity benchmark prices for crudeoil is as follows:

|                                                      | ** ** | **June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **2007**          | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(unaudited)**   | ** ** | **(unaudited)** | ** ** |
| West Texas  Intermediate grade crude oil, per barrel |       | $                 | 67.48      |   | $ | 70.96 |   |
|                                                      |            |                   |            |  |  |  |  |

 

We may use derivativefinancial instruments when we deem them appropriate to hedge exposure tochanges in the price of crude oil, fluctuations in interest rates and foreigncurrency exchange rates. JMG currently does not have any financial derivativecontracts or fixed price contracts in place.

***General and administrative expense.***Generaland administrative expense relates to compensation and overhead for executiveofficers and fees for general operational and administrative services. We havecontracted out all field personnel and equipment necessary for explorationactivities, and for related administrative functions.  General and administrative expenses were$404,323 and $338,494 for the three month periods ended June 30, 2007 and 2006,and $694,579 and $631,857 for the six month periods ended June 30, 2007 and2006, respectively.  Expenses consistprincipally of salaries, consulting fees and office costs.  The increase in general and administrative expenseof  $65,829 and $62,722 for the three andsix month periods ended June 30, 2007 from the corresponding periods in theprevious year was principally due to stock based compensation expense.

The Company has a stock option plan under which employees, directorsand consultants are eligible to receive grants. The Corporation accounts forthe stock option granted to consultants using the fair value recognitionprovisions of SFAS No. 123. Stock based compensation for the three and sixmonth periods ended June 30, 2007 was $62,443 and $124,886. Stock basedcompensation expense for the three and six month periods ended June 30,2006 was $25,144 and $50,012. The Company has adopted Statement 123(R) usingthe modified-prospective method, therefore for the three and six month periodsended June 30, 2006 the share-based payment was a result of expensing the stockoptions for employees as well as consultants on a straight line basis using theBlack-Scholes option pricing model.

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***Production expense.***Production costsinclude operating costs associated with field activities and geophysical andgeological expense. Under the successful-efforts method, costs such asgeological and geophysical, exploratory dry holes and delay rentals areexpensed as incurred. Production expenses were $74,590 and $56,186 for thethree month period ended June 30, 2007 and 2006, and $138,399 and $191,648for the six month period ended June 30, 2007 and 2006, respectively. Theincrease in production expense of $18,404 and decrease of $53,249 for the threeand six month periods ended June 30, 2007 from the corresponding periods in theprevious year was principally due to the sale of oil and gas assets inNorth Dakota.

***Depletion,depreciation and impairment expense.***Depletion,depreciation and impairment expense were $151,117 and $839,743 for the threemonth period ended June 30, 2007 and 2006, and $387,010 and $1,847,208 forthe six month period ended June 30, 2007 and 2006, respectively. Thisdecrease was due to impairment charges of $4,863,820 recorded in the year endedDecember 31, 2006 that reduced the depletable cost basis, and the sale of oiland gas assets in North Dakota effective January 2007.

***Accretion expense.***Asof June 30, 2007, the estimated present value of the Company’s asset retirementobligation was $69,969 based on estimated future cash requirements of $116,133,determined using a credit adjusted risk free interest rate of 8.5% over theeconomic life of the properties, an inflation rate of 2.0%, and an estimatedlife until repayment of 5-10 years. Accretion expense of $2,368 and $4,697 wasrecorded for the three and six month periods ending June 30, 2007.

As of June 30, 2006, the estimated present value of the Company’sasset retirement obligation was $82,020 based on estimated future cashrequirements of $216,000, determined using a credit adjusted risk free interestrate of 8.5% over the economic life of the properties, an inflation rate of2.0%, and an estimated life until repayment of 5-10 years. Accretion of$1,937 and $3,838 was recorded for the three and six month periods ending June30, 2006.

***Gain on sale of oil and gas properties.***OnNovember 3, 2006, JMG signed an Offer Letter to sell its working interests inthe Bakken lands and wells in North Dakota to an arms length party forapproximately $5,454,437, subject to adjustment. The transaction was effectiveOctober 1, 2006 and closing of the transaction, following normal title andenvironmental due diligence, occurred January 30, 2007. The properties includedin this sale are classified as “Oil and gas properties held for resale” on thebalance sheet as of December 31, 2006.

***Interest income***.Interest income was $31,014 and $0 for the three month period ending June 30,2007 and 2006, and $47,979 and $0 for the six month period ending June 30, 2007and 2006, respectively, and increased due to greater cash balances on hand inthe current year.

***Interest expense***.Interest expense was nil and $89,975 for the three month period endingJune 30, 2007 and 2006, and was $19,444 and $113,872  for the six month period ending June 30,2007 and 2006, respectively. Interest expense decreased due to the repayment ofthe promissory note and interest by an unrelated industry partner onJune 28, 2005.

***Deemed dividend onwarrant extension.***On February 24, 2006 the Companyextended 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 expireon 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 expirationdates was calculated using the Black-Scholes option-pricing model.

***Income taxes.***The Companyadopted the provisions of FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes, on January 1, 2007. No adjustments were requiredas a result of the adoption of FIN 48.

The Company filesincome tax returns in the U.S. federal jurisdiction and various states. Thereare currently no income tax examinations underway for these jurisdictions,although the tax years ended December 31, 2006, 2005 and 2004 are all stillopen for examination.

The Companyprovides for income taxes in accordance with Statement of Financial AccountingStandards No. 109, Accounting for Income Taxes (“SFAS 109”).  SFAS 109 requires the recognition of deferredtax assets and liabilities for the expected future tax consequences oftemporary differences between the 

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financialstatement carrying amounts and the tax basis of the assets andliabilities.  Where it is more likelythan not that a tax benefit will not be realized, a valuation allowance isrecorded to reduce the deferred tax asset to its realizable value.

A valuationallowance has been provided against the Company’s net deferred tax assets asthe Company believes that it is more likely than not that the net deferred taxassets will not be realized.  As a resultof this valuation allowance, the effective tax rate for the first quarter of2007 and for the year ended December 31, 2006 is zero percent.

**Liquidityand capital resources**

At June 30, 2007, we had $4,263,283 in cash and cash equivalents. Sinceour incorporation, we have financed our operating cash flow needs throughprivate and public offerings of equity securities.

We have no plans for any future issues of equity securities other thanin conjunction with the exercise of outstanding warrants, and pursuant to ouremployee equity compensation plan. Any additional exploration activities aredependent upon the exercise of our outstanding warrants, which are summarizedin the table below. In the event funds from the exercise of warrants areunavailable, we will delay our exploration activities until alternative sourcesof capital such as production revenue and farm out agreements on our propertiesor sale of our properties.

**Warrantsummary**
| ** **                                                | ** ** | **Number  of warrants  outstanding** | ** ** | **Exercise  price** | ** ** | **Maximum  proceeds** | ** ** | **Expiration  Date** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|---------------------|------------|-----------------------|------------|----------------------|------------|
| Warrants issued  in the preferred stock private placement |       | 369,249                                   |       | $                   | 6.00       |                  | 2,215,494  |                 | 01/15/2008 |   |
| Warrants issued  upon conversion of preferred stock       |       | 1,739,500                                 |       | $                   | 4.25       |                  | 7,392,875  |                 | 01/15/2008 |   |
| Warrants issued  our initial public offering              |       | 1,763,802                                 |       | $                   | 5.00       |                  | 8,819,010  |                 | 01/15/2008 |   |
| Warrants issued  to our underwriters                      |       | 190,000                                   |       | $                   | 7.00       |                  | 1,330,000  |                 | 08/03/2010 |   |
| Total                                                     |       | 4,062,551                                 |       | various             |       | 19,757,379            |       | various              |       |

 

Asof June 30, 2007, we had an accumulated deficit of $20,077,680 and haveinsufficient working capital to fund development and exploratory drillingopportunities. We have operating and liquidity concerns due to our significantnet losses and negative cash flows from operations. As a result of these andother factors there is substantial doubt about our ability to continue as agoing concern. JMG is presently exploring a range of strategic alternatives,including the possible sale or merger with another party.

OnApril 27, 2007, we entered into a non-binding Letter of Intent with IrisComputers Ltd., a distributor of computer hardware and software in India,regarding a potential business combination. The transaction is subject to a 60day 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 orconsummate a transaction with any other party, which would preclude theconsummation of the transaction. The due diligence period and No-Shop periodwere subsequently extended to August 15, 2007. Although no assurance can begiven that the parties can reach agreement and proceed to a closing, if theproposed business combination is completed, the current JMG shareholders,immediately post-closing, would own approximately 37.5% of the combinedentities, without giving effect to JMG’s outstanding options and warrants. JMG’soil and gas assets will not be included in this transaction and will be sold ormerged separately for the benefit of shareholders of a future record date.

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***Cash flow used in operations.***Cashprovided (utilized) by operating activities was $27,220 and $(174,933) for thethree months ended June 30, 2007 and 2006, and was $(65,815) and $(1,476,639)for the six months ended June 30, 2007 and 2006.

The use of cashfor the three months ended June 30, 2007 was principally attributable to netloss of $433,833 which was decreased by the cash requirements related to thedecrease in accounts payable of $60,575. These cash requirements were offset bya decrease in accounts receivable of $187,836 which provided cash anddepletion, depreciation and accretion expense of $153,486, an increase in dueto JED Oil of $133,760 and a increase in prepaid expenses of $15,894 which didnot utilize cash.

The use of cashfor the six months ended June 30, 2007 was principally attributable to netincome of $1,487,035 which was decreased by the gain on sale of property andequipment of $2,370,546 and the cash requirements related to the decrease inaccounts payable of $910,489. These cash requirements were offset by a decreasein accounts receivable of $656,434 which provided cash and depletion,depreciation and accretion expense of $391,708, an increase in due to JED Oilof $604,268 and a increase in prepaid expenses of $5,614 which did not utilizecash.

The use of cash infor the three months ended June 30, 2006 was principally attributable to thenet loss of $850,818 which was reduced by a decrease in accounts payable of$2,975,813, depletion, depreciation and accretion expense of $841,680 andstock-based compensation of $25,144 which did not utilize cash. These cashrequirements were offset by a increase in accounts receivable of $1,117,844which did not provide cash and a decrease in Due to JED Oil Inc. of $1,970,730which utilized cash.

The use of cash infor the six months ended June 30, 2006 was principally attributable to the netloss of $1,860,171 which was reduced by a decrease in accounts payable of$1,131,424, depletion, depreciation and accretion expense of $1,851,046 andstock-based compensation of $50,012 which did not utilize cash. These cashrequirements were offset by a increase in accounts receivable of $326,755 whichdid not provide cash and a decrease in Due to JED Oil Inc. of $2,117,079 whichutilized cash.

***Cash flow used in investing activities.***Cashprovided (utilized) by investing activities was nil and $255,844 for the threemonths ended June 30, 2007 and 2006, and was $5,299,560 and $(841,162) for thesix months ended June 30, 2007 and 2006, respectively.

Cash provided byinvesting activities for the six months ended June 30, 2007 was principallyattributable 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 toequipment requirements for drilling and development of oil and gas properties.

***Cash flow used in financing activities.***Cashprovided (utilized) by financing activities was nil and $60,431 for the threemonths ended June 30, 2007 and 2006, and $1,500,000 and $1,978,304 for the six months ended June 30, 2007 and2006, respectively.

The cash utilizedfor the six months ended June 30, 2007 was due to the repayment of a $1,500,000promissory note that originated in the same period in 2006.

The cash providedfor the three months ended June 30, 2006 was due to $60,431 in proceeds fromwarrants that were exercised during the period. The cash provided for the sixmonths ended June 30, 2006 was due to $1,500,000 proceeds from a promissorynote and $417,873 in proceeds from warrants that were exercised during theperiod.

**Changesin critical accounting estimates**

***Stock-based compensation***

Effective January 1, 2006, the Company adopted thefair value recognition provisions of FASB Statement No. 123(R), Share-BasedPayment, using the modified-prospective-transition method.  Under thattransition 

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method, compensation cost recognized effective January1, 2006 includes:  (a) compensation cost for share-based options granted toemployees 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 originalprovisions of Statement 123, and (b) compensation cost for all share-basedpayments granted subsequent to January 1, 2006, based on the grant-date fairvalue 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 forthe stock options granted to employees and directors under the recognition andmeasurement provisions of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related Interpretations, as permitted by FASB Statement No. 123,Accounting for Stock-Based Compensation and for the stock options granted toconsultants under the recognition and measurement provisions of FASB StatementNo. 123.  No stock-based employee and directors compensation cost wasrecognized in the Statement of Operations and Deficit for the year ended December31, 2005 nor for the period from the date of incorporation on July 16, 2004 toDecember 31, 2004, as all options granted to employees and directors under thatplan had an exercise price equal to the market value of the Company’s commonstock on the date of grant.

***Contingencies***

In the future, wemay be subject to adverse proceedings, lawsuits and other claims related toenvironmental, labor, product and other matters. We will be required to assessthe likelihood of any adverse judgments or outcomes of these matters as well aspotential ranges of probable losses. A determination of the amount of reservesrequired, if any, for these contingencies is made after careful analysis ofeach individual issue. The required reserves may change in the future due to developmentsin each matter or changes in approach such as a change in settlement strategyin dealing with these potential matters.

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**Contractualobligations and commitments**

Our explorationprospects have several phases of possible development. Costs cannot beestimated at this time, as they are dependent upon the results of theexploration activities. In the event the results of the initial exploration arepositive, our investment in subsequent exploration phases could be substantial.In the event the results of the initial exploration are not positive, there maybe no further expenditures on the prospect.

**RelatedParty Transactions**

***JEDOil Inc.***On August 1, 2004 the Company entered intoa technical services agreement with JED Oil Inc. (“JED”). Under the Agreement,JED provides all required personnel, office space and equipment, at standardindustry rates for similar services. JED is considered an affiliate, because ofits ownership interest in us and because two of our directors are directors ofJED. This agreement was terminated on January 1, 2006; it was replaced bya joint services agreement, which operates to provide the above services on anas needed basis.

During the threemonths ended June 30, 2007, the Company entered into the following transactionswith JED:

JED paid on behalfof the Company a total of $14,587 and nil for the three month period ended June30, 2007 and 2006 for operating costs and capital related expenditures.  In consideration for the assignment of JED’sinterest in certain oil and gas properties, JED charged the Company fordrilling and other costs related to those properties for the three month periodended June 30, 2007 and 2006, in the amount of $2,265 and $1,249,917.

JED paid on behalfof the Company a total of $221,660 and nil for the six month period ended June30, 2007 and 2006 for operating costs and capital related expenditures. JEDalso charged the Company $217,109 for payments to JMG’s partners paid by JED,and $4,333 in miscellaneous costs.  Inconsideration for the assignment of JED’s interest in certain oil and gasproperties, JED charged the Company for drilling and other costs related tothose properties for the six month period ended June 30, 2007 and 2006, in theamount of $53,682 and $1,249,917.

In connection withthese transactions the total amount payable to JED was $2,030,717 at June 30,2007.

***Skeehan& Company.***Joseph Skeehan, the Chief ExecutiveOfficer, President and a director of JMG is also the owner of Skeehan &Company, a professional service corporation that engages in accounting, financeand consulting services to small to mid-sized companies and organizationsprimarily in Southern California since 1980. In conjunction with themaintenance of accounting records and the preparation of financial statementsand regulatory filings, Skeehan & Company was paid a total of $77,489 and$80,527 during the three  and six monthperiods ended June 30, 2007.

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**Outlookand Proposed Transactions**

As of June 30, 2007, we had an accumulated deficit of$20,077,680 and have insufficient working capital to fund development andexploratory drilling opportunities. We have operating and liquidity concernsdue to our significant net losses and negative cash flows from operations. As aresult of these and other factors there is substantial doubt about our abilityto continue as a going concern. JMG is presently exploring a range of strategicalternatives, including a possible sale or merger with another party.

On April 27, 2007, we entered into a non-binding Letter of Intent withIris Computers Ltd., a distributor of computer hardware and software in India,regarding a potential business combination. The transaction is subject to a 60day 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 orconsummate a transaction with any other party, which would preclude theconsummation of the transaction. The due diligence period and No-Shop periodwere subsequently extended to August 15, 2007. Although no assurance can begiven that the parties can reach agreement and proceed to a closing, if theproposed business combination is completed, the current JMG shareholders,immediately post-closing, would own approximately 37.5% of the combinedentities, without giving effect to JMG’s outstanding options and warrants. JMG’soil and gas assets will not be included in this transaction and will be sold ormerged separately for the benefit of shareholders of a future record date.

**Item 3.Quantitative and QualitativeDisclosures About Market Risk**

We are exposed to all of the normal market risksinherent within the oil and natural gas industry, including commodity pricerisk, foreign-currency rate risk, interest rate risk and credit risk. We planto manage our operations in a manner intended to minimize our exposure to suchmarket risks.

                ***Credit Risk.***Creditrisk is the risk of loss resulting from non-performance of contractualobligations by a customer or joint venture partner. A substantial portion ofour accounts receivable are expected to be with customers in the energyindustry and are subject to normal industry credit risk. We intend to assessthe financial strength of our customers and joint venture partners throughregular credit reviews in order to minimize the risk of non-payment.

                ***Market Risk.***We areexposed to market risk from changes in currency exchange rates. As JED is basedin Canada, we may be adversely affected by changes in the exchange rate betweenU.S. and Canadian dollars as most of our operating expenses, drilling expensesand general overhead expenses will be billed by JED in Canadian dollars. Theprice we will receive for oil and natural gas production from operations inCanada, if any, will be based on a benchmark expressed in U.S. dollars, whichis the standard for the oil and natural gas industry worldwide. Changes to theexchange rate between U.S. and Canadian dollars can adversely affect us. Whenthe value of the U.S. dollar increases, we will receive higher revenue from anyCanadian prospects and when the value of the U.S. dollar declines, we willreceive lower revenue from any Canadian prospects on the same amount ofproduction sold at the same prices.

                ***Interest Rate Risk.***Interestrate risk will exist principally with respect to any future indebtedness thatbears interest at floating rates. At June 30, 2007, we had no long-termindebtedness and do not contemplate utilizing indebtedness as a means offinancing our exploration activities.

****Item 4T. Controls andProcedures****

**Controlsand Procedures**

***Evaluationof Disclosure Controls and Procedures***

We maintain disclosure controls and proceduresdesigned to ensure that information required to be disclosed in reports filedunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the specified time periods. Disclosure controlsare also designed to reasonably assure that such information is accumulated andcommunicated to our management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure. As of June 30, 2007, management conducted an assessment of theeffectiveness of the 

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design and operation of the Company’s disclosurecontrols. Based on this assessment, management has determined that the Company’sdisclosure controls as of June 30, 2007 were ineffective because of thematerial weakness discussed below.

The required certifications of our principal executiveofficer and principal financial officer are included as exhibits to thisQuarterly Report. The disclosures set forth below contain informationconcerning the evaluation of our disclosure controls and procedures and changesin internal control over financial reporting referred to in thosecertifications. Those certifications should be read in conjunction with thissection for a more complete understanding of the matters covered by thecertifications.

A material weakness is a significant deficiency(within the meaning of Public Company Accounting Oversight Board AuditingStandard No. 2), or combination of significant deficiencies, that resultsin there being a more than remote likelihood that a material misstatement ofthe annual or interim financial statements will not be prevented or detected.

A material weakness was identified during the audit ofour December 31, 2006 financial statements and continues to exist. Our currentauditors, Hein & Associates LLP, informed us of their concern that therewas a lack of personnel with sufficient knowledge of US generally acceptedaccounting principles and SEC reporting requirements to ensure proper andtimely evaluation of the Company’s activities and transactions. To mitigatethis weakness, the Company engaged consultants to assist with the preparationof the financial statements and other accounting issues. The Company did notretain outside experts to review its disclosure controls and procedures or itsinternal controls and consequently, no reports or recommendations regarding ourcontrols were requested or prepared.

By taking remedial actions through the hiring ofconsultants, management believes that the consolidated financial statements forall periods presented in this Form 10-Q present fairly, in all materialrespects, our financial condition, results of operations, and cash flows inconformity with U.S. generally accepted accounting principles.

***Changes in InternalControl Over Financial Reporting***

There was no change in JMG’s internal control overfinancial reporting during the six month period ended June 30, 2007 that has materiallyaffected, or is reasonably likely to materially affect, JMG’s internal controlover financial reporting.

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**Part II. OtherInformation**

**Item 1. LegalProceedings**

There are no materialoutstanding or threatened legal claims by or against us.

**Item 1A. RiskFactors**

There have been nomaterial changes to the information included in response to Item 1A. “RiskFactors” in our 2006 Annual Report on Form 10-K.

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

None

**Item 3.Defaults Upon Senior Securities**

None

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

None

**Item 5. OtherInformation**

None

**Item 6. Exhibits**

*(a)**       Exhibits*required by Item 601 of Regulation S-Kare as follows:

Exhibit 31.1 — Certificationof Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of theSecurities Exchange Act, as amended

Exhibit 31.2 —Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule15d-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 adoptedpursuant 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 adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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**SIGNATURES**

     Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                      |                                   |
|----------------------|----------------------------------------|
|                 |                                   |
|                 | JMG Exploration, Inc                   |
|                 |                                   |
| Date: August 8, 2007 | /s/ Joseph W. Skeehan                  |
|                 | Joseph W. Skeehan                      |
|                 | Chief Executive Officer  and President |
|                 |                                   |
|                 | /s/ Donald P. Wells                    |
|                 | Donald P. Wells                        |
|                 | Chief Financial Officer                |

 

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