**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM 10-Q**




**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      the quarterly period ended March 31, 2008**




**Commission
      File Number: 000-28153**




**QPC
      LASERS, INC**


(Exact
      name of registrant as specified in its charter)




**Nevada**
            
            **20-1568015**(State
                or other jurisdiction of incorporation or
              organization)
            
            (I.R.S.
                Employer Identification No.)**15632
                Roxford Street, Sylmar, CA.**
            
            **91342**(Address
                of principal executive offices)
            
            (Zip
                Code)




**(818)
      986-0000**


(Registrant’s
      telephone number, including area code)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the registrant
      was required to file such reports), and (2) has been subject to such filing
      requirements for the past 90 days. Yes x No o




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




Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filero(Donot
                check if a smallerreporting
                company)
            Smaller
                reporting companyx




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




As
      of May
      6, 2008, there were 39,346,561 shares of the registrant’s Common Stock
      outstanding.








**INDEX
      TO FORM 10-Q**





PAGEPART
                    I FINANCIAL INFORMATIONItem
                    1. Condensed Consolidated Financial Statements
                3Condensed
                    Consolidated Balance Sheets at March 31, 2008 (unaudited) and
                    December 31,
                    2007
                3Condensed
                    Consolidated Statements of Operations for the three month periods
                    ended
                    March 31, 2008 and March 31, 2007 (unaudited)
                4Condensed
                    Consolidated Statements of Stockholders' Deficiency (unaudited)
                5Condensed
                    Consolidated Statements of Cash Flows for the three month periods
                    ended
                    March 31, 2008 and March 31, 2007 (unaudited)
                6Notes
                    to Unaudited Condensed Consolidated Financial Statements
                7Item
                    2. Management's Discussion and Analysis of Financial Condition
                    and Results
                    of Operations
                22Item
                    3. Quantitative and Qualitative Disclosures about Market Risk
                38Item
                    4. Control and Procedures
                38Item
                    4T. Control and Procedures
                39PART
                    II OTHER INFORMATIONItem
                    1. Legal Proceedings
                40Item
                    2. Unregistered Sales of Equity Securities and Use of Proceeds
                40Item
                    3. Defaults Upon Senior Securities
                40Item
                    4. Submission of Matters to a Vote of Security Holders
                40Item
                    5. Other Information
                40Item
                    6. Exhibits
                40SIGNATURES
                45
  
 2


**Item
      1 Condensed Consolidated Financial Statements.**




**QPC
      LASERS, INC.**




**CONDENSED
      CONSOLIDATED BALANCE SHEETS**





**March 31, 2008**
              **(Unaudited)**
            
            **December 31, 2007****CURRENT
                ASSETS**Cash
            
            $
            2,183,372
            
            $
            6,431,744Accounts
                receivable, Commercial customers, net of allowance for doubtful accounts
                of $226,288 at March 31, 2008 and $3,735 at December 31,
                2007
            
            
            2,727,709
            
            
            2,283,425Accounts
                receivable, Government contracts, net
            
            
            163,007
            
            
            609,874Unbilled
                Revenue
            
            
            280,640
            
            
            194,537Inventory
            
            
            989,742
            
            
            688,364Prepaid
                expenses and other current assets
            
            
            179,592
            
            
            226,466Total
                Current Assets
            
            
            6,524,062
            
            
            10,434,410Property
                and equipment, net of accumulated depreciation of $6,221,749 at March
                31,
                2008 and $6,051,713 at December 31, 2007
            
            
            3,264,641
            
            
            3,359,711Other
                assets
            
            
            203,415
            
            
            203,415**TOTAL
                ASSETS**
            
            $
            9,992,118
            
            $
            13,997,536**LIABILITIES
                AND STOCKHOLDER’S DEFICIENCY****CURRENT
                LIABILITIES**Accounts
                payable and other current liabilities
            
            $
            1,624,872
            
            $
            1,737,581Embedded
                Derivative Liability
            
            
            13,210,837
            
            
            10,283,181Current
                portion of long term debt
            
            
            592,108
            
            
            624,834Total
                Current Liabilities
            
            
            15,427,817
            
            
            12,645,596Long
                term debt, less current portion
            
            
            13,615,223
            
            
            11,435,133Total
                Liabilities
            
            
            29,043,040
            
            
            24,080,729**STOCKHOLDERS’
                DEFICIENCY**Preferred
                stock, $.001 par value, 20,000,000 shares authorized, none issued
            
            
            -
            
            
            -Common
                stock, $.001 par value, 180,000,000 shares authorized,
                38,676,783 issued and outstanding
            
            
            38,677
            
            
            38,677Additional
                paid in capital
            
            
            51,237,262
            
            
            51,095,087Accumulated
                deficit
            
            
            (70,326,861
            )
            
            (61,216,957
            )Total
                stockholders’ deficiency
            
            
            (19,050,922
            )
            
            (10,083,193
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS’ DEFICIENCY**
            
            $
            9,992,118
            
            $
            13,997,536




See
      accompanying Notes to Condensed Consolidated Financial Statements




3




**QPC
      LASERS, INC.**




**CONDENSED
      CONSOLIDTED STATEMENTS OF OPERATIONS**


**For
      the three months Ended March 31, 2008 and 2007**


**(Unaudited)**





**Three months ended March 31,****2008**
            
            **2007****REVENUE**
            
            
            1,648,194
            
            
            1,106,579**COST
                OF SALES**
            
            
            851,093
            
            
            855,781**GROSS
                PROFIT**
            
            
            797,101
            
            
            250,798**OPERATING
                EXPENSES**Research
                and Development
            
            
            1,426,533
            
            
            1,012,800Selling,
                General and Administrative
            
            
            2,653,707
            
            
            1,216,524Total
                operating expenses
            
            
            4,080,240
            
            
            2,229,324**LOSS FROM
                OPERATIONS**
            
            
            (3,283,139
            )
            
            (1,978,526
            )Interest
                Income
            
            
            29,261
            
            
            1,754Interest
                Expense
            
            
            (2,953,878
            )
            
            (468,399
            )Change
                in fair value of embedded derivative
            
            
            (2,927,656
            )
            
            -Other
                income
            
            
            25,508
            
            
            31,966**NET
                LOSS**
            
            $
            (9,109,904
            )
            $
            (2,413,205
            )**LOSS
                PER COMMON SHARE**—
                Basic and Diluted
            
            $
            (0.24
            )
            $
            (0.06
            )**WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING,**basic
                and diluted
            
            
            38,676,783
            
            
            38,559,283




See
      accompanying Notes to Condensed Consolidated Financial Statements




4




**QPC
      LASERS, INC.**




**CONDENSED
      CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**


For
      the
      three months ended March 31, 2008 (Unaudited)





Common Stock
            
            Additional
            
            AccumulatedShares
            
            Amount
            
            Paid-in Capital
            
            Deficit
            
            TotalBalance,
                January 1, 2008
            
            
            38,676,783
            
            $
            38,677
            
            $
            51,095,087
            
            $
            (61,216,957
            )
            $
            (10,083,193
            )Fair
                value of vested stock options
            
            
            -
            
            
            -
            
            
            142,175
            
            
            -
            
            
            142,175Net
                loss for the three months ended March 31, 2008
            
            
            -
            
            
            -
            
            
            -
            
            
            (9,109,904
            )
            
            (9,109,904
            )Balance,
                March 31, 2008
            
            
            38,676,783
            
            $
            38,677
            
            $
            51,237,262
            
            $
            (70,326,861
            )
            $
            (19,050,922
            )




See
      accompanying Notes to Condensed Consolidated Financial Statements




5




**QPC
      LASERS, INC.**




**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**For
      the three months ended March 31, 2008 and 2007**


**(Unaudited)**





**Three Months Ended****2008**
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES****Net
                Loss**
            
            $
            (9,109,904
            )
            $
            (2,413,205
            )**Adjustments
                to reconcile net loss to net cash used in operating
                activities:****Depreciation
                and amortization**
            
            
            170,035
            
            
            247,767**Amortization
                of loan discount**
            
            
            2,319,829
            
            
            240,221**Amortization
                of Capitalized Loan Fees**
            
            
            
            
            
            14,595**Change
                in fair value of embedded derivatives**
            
            
            2,927,656**Fair
                value of vested options**
            
            
            142,175
            
            
            115,361**Changes
                in operating assets and liabilities:****Accounts
                receivable**
            
            
            2,583
            
            
            244,916**Inventory**
            
            
            (301,378
            )
            
            (10,031
            )**Unbilled
                revenue**
            
            
            (86,103
            )
            
            (278,375
            )**Other
                assets**
            
            
            -
            
            
            (146,990
            )**Prepaid
                Expenses**
            
            
            46,874
            
            
            61,607**Accounts
                payable and other current liabilities**
            
            
            (112,709
            )
            
            595,179**Net
                cash used in operating activities**
            
            
            (4,000,942
            )
            
            (1,328,955
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:****Purchase
                of property and equipment**
            
            
            (74,965
            )
            
            (48,785
            )**Net
                cash used in investing activities**
            
            
            (74,965
            )
            
            (48,785
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:****Proceeds
                from borrowing**
            
            
            -
            
            
            500,000**Principal
                payments on debt**
            
            
            (172,465
            )
            
            (238,143
            )**Net
                cash provided by financing activities**
            
            
            (172,465
            )
            
            261,857**NET
                INCREASE IN CASH**
            
            
            (4,248,372
            )
            
            (1,115,883
            )**CASH —
                Beginning of period**
            
            
            6,431,744
            
            
            1,429,077**CASH —
                End of period**
            
            $
            2,183,372
            
            $
            313,194**Supplemental
                Disclosures of Cash Flow Information****Cash
                paid during the period for:****Interest**
            
            $
            577,903
            
            $
            199,364**Taxes**
            
            
            -
            
            
            -




See
      accompanying Notes to Condensed Consolidated Financial Statements




6




**QPC
      LASERS, INC. AND SUBSIDIARY**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (UNAUDITED)**




NOTE
      1 –
NATURE OF OPERATIONS AND BASIS OF PRESENTATION





The
      accompanying condensed consolidated financial statements of QPC Lasers, Inc.
      (the Company) have been prepared, without audit, in accordance with U.S.
      generally accepted accounting principles for interim financial reporting. 
Accordingly, the condensed consolidated financial statements do not include
      all
      of the information and notes required by U.S. generally accepted accounting
      principles for complete financial statements.  In the opinion of
      management, such interim financial statements contain all adjustments
      (consisting of normal recurring items) considered necessary for a fair
      presentation of our financial position, results of operations and cash flows
      for
      the interim periods presented.  The results of operations and cash flows
      for any interim period are not necessarily indicative of results that may be
      reported for the full fiscal year.




The
      accompanying condensed consolidated financial statements should be read in
      conjunction with the audited consolidated financial statements, and the notes
      thereto, included in our Annual Report on Form 10-KSB for the year ended
      December 31, 2007, as filed with the Securities and Exchange
      Commission.





ORGANIZATION
      AND NATURE OF OPERATIONS





The
      Company was originally incorporated in the State of Nevada on August 31, 2004
      under the name “Planning Force, Inc.” (PFI) as a development stage company that
      planed to specialize in event planning for corporations. The Company offered
      two
      types of services: retreat training services and product launch event planning.
      This business generated minimal revenue for the Company since
      inception.





Effective
      May 1, 2006, Planning Force Inc., changed its name to QPC Lasers, Inc. On May
      12, 2006 QPC Lasers, Inc. (QPC) executed a Share Exchange Agreement by and
      among
      Julie Moran, its majority shareholder, and Quintessence Photonics Corporation
      (Quintessence) and substantially all of its shareholders. Under the agreement
      QPC issued one share of its common stock to the Quintessence shareholders in
      exchange for each share of QPC common stock (QPC Shares). Upon closing,
      Quintessence Shares represented at least 87% of QPC’s common stock. Therefore, a
      change in control occurred and Quintessence also became a wholly owned
      subsidiary of QPC. Accordingly, the transaction was accounted for as a reverse
      merger (recapitalization) in the accompanying condensed consolidated financial
      statements with Quintessence deemed to be the accounting acquirer and QPC is
      deemed to be the legal acquirer. As such the condensed consolidated financial
      statements herein reflect the historical activity of Quintessence since its
      inception, and the historical stockholders’ equity of Quintessence has been
      retroactively restated for the equivalent number of shares received in the
      exchange after giving effect to any differences in the par value offset to
      paid
      in capital.





GOING
      CONCERN




The
      accompanying condensed consolidated financial statements have been prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America, which contemplate continuation of the Company as a going concern.
      However, the Company had a net loss of $9,710,564 and utilized cash of
      $8,561,410 in operating activities during the year ended December 31, 2007,
      and
      had a stockholders’ deficiency of $10,083,193 at December 31, 2007. During the
      three months ended March 31, 2008, the Company had a net loss of $9,109,904
      and
      utilized cash of $4,000,942 in operating activities. At March 31, 2008 the
      Company had a stockholders’ deficiency of $19,050,922. These factors raise
      substantial doubt about the Company's ability to continue as a going concern.
      The condensed
      consolidated financial
      statements do not include any adjustments relating to the recoverability and
      classification of recorded asset amounts, or amounts and classification of
      liabilities that might result from this uncertainty.




7




All
      of
      our assets are currently pledged to various lenders. Therefore, we do not have
      the ability to borrow funds from banks or other traditional lenders. Although
      management expects that revenue will increase through its continued sales and
      production growth efforts, the funds available from these activities are not
      expected to be enough to fulfill our cash requirements in the near term. We
      are
      currently exploring various alternatives to address our cash requirements.





Principles
      of Consolidation





The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly owned subsidiary, Quintessence Photonics Corporation.
      All
      intercompany transactions have been eliminated in consolidation.




NOTE
      2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Revenue
      Recognition





A
      portion
      of the Company’s revenues result from fixed-price contracts with U.S. government
      agencies. Revenues from fixed-price contracts are recognized under the
      percentage-of-completion method of accounting, generally based on costs incurred
      as a percentage of total estimated costs of individual contracts (“cost-to-cost
      method”). Revisions in contract revenue and cost estimates are reflected in the
      accounting period as they are identified. Provisions for the entire amount
      of
      estimated losses on uncompleted contracts are made in the period such losses
      are
      identified. No contracts were determined to be in an overall loss position
      at
      December 31, 2007 or March 31, 2008. In addition, the Company has certain cost
      plus fixed fee contracts with U.S. Government agencies that are being recorded
      as revenue is earned based on time and costs incurred. At December 31, 2007,
      there was no deferred revenue and approximately $194,537 of unbilled receivables
      related to these government contracts. At March 31, 2008 there was no deferred
      revenue and $280,640 of unbilled receivables related to these government
      contracts.





The
      Company recognizes revenues on product sales, other than fixed-price contracts,
      based on the terms of the customer agreement. The customer agreement takes
      the
      form of either a contract or a customer purchase order and each provide
      information with respect to the product or service being sold and the sales
      price. If the customer agreement does not have specific delivery or customer
      acceptance terms, revenue is recognized at the time of shipment of the product
      to the customer. Revenue for services, such as non-recurring engineering
      charges, is recognized upon delivery of a technical report or other deliverable
      as specified in the contract or purchase order.





Management
      periodically reviews all product returns and evaluates the need for establishing
      either a reserve for product returns or a product warranty liability. As of
      March 31, 2008, management has concluded that neither a reserve for product
      returns nor a warranty liability is required.





Accounts
      receivable are reviewed for collectibility. A reserve is established at the
      end
      of a quarter in which management determines there is a collectibility problem,
      with the amount of the reserve based on management’s estimate of the potential
      bad debt. When management abandons all collection efforts it will directly
      write
      off the account and adjust the reserve accordingly.





Management
      Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.




8




NOTE
      2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Stock-Based
      Compensation





The
      Company periodically issues stock options and warrants to employees and
      non-employees in non-capital raising transactions for services and for financing
      costs. The Company adopted Statement of Financial Accounting Standards (SFAS)
      No. 123R effective January 1, 2006, and is using the modified prospective method
      in which compensation cost is recognized beginning with the effective date
      (a)
      based on the requirements of SFAS No. 123R for all share-based payments granted
      after the effective date and (b) based on the requirements of SFAS No. 123R
      for
      all awards granted to employees prior to the effective date of SFAS No. 123R
      that remained unvested on the effective date. The Company accounts for stock
      option and warrant grants issued and vesting to non-employees in accordance
      with
      EITF No. 96-18: "Accounting for Equity Instruments that are Issued to Other
      Than
      Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
      EITF 00-18 “Accounting Recognition for Certain Transactions involving Equity
      Instruments Granted to Other Than Employees” whereas the value of the stock
      compensation is based upon the measurement date as determined at either a)
      the
      date at which a performance commitment is reached, or b) at the date at which
      the necessary performance to earn the equity instruments is
      complete.





Fair
      Value of Financial Instruments





The
      recorded values of cash, accounts receivable, accounts payable and other current
      liabilities approximate their fair values based on their short-term nature.
      The
      carrying amount of the notes payable and long term debt at March 31, 2008 and
      December 31, 2007 approximates fair value because the related effective interest
      rates on the instruments approximate rates currently available to the
      Company.





Concentration
      of Credit Risk





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist primarily of cash and cash equivalents placed with high credit
      quality institutions and account receivable due from government agencies and
      commercial customers. The Company places its cash and cash equivalents with
      high
      credit quality financial institutions. From time to time such cash balances
      may
      be in excess of the FDIC insurance limit of $100,000. Accounts receivable are
      typically unsecured and are derived from revenues earned from customers. The
      Company performs ongoing credit evaluations of its customers and maintains
      reserves for potential credit losses; historically, such losses have been
      immaterial and within management's expectations. At March 31, 2008, three
      customers accounted for a total of 68% of the accounts receivable balance,
      and
      each of these customers individually accounted for more than 10% of the accounts
      receivable balance.





Allowance
      for Doubtful Accounts





The
      Company generally, requires no collateral or deposits from its customers and
      relies upon its own evaluation of a customer’s creditworthiness. The Company
      records an allowance for doubtful accounts receivable for credit losses at
      the
      end of each period based on an analysis of individual aged accounts receivable
      balances. As a result of this analysis, the Company believes that its allowance
      for doubtful accounts is adequate at March 31, 2008 and December 31, 2007.
      If
      the financial condition of the Company's customers should deteriorate, or other
      events occur which result in an impairment of collectibility of the receivable,
      additional allowances will be recorded.





Loss
      per Common Share





Basic
      loss per share is calculated by dividing net loss by the weighted average number
      of common shares outstanding during the period. Diluted loss per share is
      calculated assuming the issuance of common shares, if dilutive, resulting from
      the exercise of stock options and warrants. At March 31, 2008 and 2007,
      potentially dilutive securities consisted of outstanding common stock purchase
      warrants and stock options to acquire an aggregate of 43,200,449 and 11,997,547
      shares, respectively. Since the Company reported a net loss for the three months
      ended March 31, 2008 and 2007, these potentially dilutive common shares were
      excluded from the diluted loss per share calculation because they were
      anti-dilutive.




9




NOTE
      2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Accounting
      for Derivative Instruments





Statement
      of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” as amended, requires all derivatives to be
      recorded on the balance sheet at fair value. In September 2000, the Emerging
      Issues Task Force (“EITF”) issued EITF 00-19, “Accounting for Derivative
      Financial Instruments Indexed to and Potentially Settled in, a Company’s Own
      Stock,” (“EITF 00-19”) which requires freestanding contracts that are settled in
      a company’s own stock, including common stock warrants, to be designated as an
      equity instrument, asset or a liability. Under the provisions of EITF 00-19,
      a
      contract designated as an asset or a liability must be carried at fair value
      on
      a company’s balance sheet, with any changes in fair value recorded in the
      company’s results of operations. These derivatives, including embedded
      derivatives in the debentures issued in April and May 2007 that are discussed
      in
      Note 6, are separately valued and accounted for on our balance sheet, and
      revalued at each reporting period. The net change in the value of embedded
      derivative liability is recorded as change in fair value of derivative liability
      in the consolidated statement of operations, and is included in other income
      and
      expense.





Fair
      Value Instruments





Effective
      January 1, 2008, the Company adopted Statement of Financial Accounting Standards
      (SFAS) No. 157, Fair Value Measurements. This Statement defines fair value
      for
      certain financial and nonfinancial assets and liabilities that are recorded
      at
      fair value, establishes a framework for measuring fair value, and expands
      disclosures about fair value measurements. This guidance applies to other
      accounting pronouncements that require or permit fair value measurements. On
      February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2,
      Effective Date of FASB Statement No. 157. This Staff Position delays the
      effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal
      years beginning after November 15, 2008 and interim periods within those fiscal
      years, except for those items that are recognized or disclosed at fair value
      in
      the financial statements on a recurring basis (at least annually). The adoption
      of SFAS No. 157 had no effect on the Company’s consolidated financial position
      or results of operations.





The
      Company partially adopted SFAS 157 on January 1, 2008, delaying application
      for non-financial assets and non-financial liabilities as permitted. This
      statement establishes a framework for measuring fair value, and expands
      disclosures about fair value measurements. SFAS 157 establishes a fair
      value hierarchy that prioritizes the inputs to valuation techniques used to
      measure fair value into three levels as follows:





**•**
            Level
                1 — quoted prices (unadjusted) in active markets for identical assets
                or liabilities that the Company has the ability to access as of the
                measurement date. Financial assets and liabilities utilizing Level
                1
                inputs include active exchange-traded securities and exchange-based
                derivatives.


**•**
            Level
                2 — inputs other than quoted prices included within Level 1 that are
                directly observable for the asset or liability or indirectly observable
                through corroboration with observable market data. Financial assets
                and
                liabilities utilizing Level 2 inputs include fixed income securities,
                non-exchange-based derivatives, mutualfunds,and fair-value hedges.


**•**
            Level
                3 — unobservable inputs for the asset or liability only used when there
                is
                little, if any, market activity for the asset or liability at the
                measurement date. Financial assets and liabilities utilizing Level
                3
                inputs include infrequently-traded, non-exchange-based derivatives
                and
                commingled investment funds, and are measured using present value
                pricing
                models.





10


NOTE
      2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





In
      accordance with SFAS 157, the Company determines the level in the fair value
      hierarchy within which each fair value measurement in its entirety falls, based
      on the lowest level input that is significant to the fair value measurement
      in
      its entirety.





The
      following table presents the embedded derivative, the Company’s only financial
      assets measured and recorded at fair value on the Company’s Consolidated Balance
      Sheets on a recurring basis and their level within the fair value hierarchy
      during the three months ended March 31, 2008:




**Fair Value****As of March 31, 2008**
                
                **Level 1**
                
                **Level 2**
                
                **Level 3**
                
                **Total**Embedded
                    derivativeliabilities
                
                $
                -
                
                $
                13,210,837
                
                $
                -
                
                $
                13,210,837





The
      following table reconciles, for the period ended March 31, 2008, the
      beginning and ending balances for financial instruments that are recognized
      at
      fair value in the consolidated financial statements:





Balance
                ofEmbedded
                derivative at December 31, 2007
            
            $
            10,283,181Loss
                on fair value adjustments to embedded derivatives
            
            
            2,927,656Balance
                at March 31, 2008
            
            $
            13,210,837





The
      valuation of the derivatives are calculated using a complex binomial pricing
      model that is based on changes in the volatility of our shares and our stock
      price and the time to conversion of the related financial instruments. See
      Note
      6 for more information on the valuation methods used.





Income
      Taxes





Current
      income tax expense is the amount of income taxes expected to be payable for
      the
      current year. A deferred income tax asset or liability is established for the
      expected future consequences of temporary differences in the financial reporting
      and tax bases of assets and liabilities. The Company considers future taxable
      income and ongoing, prudent and feasible tax planning strategies, in assessing
      the value of its deferred tax assets. If the Company determines that it is
      more
      likely than not that these assets will not be realized, the Company will reduce
      the value of these assets to their expected realizable value, thereby decreasing
      net income. Evaluating the value of these assets is necessarily based on the
      Company’s judgment. If the Company subsequently determines that the deferred tax
      assets, which have a full valuation allowance, would be realized in the future,
      the value of the deferred tax assets would be increased, thereby increasing
      net
      income in the period when that determination was made. The company’s adoption of
      Fin 48 on January 1, 2007 had no effect on the company’s income taxes.





Recent
      Accounting Pronouncements





In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. SFAS 141(R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.





11




NOTE
      2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





In
      March
      2008, the FASB issued SFAS No. 161 “Disclosures About Derivative Instruments and
      Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS
      161 amends SFAS 133 by requiring expanded disclosures about an entity’s
      derivative instruments and hedging activities. SFAS 161 requires qualitative
      disclosures about objectives and strategies for using derivatives, quantitative
      disclosures about fair value amounts of and gains and losses on derivative
      instruments, and disclosures about credit-risk-related contingent features
      in
      derivative instruments. SFAS 161 is effective for the Company as of January
      1,
      2009. The Company is currently assessing the impact of SFAS 161 on its
      consolidated financial statements.




12




NOTE
      3 –
INVENTORY





Inventory
      consists of the following:




March 31, 2008
              (Unaudited)
            
            December 31,
              2007Raw
                materials
            
            $
            830,397
            
            $
            549,792Work
                in process
            
            
            142,378
            
            
            126,003Finished
                Goods
            
            
            18,590
            
            
            14,192Reserve
                for slow moving and obsolescence
            
            
            (1,623
            )
            
            (1,623
            )$
            989,742
            
            $
            688,364





NOTE
      4 –
PROPERTY AND EQUIPMENT





Property
      and equipment consist of the following:




March 31, 2008
              (Unaudited)
            
            December 31,
              2007
            
            Useful
              LivesComputer
                software
            
            $
            86,803
            
            $
            86,803
            
            
            3
                yearsFurniture
                and fixtures
            
            
            124,380
            
            
            124,380
            
            
            6
                yearsComputer
                equipment
            
            
            171,327
            
            
            161,310
            
            
            3
                yearsOffice
                equipment
            
            
            73,258
            
            
            72,230
            
            
            5
                yearsLab
                and manufacturing equipment
            
            
            5,132,965
            
            
            5,071,681
            
            
            5
                yearsLeasehold
                improvements
            
            
            3,889,307
            
            
            3,886,670
            
            
            14
                yearsConstruction
                in progress
            
            
            8,350
            
            
            8,3509,486,390
            
            
            9,411,424Less
                accumulated depreciation and amortization
            
            
            (6,221,749
            )
            
            (6,051,713
            )Property
                and equipment, net
            
            $
            3,264,641
            
            $
            3,359,711





Depreciation
      and amortization expense related to property and equipment amounted to $170,035
      and $247,767, respectively for the three months ended March 31, 2008 and 2007.





13




NOTE
      5 –
LONG TERM DEBT





As
      of
      December 31, 2007, long term debt consisted of the following:





Loan
              Balance
            
            Loan
              discount
            
            Current
              portion
            
            Noncurrent
              PortionSubordinated
                Secured Convertible Notes  (a)
            
            $
            145,169
            
            $
            (10,494
            )
            $
            134,675
            
            $
            —Finisar
                Secured Note (b)
            
            
            5,618,256
            
            
            —
            
            
            340,431
            
            
            5,277,825Secured
                Equipment Financing (c)
            
            
            403,755
            
            
            —
            
            
            149,728
            
            
            254,027April
                Secured Debentures (d)
            
            
            7,976,146
            
            
            (5,151,261
            )
            
            —
            
            
            2,824,885May
                Secured Debentures (e)
            
            
            10,554,500
            
            
            (7,476,104
            )
            
            —
            
            
            3,078,396$
            24,697,826
            
            $
            (12,637,859
            )
            $
            624,834
            
            $
            11,435,133





As
      of
      March 31, 2008, long term debt consisted of the following:





Loan
              Balance
            
            Loan
              discount
            
            Current
              portion
            
            Noncurrent
              PortionSubordinated
                Secured Convertible Notes  (a)
            
            $
            87,660
            
            $
            (6,996
            )
            $
            80,664
            
            $
            —Finisar
                Secured Note (b)
            
            
            5,536,211
            
            
            —
            
            
            348,764
            
            
            5,187,447Secured
                Equipment Financing (c)
            
            
            370,845
            
            
            —
            
            
            162,680
            
            
            208,165April
                Secured Debentures (d)
            
            
            7,976,146
            
            
            (4,154,243
            )
            
            —
            
            
            3,821,903May
                Secured Debentures (e)
            
            
            10,554,500
            
            
            (6,156,792
            )
            
            —
            
            
            4,397,708$
            24,525,362
            
            $
            (10,318,031
            )
            $
            592,108
            
            $
            13,615,223





(a)
      Subordinated Secured Convertible Notes Payable





During
      2005, the Company issued $1,280,000 of subordinated, secured notes to nine
      note
      holders. The terms of the notes include interest only payments for 24 months,
      thereafter the loans were to be paid in full over the next twelve months. The
      loans are secured by all the assets of the Company. The interest rate on the
      loans is 10% per annum. The loans, at the option of the note holder, may be
      extended an additional three years, with the same terms as the original three
      year period. If the note holders elect to extend the loan, they will receive
      additional warrants to purchase 26,666 shares of the Company’s common stock for
      every $100,000 loaned to the Company. The conversion feature which is in effect
      during the time the loan is outstanding, allows the note holder to convert
      outstanding principal and interest into common stock at an initial conversion
      price of $3.75. The conversion price is subject to downward revision upon the
      occurrence of certain stock offerings. The downward revision is subject to
      a
      floor of $0.90 and allows the note holder to convert at the price of the most
      recent stock offering. The conversion price was reduced to $1.25 in December
      2005, and reduced to $1.05 in April 2007. During April 2007, six of the note
      holders converted the remaining principal balance of their notes of $1,050,000
      into the April 2007 Debentures (see (d) below).





14




NOTE
      5 –
LONG TERM DEBT (CONTINUED)





The
      Company issued warrants to purchase 320,000 shares of the Company’s common stock
      in connection with this debt offering during 2005. The warrants were valued
      at
      $0.73 a warrant or $233,600, using an option pricing model and were reflected
      as
      a loan discount amount, which has been netted against the loan principal
      balance. The assumptions used in the model were: risk free interest rate, 4.41%,
      expected life, 5 years, expected volatility, 70%, no expected dividends. The
      loan discount fee is being amortized over the life of the loan. Interest expense
      includes $3,498 and $19,467 relating to the amortization of this discount during
      the three months ended March 31, 2008 and 2007, respectively. The effective
      interest rate on these loans, giving effect for the modified terms and the
      loan
      discount is 22%.





The
      Company has analyzed the terms of the conversion feature and warrants issued
      to
      the note holders and has determined that such features do not give rise to
      an
      embedded derivative as defined by SFAS 133 and EITF 00-19 as the instruments
      are
      not derivative liabilities based on the analysis, principally because they
      are
      convertible into unregistered common shares, the Company has sufficient
      authorized shares available for conversion, there is a fixed maximum number
      of
      shares required to be issued, and there are no provisions that could
      require a net cash settlement.





(b) Finisar
      Senior Secured Note





During
      the year ended December 31, 2006, an agreement between Finisar and QPC to
      terminate the License Agreement dated September 18, 2003 became effective.
      In
      consideration of the termination of the license, the Company issued Finisar
      a $6
      million promissory note. Payment terms of the note require that $1,000,000
      of
      the principal, together with interest thereon payable at the rate of 9.7% per
      annum, be paid in thirty-six monthly installments, commencing on October 18,
      2006. The remaining $5,000,000 of the principal shall be paid in full on
      September 18, 2009 and accrues interest at the rate of 9.7% per annum payable
      in
      arrears, on the 18th day of each calendar month commencing on October 18, 2006.
      The note is secured by substantially all of our assets.





(c) Secured
      Equipment Financing





On
      February 8, 2007, the Company completed a secured equipment lease financing
      transaction with a financing company. The Company sold and leased back certain
      manufacturing equipment that had been purchased by the Company between July
      and
      December 2006. The gross amount of the loan was $500,000. Repayments under
      the
      loan require a monthly payment of $21,990 for the first 30 months, $4,850 for
      the next 30 months, and then an option to extend for an additional 60 months
      for
      $2,800 per month. Additionally, at the end of the first 60 payments, the Company
      has the option of acquiring the equipment at the greater of 20% of the original
      cost ($100,000) or fair market value at the time.





The
      Company has determined that the substance of this lease was a financing
      transaction and reflected the amount payable to the lender as a secured debt
      in
      the accompanying financial statements. The Company calculated the interest
      rate
      implicit in the lease based on the stream of payments over the first 60 months
      of the lease, at which time management estimates they would exercise the
      purchase option for $100,000. As such, the interest rate implicit in the lease
      was calculated to be 33.5%. The Company is allocating its payments to principal
      and interest based upon this payment stream and implicit interest rate. The
      Company further determined that as the gross proceeds of the loan approximated
      the net book value of the assets on the date of the agreement, and no gain
      was
      recognized.





In
      accordance with the lease, the Company paid a security deposit of $125,000
      that
      has been classified as other assets in the accompanying balance sheet that
      is
      secured by certain manufacturing equipment purchased by the company between
      July
      and December 2006.




15




NOTE
      5 –
LONG TERM DEBT (CONTINUED)





(d) April
      Secured Debentures





In
      April
      2007, the Company entered into securities purchase agreements with certain
      investors, pursuant to which the Company issued the investors secured
      convertible debentures (the “April Secured Debentures”) in the aggregate
      principal amount of $7,976,146 at an original issue discount of 10% resulting
      in
      gross proceeds to the Company of $7,178,531. The April Secured Debentures have
      a
      term of 2 years and pay interest at the rate of 10% per annum, and are secured
      by all of our shares in Quintessence Photonics Corporation, the operating
      subsidiary which owns all of our operating assets. The April Secured Debentures
      are convertible into shares of the Company’s common stock at an initial
      conversion price of $1.05 per share, subject to adjustments as set forth therein
      and any applicable Milestone Adjustments. The initial fair value of this
      conversion feature was $4,738,682 using a complex Binomial Lattice pricing
      model
      using the assumptions provided below.





In
      connection with the April 2007 Debenture Offering, the Company granted warrants
      to purchase 11,394,494 shares of common stock to certain investors and warrants
      to purchase 212,796 shares of common stock to the dealers in that offering.
      The
      above warrants have an initial exercise price of $1.05 per share, subject to
      adjustments as set forth therein and any applicable Milestone Adjustments,
      and
      expire five years from the date of issuance. The aggregate purchase price for
      the April Secured Debentures and the warrants issued in connection with the
      April 2007 Debenture Offering was $7,178,531. The initial fair value of the
      investor warrants was estimated at approximately $10,112,590 using a complex
      Binomial Lattice pricing model suitable to value path dependent American
      options. The significant assumptions used in the model are as follows: (1)
      dividend yield of 0%; (2) expected volatility of 63%, (3) risk-free interest
      rate of 4.64%, (4) expected life of 5 years, and (5) the probability of the
      occurrence of certain factors impacting the future fair value due to possible
      adjustment.





The
      aggregate fair value of the conversion feature and the investor warrants was
      $14,851,272 on the date of issuance. The value of the compound embedded
      derivative up to the $7,178,531 amount of the loan less the original issue
      discount was accounted for as a loan discount which has been netted against
      principal balance, to be amortized over the term of the loan. Interest expense
      includes $997,018 related to the amortization of this discount during the three
      months ended March 31, 2008. The excess $7,672,741 fair value of the embedded
      derivative was charged to private placement costs during the year ended December
      31, 2007.





See
      Note
      6 for a description of the compound embedded derivative.





(e) May
      Secured Debentures





On
      May
      22, 2007, the Company entered into securities purchase agreements with certain
      investors (the “May Investors”), pursuant to which the Company issued the May
      Investors secured convertible debentures (the “May Secured Debentures” and
      collectively with the April Secured Debentures, the “Secured Debentures”) in the
      aggregate principal amount of $10,554,500 at an original issue discount of
      10%
      resulting in gross proceeds to the Company of $9,500,000. The May Secured
      Debentures have a term of 2 years and pay interest at the rate of 10% per annum,
      and are secured by all of our shares in Quintessence Photonics Corporation,
      the
      operating subsidiary which owns all of our operating assets. The May Secured
      Debentures are convertible into shares of the Company’s common stock at an
      initial conversion price of $1.05 per share, subject to adjustments as set
      forth
      therein and any applicable Milestone Adjustments. The initial fair value of
      this
      beneficial conversion feature was approximately $4,974,818 using a complex
      Binomial Lattice pricing model using the assumptions provided below. The Company
      paid the following fees (including fees for advisors, placement agents and
      finders) in connection with the May 2007 Debenture Offering: (i) $795,000 in
      cash, and (ii) warrants to purchase up to 2,571,171 shares of common stock
      valued at $1,907,809.




16




NOTE
      5 –
LONG TERM DEBT (CONTINUED)





In
      connection with the May 2007 Debenture Offering, the Company granted warrants
      to
      purchase 15,077,857 shares of common stock to the May Investors and warrants
      to
      purchase 2,571,171 shares of common stock to the dealers in that offering.
      All
      of the above warrants have an initial exercise price of $1.05 per share, subject
      to adjustments as set forth therein and any applicable Milestone Adjustments,
      and expire five years from the date of issuance. The aggregate purchase price
      for the May Secured Debentures and the warrants issued in connection with the
      May 2007 Debenture Offering was $9,500,000 paid in cash **.** The initial fair value of the investor warrants was estimated at approximately
      $11,182,902 using a complex Binomial Lattice pricing model suitable to
      value path dependent American options. The significant assumptions used in
      the
      model are as follows: (1) dividend yield of 0%, (2) expected volatility of
      63%,
      (3) risk-free interest rate of 4.82%, (4) expected life of 5 years, and (5)
      the
      probability of the occurrence of certain factors impacting the future fair
      value
      due to possible adjustment.




The
      aggregate fair value of the beneficial conversion feature and the investor
      warrants was $16,157,720 on the date of issuance. The value of the compound
      embedded derivative up to $9,500,000, the amount of the loan less the original
      issue discount was accounted for as a loan discount which has been netted
      against principal balance, to be amortized over the term of the loan. Interest
      expense includes $1,319,313 related to the amortization of this discount during
      the three months ended March 31, 2008. The excess $6,657,720 fair value of
      the
      embedded derivative was charged to private placement costs during the year
      ended
      December 31, 2007.





See
      Note
      6 for a description of the compound embedded derivative.





The
      Secured Debentures issued in April and May 2007 are secured by all of our shares
      in Quintessence Photonics Corporation, the operating subsidiary which owns
      all
      of our operating assets.




17




NOTE
      6 –
COMPOUND EMBEDDED DERIVATIVE





In
      April
      2007, the Company entered into securities purchase agreements with certain
      investors, pursuant to which the Company issued the investors secured
      convertible debentures (the “April Secured Debentures”) in the aggregate
      principal amount of $7,976,146 at an original issue discount of 10% (the “April
      2007 Debenture Offering”). On May 22, 2007, the Company entered into securities
      purchase agreements with certain investors (the “May Investors”), pursuant to
      which the Company issued the May Investors secured convertible debentures (the
      “May Secured Debentures” and collectively with the April Secured Debentures, the
“Secured Debentures”) in the aggregate principal amount of $10,554,500 at an
      original issue discount of 10% (the “May 2007 Debenture Offering”). The April
      Secured Debentures and the May Secured Debentures have a term of 2 years and
      pay
      interest at the rate of 10% per annum. The April Secured Debentures and the
      May
      Secured Debentures are convertible into shares of the Company’s common stock at
      an initial conversion price of $1.05 per share, subject to adjustments as set
      forth therein and any applicable Milestone Adjustments. The market price of
      our
      common stock on April 16, 2007 and May 29, 2007 was $1.35 and $1.18 per share,
      respectively.




The
      conversion price of the Secured Debentures may be adjusted downwards if the
      Company fails to meet certain revenue milestones for any one or more of the
      following periods (“Milestone Adjustments”):




o
            $5,000,000
                in revenues for the nine (9) month period ending September 30, 2007,o
            $7,750,000
                in revenues for the twelve (12) month period ending December 31,
                2007o
            $6,000,000
                in revenues for the six (6) month period ending June 30,
                2008.




If
      a
      Milestone Adjustment occurs the conversion price will be the lower of $1.05
      or
      the market price as determined on the date that is five trading days after
      the
      Company files its next Form 10-Q with the SEC following the applicable Milestone
      period. Any Milestone Adjustment is permanent notwithstanding any future revenue
      or achievement of any other milestones. Any Milestone Adjustment may only adjust
      the conversion price downward. The Secured Debentures are subject to a
      conversion cap which limits the number of shares issuable upon conversion of
      the
      Secured Debentures. The number of shares currently issuable upon conversion
      of
      the Secured Debentures is at the maximum level permitted by the conversion
      cap.
      Consequently, if a Milestone Adjustment occurs, the Secured Debenture holders
      will not acquire additional shares upon conversion. The Company, however, will
      be obligated to redeem that portion of the Secured Debenture that can not be
      converted into common stock.





In
      connection with the April 2007 Debenture Offering, we granted warrants to
      purchase 11,394,494 shares of common stock to certain investors and warrants
      to
      purchase 212,796 shares of common stock to the dealers in that offering. In
      connection with the May 2007 Debenture Offering, we granted warrants to purchase
      15,077,857 shares of common stock to the May Investors and warrants to purchase
      2,571,171 shares of common stock to the dealers in that offering. All of the
      above warrants have an initial exercise price of $1.05 per share, subject to
      adjustments as set forth therein and any applicable Milestone Adjustments,
      and
      expire five years from the date of issuance.




EITF
      05-02 requires that instruments provide holders with an option to convert into
      a
      fixed number of shares (or an equivalent amount of cash at the discretion of
      the
      issuer) in order to be treated as conventional convertible securities. The
      Company determined that the Secured Debentures were not eligible for treatment
      as conventional convertible securities because the conversion price is subject
      to milestone adjustments.




The
      Company then compared the terms of the debentures to the provisions of EITF
      00-19. Per EITF 00-19, contracts that include *any* provision
      that could require net-cash settlement cannot be accounted for as equity of
      the
      company (that is, asset or liability classification is required for those
      contracts). Based on our review we determined that the since the debentures
      require a net cash settlement in the event that the conversion price is reduced,
      the conversion feature requires bifurcation and is a derivative.




We
      performed the same analysis on the warrants, and determined that an event of
      default as described in the Warrants would trigger a mandatory redemption and
      cash payment. The mandatory redemption amount is payable in cash or cash
      equivalent within five business days of the date of the applicable default
      notice. Since these circumstances would require a net cash settlement, under
      EITF 00-19 they are treated as a derivative.




18


NOTE
      6 –
COMPOUND EMBEDDED DERIVATIVE (CONTINUED)





We
      concluded that both the debentures conversion features and the detached warrants
      should be accounted for as a compound embedded derivative and had a valuation
      performed which concluded that the value of these features value exceeded the
      value of the funds raised. See Note 5 for a description of the assumptions
      used
      in the complex binomial lattice pricing model to determine the fair value of
      the
      compound embedded derivative at issuance.





As
      of
      March 31, 2008 the fair value of the embedded derivative liability related
      to
      our April and May debentures’ conversion features and the detached warrants was
      $13,210,837 an increase of $2,927,656 from the fair value of $10,283,181at
      December 31, 2007. The change in fair value of the derivative liability was
      recorded in other losses in the accompanying statement of operations.





NOTE
      7 –
STOCK OPTIONS AND WARRANTS





A
      summary
      of option activity as of March 31, 2008 and changes during the three months
      then
      ended is presented below:


Options
              
              Shares
              
              Weighted-Average
                Exercise Price
              
              Weighted-Average
                Remaining Contractual
                Term (Years)
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at January 1, 2008
              
              
              4,417,666
              
              $
              0.84
              
              
              7.7Granted
              
              
              635,000
              
              $
              0.68
              
              
              10Exercised
              
              
              —Forfeited
                  or expired
              
              
              (65,000
              )
              $
              0.75Outstanding
                  at March 31, 2008
              
              
              4,987,666
              
              $
              0.82
              
              
              7.8
              
              $
              732,688Exercisable
                  at March 31, 2008
              
              
              2,877,472
              
              $
              0.70
              
              
              6.7
              
              $
              673,938





The
      value
      of options vesting during the three months ended March 31, 2008 and 2007 was
      $142,175 and $115,361 respectively, and has been reflected as compensation
      cost.
      As of March 31, 2008, the Company has unvested options valued at $2,423,987
      which will be reflected as compensation cost in future periods as the options
      vest.




The
      Company calculates the fair value of employee stock options using a
      Black-Scholes option pricing model at the time the stock options are granted
      and
      that amount is amortized over the vesting period of the options, which is
      generally four years. The fair value for employee stock option grants for the
      three months ended March 31, 2008 and 2007 was calculated based on the
      following assumptions: risk-free interest rate of 3.02% to 4.5%; dividend yield
      of 0%; volatility factor of 63% to 73.5%; and a weighted average expected life
      of the options of 7 years. The risk-free interest rate was based on the applied
      yield currently available on U.S treasury zero-coupon issues. The expected
      weighted-average volatility factor is based on the historical stock prices
      of
      competitors of the Company whose shares are publicly traded over the most recent
      period.





There
      were no stock purchase warrants granted, exercised, cancelled or expired during
      the three months ended March 31, 2008. As of March 31, 2008 there were
      38,212,783 warrants outstanding. There was no intrinsic value to any of the
      warrants outstanding at March 31, 2008 as all of the outstanding warrants have
      an exercise price higher than the stock price on March 31, 2008.





19


NOTE
      8 –
INCOME TAXES





At
      December 31, 2007, the Company had available Federal and state net
      operating loss carryforwards to reduce future taxable income. The amounts
      available were approximately $42,000,000 for Federal and for state purposes.
      The
      Federal carryforward expires in 2026 and the state carryforward expires in
      2016.
      Given the Company’s history of net operating losses, management has determined
      that it is more likely than not the Company will not be able to realize the
      tax
      benefit of the carryforwards.




Accordingly,
      the Company has not recognized a deferred tax asset for this benefit. Upon
      the
      attainment of taxable income by the Company, management will assess the
      likelihood of realizing the tax benefit associated with the use of the
      carryforwards and will recognize a deferred tax asset at that time.





SFAS
      No.
      109 requires that a valuation allowance be established when it is more likely
      than not that all or a portion of deferred tax assets will not be realized.
      Due
      to restrictions imposed by Internal Revenue Code Section 382 regarding
      substantial changes in ownership of companies with loss carry-forwards, the
      utilization of the Company’s net operating loss carry-forwards will likely be
      limited as a result of cumulative changes in stock ownership. The company has
      not recognized a deferred tax asset and, as a result, the change in
      stock ownership has not resulted in any changes to valuation
      allowances.




Effective
      January 1, 2007, the Company adopted Financial Accounting Standards Board
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      48”). *—an
      interpretation of FASB Statement No. 109, Accounting for Income
      Taxes* .
      The
      Interpretation addresses the determination of whether tax benefits claimed
      or
      expected to be claimed on a tax return should be recorded in the financial
      statements. Under FIN 48, we may recognize the tax benefit from an uncertain
      tax
      position only if it is more likely than not that the tax position will be
      sustained on examination by the taxing authorities, based on the technical
      merits of the position. The tax benefits recognized in the financial statements
      from such a position should be measured based on the largest benefit that has
      a
      greater than fifty percent likelihood of being realized upon ultimate
      settlement. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties on income taxes, accounting in interim periods and
      requires increased disclosures. At the date of adoption, and as of December
      31,
      2007, the Company does not have a liability for unrecognized tax
      benefits.





The
      Company files income tax returns in the U.S. federal jurisdiction and various
      states. The Company is subject to U.S. federal or state income tax examinations
      by tax authorities for years after 2002. During the periods open to examination,
      the Company has net operating loss and tax credit carry forwards for U.S.
      federal and state tax purposes that have attributes from closed periods. Since
      these NOLs and tax credit carry forwards may be utilized in future periods,
      they
      remain subject to examination.




20


NOTE
      9 -
      SUBSEQUENT EVENTS





Between
      April 3 and April 23, 2008, holders of our April and May Debentures converted
      $703,267 of principal into 669,778 shares of common stock in accordance with
      the
      original terms of the debentures (see Note 5). These conversions reduce the
      amount of principal that is to be repaid to the debenture holders by the
      Company. Following these conversions, there were 39,346,561 shares of common
      stock outstanding.





21


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





THE
      FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE CONSOLIDATED
      FINANCIAL STATEMENTS OF QPC LASERS, INC. AND THE NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-KSB. THIS
      DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING OUR OPERATING RESULTS,
      FINANCIAL CONDITIONS AND LIQUIDITY AND CASH-FLOW FOR THE PERIOD ENDEDMARCH31,
      2008.





**FORWARD
      LOOKING STATEMENTS**




This Quarterly
      Report contains forward looking statements with respect to our expectations,
      plans or intentions (such as those relating to future business or financial
      results, products in development and our business strategies). These statements
      are subject to risks and uncertainties and are based on judgments concerning
      various factors that are beyond our control. Forward-looking statements may
      be
      identified by words such as “may,” “ should,” “expect,” “anticipate,” “believe,”
“estimate,” “intend,” “plan” and other similar expressions. Our actual results
      may differ materially from those anticipated in any forward looking statements
      as a result of various developments including those set forth below under the
      heading “Risk Factors That May Affect Future Performance”. Except as required by
      law or regulation, we assume no obligation to update any forward-looking
      statements.




**Background**




QPC
      Lasers, Inc. designs and manufactures laser diodes through its wholly-owned
      subsidiary, Quintessence Photonics Corporation. Quintessence was incorporated
      in
      November 2000 by Jeffrey Ungar, Ph.D. and George Lintz, MBA (our “Founders”).
      The Founders began as entrepreneurs in residence with DynaFund Ventures in
      Torrance, California and wrote the original business plan during their tenure
      at
      DynaFund Ventures from November 2000 to January 2001. The business plan drew
      on
      Dr. Ungar’s 17 years of experience in designing and manufacturing semiconductor
      lasers and Mr. Lintz’s 15 years of experience in finance and business; the
      primary objective was to build a state of the art wafer fabrication facility
      and
      hire a team of experts in the field of semiconductor laser design.




After
      operating as a private company for almost six years, on May 12, 2006 and June
      13, 2006, the stockholders of Quintessence entered into Share Exchange
      Agreements with QPC in which all of the stockholders of Quintessence exchanged
      their shares, warrants and options for shares warrants and options of QPC.
      QPC
      was a public reporting company; and as a result of the Share Exchange, QPC
      was
      the surviving entity and is now a public reporting company. Our predecessor
      public company was incorporated in the State of Nevada on August 31, 2004 as
      Planning Force, Inc. The transaction was accounted for as a reverse merger
      (recapitalization) with Quintessence deemed to be the accounting acquirer and
      Planning Force deemed the legal acquirer.




Our
      originally targeted market was fiber optic telecommunications. As it became
      clear within the first two years of operations that the telecommunication market
      was experiencing a slump, we investigated other markets that could benefit
      from
      our laser diode technology and decided to focus on materials processing,
      printing and medical applications, as well as the burgeoning defense/homeland
      security laser market.




We
      released our first Generation I products in the second quarter of 2004, and
      released some of our Generation II products in early 2006. We released our
      initial Generation III products during 2007 with further commercialization
      expected in 2008-2009. Generation I and II products have been sold to customers
      in the medical, printing, and defense industries. Generation III products have
      been sold to customers in the medical and consumer industries.




QPC
      signed its first government development contract in the second quarter of 2002
      and we shipped our first commercial product in the second quarter of 2004.
      We
      hired our first salesman in the fourth quarter of 2003, added a Director of
      Worldwide Sales in the third quarter of 2004 and a Senior Vice President of
      Marketing and Sales in the second quarter of 2005.




22




Total
      sales grew from $89,161 in 2002; to $229,079 in 2003; to $1,050,816 in 2004
      to
      $1,073,091 in 2005. Total sales for the year ended December 31, 2006 were
      $3,073,332 and total sales for the year ended December 31, 2007 were
      $7,932,182.





Our
      product development efforts have been advanced by a number of government
      contracts. We have been awarded five Phase I “Small Business Innovation
      Research” contracts; three of them have progressed to Phase II contracts. In
      general, these contracts are cancelable and in some cases include multiple
      phases associated with meeting technical milestones. In the second quarter
      of
      2006, we signed a sub-contract with Telaris, Inc. as part of a team working
      on a
      project for the Defense Advance Research Project Agency (“DARPA”). Our portion
      of the DARPA contract is $3.1 million which is to be performed in two phases
      over three years. This contract will fund development of semiconductor lasers
      to
      be used for directed energy weapons and the technology overlaps with our
      development of lasers for the industrial materials processing markets.




In
      the
      second quarter of 2006, QPC was also awarded a subcontract with Fibertek, Inc.
      as part of a team working on a project for the United States Missile Defense
      Agency to develop lasers that emit mid-infrared wavelengths. Management believes
      these lasers may be used in systems designed to defend military and commercial
      aircraft against heat seeking missiles. We also believe that this effort will
      bring us closer to creating a compact and affordable system for detection of
      biochemical agents in public places. The contract is a Phase III follow-on
      contract from an earlier contract that QPC completed which demonstrated the
      early phases of feasibility of our technology. Our portion of this Phase III
      contract is $800,000 and is to be performed over twelve months through June
      2007. As of March 31,2008, we have recognized $790,000 of revenue from this
      contract.




The
      United States Army Research Laboratory awarded us a Phase II development
      contract in the first quarter of 2006 and we began performing under this
      contract in the second quarter of 2006. The contract is a follow-on contract
      from an earlier contract with the same customer in which QPC demonstrated its
      ability to develop diode lasers that emit wavelengths that are safer to the
      human eye than conventional high power diode wavelengths. Management believes
      that upon successful completion of the diode laser project, these lasers may
      be
      used in both military and commercial systems to limit accidental damage to
      human
      eyes of system operators, friendly forces, and bystanders. The Army contract
      amount is $673,028 and is to be performed by March 2008. As of March 31, 2008,
      we have recognized $673,028 of revenue from this contract.




During
      the second quarter of 2007, the United States Navy awarded us two contracts
      totaling $1.5 million to deliver high-energy laser engine prototypes for naval
      aviation directed energy weapons applications. The concurrent nine-month
      contracts build upon the Company's previous high-brightness chip-based laser
      development for the U.S. Navy, as well as for the DARPA, the U.S. Army, the
      Missile Defense Agency, and the Israeli Ministry of Defense.




In
      addition to U.S. Government funds, we have received development funds from
      U.S.
      prime defense contractors as well as a major foreign military contractor. The
      funds that we have received and expect to receive are for development that
      overlaps with our commercial development.




During
      the fourth quarter of 2007, the Company entered into a contract with an
      international manufacturer of consumer electronics to develop and deliver lasers
      to be used in rear projection televisions. We realized revenues during the
      fourth quarter of approximately $1 million including non-recurring engineering
      fees for the development and delivery of initial prototypes. The contract also
      provides for an $11 million non-cancellable order if and when product
      specifications have been met.





In
      the
      medical laser market, QPC has received production orders and new product
      development orders from a large medical laser manufacturer. Other medical
      equipment manufacturers have also ordered from us. In the industrial market,
      QPC
      has received an order for development and production of optical sensing
      lasers.




23




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




Our
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the U.S. The
      preparation of these financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses for each period. The following represents a summary of our critical
      accounting policies, defined as those policies that we believe are the most
      important to the portrayal of our financial condition and results of operations
      and that require management's most difficult, subjective or complex judgments,
      often as a result of the need to make estimates about the effects of matters
      that are inherently uncertain.




**Impairment
      of Long-Lived Assets**




On
      January 1, 2002, the Company adopted the provisions of Statement of Financial
      Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal
      of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting
      for the disposal of long-lived assets and supersedes SFAS No. 121, “Accounting
      for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
      of.” The adoption of this statement did not have a material effect on the
      Company’s results of operations or financial condition. Management regularly
      reviews property, equipment and other long-lived assets for possible impairment.
      This review occurs quarterly, or more frequently if events or changes in
      circumstances indicate the carrying amount of the asset may not be recoverable.
      If there is indication of impairment, then management prepares an estimate
      of
      future cash flows (undiscounted and without interest charges) expected to result
      from the use of the asset and its eventual disposition. If these cash flows
      are
      less than the carrying amount of the asset, an impairment loss is recognized
      to
      write down the asset to its estimated fair value. Management believes that
      the
      accounting estimate related to impairment of its property and equipment, is
      a
“critical accounting estimate” because: (1) it is highly susceptible to
      change from period to period because it requires management to estimate fair
      value, which is based on assumptions about cash flows and discount rates; and
      (2) the impact that recognizing an impairment would have on the assets
      reported on our balance sheet, as well as net income, could be material.
      Management’s assumptions about cash flows and discount rates require significant
      judgment because actual revenues and expenses have fluctuated in the past and
      are expected to continue to do so.





**Revenue
      Recognition**





A
      portion
      of the Company’s revenues result from fixed-price contracts with U.S. government
      agencies. Revenues from fixed-price contracts are recognized under the
      percentage-of-completion method of accounting, generally based on costs incurred
      as a percentage of total estimated costs of individual contracts (“cost-to-cost
      method”). Revisions in contract revenue and cost estimates are reflected in the
      accounting period as they are identified. Provisions for the entire amount
      of
      estimated losses on uncompleted contracts are made in the period such losses
      are
      identified. No contracts were determined to be in an overall loss position
      at
      December 31, 2007 or March 31, 2008. In addition, the Company has certain cost
      plus fixed fee contracts with U.S. Government agencies that are being recorded
      as revenue is earned based on time and costs incurred. At December 31, 2007,
      there was no deferred revenue and approximately $194,537 of unbilled receivables
      related to these government contracts. At March 31, 2008 there was no deferred
      revenue and $280,640 of unbilled receivables related to these government
      contracts.





The
      Company recognizes revenues on product sales, other than fixed-price contracts,
      based on the terms of the customer agreement. The customer agreement takes
      the
      form of either a contract or a customer purchase order and each provide
      information with respect to the product or service being sold and the sales
      price. If the customer agreement does not have specific delivery or customer
      acceptance terms, revenue is recognized at the time of shipment of the product
      to the customer. Revenue for services, such as non-recurring engineering
      charges, is recognized upon delivery of either technical report or other
      deliverable as specified in the contract or purchase order.





Management
      periodically reviews all product returns and evaluates the need for establishing
      either a reserve for product returns or a product warranty liability. As of
      March 31, 2008, management has concluded that neither a reserve for product
      returns nor a warranty liability is required.




24




Accounts
      receivable are reviewed for collectibility. When management determines a
      potential collection problem, a reserve is established, based on management’s
      estimate of the potential bad debt. When management abandons all collection
      efforts it will directly write off the account and adjust the reserve
      accordingly.





The
      Company generally, requires no collateral or deposits from its customers and
      relies upon its own evaluation of a customer’s creditworthiness. The Company
      records an allowance for doubtful accounts receivable for credit losses at
      the
      end of each period based on an analysis of individual aged accounts receivable
      balances. If the financial condition of the Company's customers should
      deteriorate, or other events occur which result in an impairment of
      collectibility of the receivable, additional allowances will be
      recorded.





**Management
      Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.





**Accounting
      for Derivative Instruments**





SFAS
      No.
      133, “Accounting for Derivative Instruments and Hedging Activities,” as amended,
      requires all derivatives to be recorded on the balance sheet at fair value.
      In
      September 2000, the Emerging Issues Task Force (“EITF”) issued EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in, a Company’s Own Stock,” (“EITF 00-19”) which requires freestanding
      contracts that are settled in a company’s own stock, including common stock
      warrants, to be designated as an equity instrument, asset or a liability. Under
      the provisions of EITF 00-19, a contract designated as an asset or a liability
      must be carried at fair value on a company’s balance sheet, with any changes in
      fair value recorded in the company’s results of operations. These derivatives
      are separately valued and accounted for on our balance sheet, and revalued
      at
      each reporting period. The net change in the value of embedded derivative
      liability is recorded as income or loss on derivative instruments in the
      consolidated statement of operations, included in other income.





**Stock
      Based Compensation**





The
      Company periodically issues stock options and warrants to employees and
      non-employees in non-capital raising transactions for services and for financing
      costs. The Company adopted SFAS No. 123R effective January 1, 2006, and is
      using
      the modified prospective method in which compensation cost is recognized
      beginning with the effective date (a) based on the requirements of SFAS No.
      123R
      for all share-based payments granted after the effective date and (b) based
      on
      the requirements of SFAS No. 123R for all awards granted to employees prior
      to
      the effective date of SFAS No. 123R that remain unvested on the effective date.
      The Company accounts for stock option and warrant grants issued and vesting
      to
      non-employees in accordance with EITF No. 96-18: "Accounting for Equity
      Instruments that are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services” and EITF 00-18 “Accounting
      Recognition for Certain Transactions Involving Equity Instruments Granted to
      Other Than Employees” whereas the value of the stock compensation is based upon
      the measurement date as determined at either (a) the date at which a performance
      commitment is reached, or (b) at the date at which the necessary performance
      to
      earn the equity instruments is complete.





**Fair
      Value Instruments**





Effective
      January 1, 2008, the Company adopted Statement of Financial Accounting Standards
      (SFAS) No. 157, Fair Value Measurements. This Statement defines fair value
      for
      certain financial and nonfinancial assets and liabilities that are recorded
      at
      fair value, establishes a framework for measuring fair value, and expands
      disclosures about fair value measurements. This guidance applies to other
      accounting pronouncements that require or permit fair value measurements. On
      February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2,
      Effective Date of FASB Statement No. 157. This Staff Position delays the
      effective date of SFAS No. 157 for nonfinancial assets and liabilities to fiscal
      years beginning after November 15, 2008 and interim periods within those fiscal
      years, except for those items that are recognized or disclosed at fair value
      in
      the financial statements on a recurring basis (at least annually). The adoption
      of SFAS No. 157 had no effect on the Company’s consolidated financial position
      or results of operations.




25




The
      following table reconciles, for the period ended March 31, 2008, the
      beginning and ending balances for financial instruments that are recognized
      at
      fair value in the consolidated financial statements:





Balance
                ofEmbedded
                derivative at December 31, 2007
            
            $
            10,283,181Loss
                on fair value adjustments to embedded derivatives
            
            
            2,927,656Balance
                at March 31, 2008
            
            $
            13,210,837





The
      valuation of the derivatives are calculated using a complex binomial pricing
      model that is based on changes in the volatility of our shares and our stock
      price and the time to conversion of the related financial instruments. See
      note
      6 in the accompanying financial statements for more information on the valuation
      methods used.




26


**THREE
      MONTHS ENDED MARCH 31, 2008 COMPARED TO THE THREE MONTHS ENDED****MARCH
      31, 2007**





REVENUE.
      During the three months ended March 31, 2008, the Company recognized revenue
      of
      $1,648,194 as compared to revenue of $1,106,579 during the quarter ended March
      31, 2007, representing an increase of approximately 49%. The increase in
      revenues was due in significant part to non-recurring engineering fees earned
      in
      connection with development work for new commercial customers. The increase
      was
      offset by the Company’s cessation of work for a major medical customer that
      commenced Chapter 11 proceedings during the quarter. Revenues were also
      adversely impacted by unexpected delays in an anticipated award from a defense
      agency. We believe that our expanded product offerings, our entry into the
      consumer electronics market and opportunities in the defense and medical markets
      offer potential for significant growth. However, our ability to grow our
      revenues is subject to significant risks including, without limitation, our
      limited marketing budget, the limited track record for our products,
      difficulties encountered in trying to displace incumbent products and
      technologies, the long sales and qualification process required for our products
      and the risk that our competitors will develop products that diminish or
      eliminate any technological advantages of our products. In addition, our ability
      to grow our revenues could be adversely affected by uncertain economic
      conditions, financial difficulties encountered by some of our customers and
      shifting defense priorities.




COST
      OF
      REVENUE; GROSS PROFIT. Cost of revenue, which consists of direct labor, overhead
      and material costs, was $851,093 or 52% of revenues for the quarter ended March
      31, 2008 as compared to $855,781 or 77% of revenues for the quarter ended March
      31, 2007. As a percentage of revenue, cost of sales decreased as we benefited
      from higher pricing on our higher brightness higher powered modules, improved
      efficiencies as a result of allocating our fixed costs over a higher number
      of
      units sold and higher yields on direct materials and labor. If we can continue
      to increase our sales, then our fixed costs should continue to decline as a
      percentage of sales. As a result of the foregoing, gross profit was $797,101
      for
      the three months ended March 31, 2008 as compared to $250,798 for the three
      months ended March 31, 2007, representing gross margins of approximately 48%
      and
      23%, respectively.





RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
      professional and technical support fees, material and overhead, totaled
      $1,426,533 for the three months ended March 31, 2008, as compared to $1,012,800
      for the three months ended March 31, 2007. This increase in research and
      development spending is largely attributable to additional costs incurred as
      we
      develop new products for the consumer electronics markets. We currently expect
      research and development costs to increase moderately as we seek to maintain
      our
      technological edge and develop new products for various
      applications.





SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative
      expenses totaled $2,653,707 for the quarter ended March 31, 2008, as compared
      to
      $1,216,524 for the quarter ended March 31, 2007, which represents an increase
      of
      approximately 118%. This year-over-year increase in selling, general and
      administrative costs is a result of several factors including approximately
      $370,000 in sales and marketing costs; $570,000 in investor relations costs;
      bad
      debt expense of $225,000 and increases in legal and accounting fees. The bad
      debt expense represents the recording of a reserve against accounts receivable
      from a customer that recently sought protection under Chapter 11 of the federal
      bankruptcy laws. We believe there is a significant likelihood that additional
      reserves will be required as the current recession and constraints in the credit
      market adversely affect a number of our customers. We also expect selling,
      general and administrative costs to increase as we expand our sales and
      marketing efforts.





As
      mentioned above, we recognized an expense of approximately $225,000 related
      to
      setting up an allowance for the accounts receivable outstanding for one of
      our
      customers that declared bankruptcy during the first quarter of 2008, as we
      believe there is a likelihood that we will not be paid for the amounts
      outstanding. We stopped work on all orders from that customer, and did not
      recognize any revenue for sales to this customer during the first quarter of
      2008.




27




OTHER
      INCOME AND EXPENSE. Other Income and Expense includes interest expense of
      $2,953,878 for the three months ended March 31, 2008 compared to $468,399.
      The
      increase in interest expenses includes the amortization of loan discounts of
      $2,319,829 and $240,221 for the first quarters of 2008 and 2007 respectively.
      This increase in interest expense relates to the loan discount amortization
      and
      cash interest paid to holders of debentures that were issued in April and May
      2007. Other expenses also include $2,927,656 for the change in fair value of
      the
      embedded derivative liability during the three months ended March 31, 2008.
      This
      change in fair value is primarily caused by an increase in our stock price
      from
      December 31, 2007 to March 31, 2008. No similar charge was recorded in the
      first
      quarter of 2007 as the derivative liability is related to the conversion feature
      and detached warrants that were issued to the holders of the debentures that
      were issued in April and May 2007. The conversion feature and detached warrants
      have been bifurcated and are treated as embedded derivatives.





The
      determination of the change in value of the embedded derivatives requires the
      use of a complex valuation model and can fluctuate significantly between periods
      based on the price of our shares and the time remaining in the life of the
      underlying financial instruments. Increases in our stocks market price increases
      the value of the derivative creating losses in our income statement and
      increasing the derivative liability on our balance sheet while decreases in
      our
      stock’s market value reduces the value of the derivatives, creating gains in our
      income statements and decreasing the derivative liability on our balance sheet.




Other
      Expenses is offset by interest income of $29,261 for the quarter ended March
      31,
      2008 compared to interest income of $1,754 for the quarter ended March 31,
      2007.





NET
      LOSS.
      QPC had a net loss of $9,109,904 for the quarter ended March 31, 2007 as
      compared to a net loss of $2,413,205 for the quarter ended March 31, 2007.
      The
      loss in the first quarter of 2008 was in significant part attributable to
      interest expense including amortization of loan discount of $2,953,878 and
      the
      change in fair value of embedded derivatives of $2,927,656. In addition,
      increases in research and development spending, investor relations costs, and
      bad debt expense as described above contributed to the increase in overall
      net
      loss for the quarter.





While
      we
      anticipate that revenues should continue to grow from the amounts recorded
      in
      2007, we do not expect to achieve profitability during the next 12 months.





CASH
      FLOWS FROM OPERATING ACTIVITIES. Our net loss has been significantly impacted
      by
      the non-cash items discussed above. During the first quarter of 2008, we had
      a
      negative cash flow from operations of approximately $4,000,000, an increase
      of
      approximately $2,672,000 as compared to our negative cash flow from operations
      of approximately $1,329,000 in the first quarter of 2007. The increase in
      negative cash flow during the quarter is related to increased research and
      development spending and purchase of additional inventory to prepare for the
      fulfillment of several customer orders. In addition, interest payments for
      the
      first quarter of 2008 totaled $577,903 compared to $199,364 during the first
      quarter of 2007. We do not anticipate becoming cash flow positive in the
      immediate future.





**Liquidity
      and Capital Resources**




We
      continue to operate with a negative cash flow from operations, and depend upon
      external financing to maintain our operations. QPC lost $9,109,904 during the
      quarter ended March 31, 2008 and has a cumulative deficit of $70,326,861 at
      March 31, 2008. Our negative cash flow from operations during the quarter ended
      March 31, 2008 was $4,000,942. We currently anticipate that we will continue
      to
      have a negative cash flow from operations for at least the next 12
      months.





We
      will
      need to raise additional funds to continue our operations. During 2008, we
      may
      incur significant expenditures to build out additional manufacturing and office
      space at our Sylmar facility . Moreover, although we expect our revenues to
      continue to grow, the funds available from such increased revenues are not
      expected to be sufficient to meet our debt obligations that mature in 2009.
      Those obligations are in excess of $25 million, and even if all of the Secured
      Debentures are converted, our payment obligation on our outstanding debt in
      2009
      will be nearly $6 million.




28




The
      Secured Debentures issued in April and May 2007 are secured by all of our shares
      in Quintessence Photonics Corporation, the operating subsidiary which owns
      all
      of our operating assets. In addition, all of our assets and intellectual
      property is pledged as collateral on certain indebtedness. As a result, it
      may
      be difficult or impossible for us to borrow money as we have no collateral
      to
      provide for any loan.


The
        Company is currently offering a minimum of $500,000 and up to maximum of
        $3,500,000 in a private placement (the “Convertible Debenture Financing”) of its
        convertible unsecured debentures (the “Debentures”) and warrants (the
“Warrants”). The debentures may be converted into shares of the Company’s common
        stock at a price of $1.05 per share; the warrants may be exercised any time
        during the next five years for shares of the Company’s common stock at an
        exercise price of $1.05 per share. The convertible debentures are being offered
        at a 10% original issue discount. The Convertible Debenture Financing is
        being
        effected through a private placement offered solely to accredited investors
        as
        that term is defined in Rule 501 of Regulation D promulgated under the
        Securities Act of 1933 (the “Securities Act”). The convertible debentures and
        warrants are not being registered under Section 5 of the Securities Act and
        may
        not be offered for sale, sold or resold in the United States absent such
        registration, except pursuant to an applicable exemption from such registration
        requirements.




While
      we
      anticipate that the proceeds from the Convertible Debenture Financing will
      meet
      our immediate cash requirements, we expect to seek additional financing in
      the
      near future. If we issue additional equity securities to raise funds, the
      ownership percentage of our existing stockholders would be reduced. New
      investors may demand rights, preferences or privileges senior to those of
      existing holders of common stock. If we cannot raise the needed funds, we might
      be forced to make substantial reductions in our operating expenses, which could
      adversely affect our ability to implement our current business plan and
      ultimately our viability as a company.




Our
      consolidated financial statements have been prepared assuming that the Company
      will continue as a going concern. The factors described above raise substantial
      doubt about our ability to continue as a going concern. Our consolidated
      financial statements do not include any adjustments that might result from
      this
      uncertainty. Our independent registered public accounting firm has included
      an
      explanatory paragraph expressing doubt about our ability to continue as a going
      concern in their audit report for the fiscal years ended December 31, 2007
      and
      2006.





Our
      current obligations require us to make the following payments over the next
      five
      years including principal and interest:




**Payments
      by Period**





Remainder of
              2008
            
            2009
            
            2010 and
              BeyondSubordinated
                Secured Notes Payable
            
            
            89,674
            
            
            —
            
            
            —Finisar
                Secured Note Payable
            
            
            653,411
            
            
            5,653,408
            
            
            —Secured
                Equipment Financing
            
            
            197,910
            
            
            178,180
            
            
            221,250April
                Secured Debentures
            
            
            587,128
            
            
            8,056,707
            
            
            —May
                Secured Debentures
            
            
            794,925
            
            
            10,390,628
            
            
            —Total
            
            $
            2,323,048
            
            $
            24,278,923
            
            $
            221,250




Between
      April 3 and April 23, 2008, holders of our April and May Debentures converted
      $703,267 of principal into 669,778 shares of common stock. These conversions
      reduce the amount of principal that is to be repaid to the debenture holders
      by
      the Company during 2009. The table above reflects these conversions and the
      reduction in principal that is no longer outstanding. Following these
      conversions, there were 39,346,561 shares of common stock
      outstanding.




29





**Financing
      History**




We
      secured our first round of equity financing in August 2001, led by Finisar
      Corporation (NASDAQ: FNSR), a telecommunications component manufacturer,
      headquartered in Sunnyvale, California. Finisar invested $5 million and DynaFund
      Ventures invested $2 million in our preferred stock. Other investors, including
      small funds and individuals, invested $2.03 million in the first round of
      financing. We issued Series A Preferred Stock at a price of $2.8466 per share
      to
      the investors.




In
      addition to Finisar’s equity investment, Finisar made a five-year term loan to
      us for $7 million, closing in two tranches between August 2001 and January
      2002.
      The total investment of Finisar in our Company was $12 million, including the
      preferred equity and debt. The total equity and debt capital invested in our
      Company, as of January 2002, was $16 million.




In
      the
      third quarter of 2003, we raised a second round of equity financing. Finisar
      converted the $5 million remaining principal balance on their term loan into
      our
      Series B Preferred Stock and we raised an additional $2.8 million in new cash.
      The price per share of Series B Preferred Stock was $3.118998. Three of the
      five
      members of the Board of Directors at that time, founders Dr. Ungar and Mr.
      Lintz
      and independent director, Dr. Israel Ury, each purchased preferred stock in
      the
      Series B round of financing. As a condition to Finisar’s investment in Series B
      Preferred Stock, we granted Finisar a non-exclusive royalty free perpetual
      license to our existing and future intellectual property pursuant to a certain
      License Agreement, dated September 16, 2003, by and between Quintessence and
      Finisar (“License Agreement”). The License Agreement allowed for termination by
      us by paying a fee on or before September 18, 2008. We subsequently terminated
      the license by issuing a promissory note in the amount of $6 million to Finisar
      as of September 18, 2006. As of March 31, 2008, the outstanding principal
      balance of the Finisar secured note was $5,536,211.




In
      the
      second quarter of 2004, we entered into a senior secured two-year note
      transaction with various investors and raised $3.25 million. We issued 2,437,500
      warrants to purchase common stock to the lenders as part of this transaction.
      The exercise price of these warrants was initially $3.75 per share. In the
      second quarter of 2005, approximately $2.1 million of the $2.4 million
      outstanding balance was extended for an additional year. We issued an additional
      840,000 warrants to purchase common stock as part of this transaction, and
      adjusted the exercise price of 2,325,000 warrants to $1.25 per share in January
      2006 upon the closing of the Brookstreet Tranche I offering. The new exercise
      price was subject to downward adjustment if future financings were completed
      at
      a price lower than $3.75 per share. The exercise price was ultimately fixed
      at
      $1.25 per share at the time of the Share Exchange in May 2006. The largest
      participant in the note transaction, investing $2.5 million, was Envision
      Partners of which QPC’s Chief Financial Officer, Mr. Lintz, is a 50% partner. In
      April 2007, $554,631 of principal was exchanged for April Secured Debentures.
      The remaining balance was paid in full as of May 31, 2007.




From
      the
      fourth quarter of 2004 through the first quarter of 2005, we raised $5.9 million
      in a third round of equity financing. Approximately 60 accredited investors
      participated in this round. We issued Series C Preferred Stock at a price of
      $3.75 per share and warrants to purchase common stock with an exercise price
      of
      $3.75 per share. In subsequent transactions from November 2005 to June 2006,
      all
      but 222,749 warrants were exchanged for common stock in a ratio of three shares
      for four warrants. The exercise price of remaining warrants was adjusted from
      $3.75 to $1.25 per share.




In
      the
      third quarter of 2005, we raised $221,000 through a sale of our common stock
      to
      eight high net worth individuals at a price of $1.00 per share.




In
      the
      third quarter of 2005 we entered into a subordinated secured note with various
      investors for $1,280,000. In April 2007, six of the note holders converted
      the
      remaining principal balance of their notes into the April Secured Debentures.
      As
      of June 30, 2007, the outstanding principal balance was $230,000. We issued
      320,000 warrants to purchase common stock to these lenders. The exercise price
      of the warrants and the conversion price of the loan are variable. The initial
      price was $3.75 per share and is to be adjusted downward if there are any
      subsequent financings of at least $1,000,000 in which stock is sold for less
      than $3.75 per share. The exercise price for the warrants and the conversion
      price for the loan were reset to $1.05 per share in conjunction with the April
      Secured Debenture offering. The “floor” of minimum price that is applicable to
      the exercise price of the warrants and the conversion price of the loan is
      $0.90
      per share. In addition to these warrants issued at the time of the loan, we
      offered the lenders the option of receiving an additional 341,325 warrants
      on
      the same terms if they extended their loan for an additional three years at
      any
      time during the term of the loan. To date, one lender has given us notice of
      extension of his $100,000 loan and has been issued 26,666 additional warrants.




30




In
      November 2005, we offered each holder of preferred stock (Series A, B and C)
      a
      share dividend of one share of common stock per share of preferred stock that
      they owned as consideration for giving management their proxy and power of
      attorney to exchange all of their securities of Quintessence for shares of
      a
      publicly traded company, subject to reporting requirements of the Commission
      in
      a reverse merger transaction. We offered additional incentive to the Series
      C
      investors by offering to either (1) exchange the warrants that they received
      as
      part of their investment in the Series C preferred stock, for common stock
      or
      (2) lower the exercise price on the warrants from $3.75 to $1.25 per share.




In
      November 2005, we raised $500,000 pursuant to a 10% secured note financing
      with
      Jeffrey Ungar, our Chief Executive Officer, and George Lintz, our Chief
      Financial Officer. Pursuant to these bridge notes, we issued these lenders
      warrants to purchase 320,000 shares of common stock at $1.25 per share (“Bridge
      Warrants”). In connection with extensions of the maturity date of these bridge
      notes from January 2006 to April 2006, we granted 900,000 additional Bridge
      Warrants to these lenders. The bridge notes were paid in full as of April 25,
      2006.




In
      January 2006, through a private placement offering, referred to as the
      Brookstreet Tranche I offering, we raised $2,862,630 from the sale of 572,526
      units of our securities, each unit consisting of four shares of common stock
      and
      one warrant to purchase one share of common stock at $1.50 per share (for a
      total of 2,290,104 shares of common stock and 572,526 warrants).




In
      a
      series of private placement closings between March 31, 2006 and September 30,
      2006, referred to as the Brookstreet Tranche II offering, we raised $11,795,721
      from the sale of 9,436,577 shares of common stock at a price of $1.25 per share.
      In addition, the Company issued warrants to purchase 2,345,341 shares of the
      Company’s common stock to Brookstreet in connection with the underwriting.




Purchasers
      in the Brookstreet Tranche I and Tranche II were granted registration rights.
      The Company filed and later withdrew, prior to effectiveness, a registration
      statement filed on behalf of the Brookstreet investors. None of the Brookstreet
      investors are currently seeking registration of their shares.




On
      February 8, 2007, the Company completed a financing transaction with Boston
      Financial and Equity Corporation, a financing company, which was structured
      as
      sale and leaseback of certain manufacturing equipment that had been purchased
      by
      the Company between July and December 2006 for $500,000. The gross amount of
      the
      loan was $500,000, and the Company paid a security deposit of $125,000 and
      first
      and last month’s lease payment of $43,980. Monthly lease payments including
      interest at 33.65% per annum are $21,990 through July 2009 and $4,850 through
      January 2012.




In
      April
      2007, we issued to certain investors secured convertible debentures in the
      aggregate principal amount of $7,976,146 at an original issue discount of 10%.
      The April Secured Debentures are convertible into shares of the Company’s common
      stock at an initial conversion price of $1.05 per share, subject to certain
      adjustments. In addition, the Company issued to the investors five year warrants
      to purchase up to 11,394,494 shares of the common stock at an exercise price
      of
      $1.05 per share, subject to certain adjustments. The aggregate purchase price
      for the April Secured Debentures and the warrants was $ 7,178,531.




The
      purchase price consisted of (i) $ 5,013,900 in cash, (ii) outstanding notes
      in
      the aggregate principal amount of $1,604,631 which were exchanged for April
      Secured Debentures, (iii) promissory notes for the aggregate principal sum
      of
      $100,000 payable to the Company, that are due in 30 days and (iv) promissory
      notes for the aggregate principal sum of $460,000 payable to the Company, that
      are due in 45 days. The Company paid the following fees (including fees for
      advisors, placement agents and finders) in connection with the April 2007
      Debenture Offering: (i) $404,068 in cash, (ii) warrants to purchase up to
      212,796 shares of common stock, and (iii) 100,000 shares of common
      stock.




31




In
      May
      2007, we issued to certain investors secured convertible debentures in the
      aggregate principal amount of $10,554,500 at an original issue discount of
      10%.
      The May Secured Debentures are convertible into shares of the Company’s common
      stock at an initial conversion price of $1.05 per share, subject to certain
      adjustments. In addition the Company issued to the investors in the May Secured
      Debentures five year warrants to purchase up to 15,077,857 shares of common
      stock at an exercise price of $1.05, subject to certain adjustments. The
      aggregate purchase price for the May Secured Debentures and warrants was
      $9,500,000 paid in cash. The Company paid the following fees (including fees
      for
      advisors, placement agents and finders) in connection with the May 2007
      Debenture Offering: (i) $795,000 in cash, and (ii) warrants to purchase up
      to
      2,571,171 shares of common stock.





**Capital
      Expenditures**




From
      January 1, 2008 to March 31, 2008, we spent approximately $75,000 on
      manufacturing equipment, office equipment, computer equipment and software,
      and
      furniture. We expect our capital expenditures to increase based on the growth
      of
      our operations, and increased orders and personnel. We plan to expand our
      manufacturing area by up to 10,000 square feet in order to meet anticipated
      growth in our sales during 2008. Our facility has warehouse space that is
      contiguous to our present manufacturing area which we plan to use for the
      manufacturing area expansion. We expect the expansion to cost in the range
      of $1
      million to $3 million.




**Recent
      Accounting Pronouncements**




In
      December 2007, the FASB issued FASB Statement No. 141 (R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. SFAS 141(R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. Earlier
      adoption is prohibited.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160
      establishes accounting and reporting standards that require that the ownership
      interests in subsidiaries held by parties other than the parent be clearly
      identified, labeled, and presented in the consolidated statement of financial
      position within equity, but separate from the parent’s equity; the amount of
      consolidated net income attributable to the parent and to the noncontrolling
      interest be clearly identified and presented on the face of the consolidated
      statement of income; and changes in a parent’s ownership interest while the
      parent retains its controlling financial interest in its subsidiary be accounted
      for consistently. SFAS No. 160 also requires that any retained noncontrolling
      equity investment in the former subsidiary be initially measured at fair value
      when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure
      requirements to identify and distinguish between the interests of the parent
      and
      the interests of the noncontrolling owners. SFAS No. 160 applies to all entities
      that prepare consolidated financial statements, except not-for-profit
      organizations, but will affect only those entities that have an outstanding
      noncontrolling interest in one or more subsidiaries or that deconsolidate a
      subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years, beginning on or after December 15, 2008. Earlier
      adoption is prohibited. SFAS No. 160 must be applied prospectively as of the
      beginning of the fiscal year in which it is initially applied, except for the
      presentation and disclosure requirements. The presentation and disclosure
      requirements are applied retrospectively for all periods presented.





In
      March
      2008, the FASB issued SFAS No. 161 “Disclosures About Derivative Instruments and
      Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS
      161 amends SFAS 133 by requiring expanded disclosures about an entity’s
      derivative instruments and hedging activities. SFAS 161 requires qualitative
      disclosures about objectives and strategies for using derivatives, quantitative
      disclosures about fair value amounts of and gains and losses on derivative
      instruments, and disclosures about credit-risk-related contingent features
      in
      derivative instruments. SFAS 161 is effective for the Company as of January
      1,
      2009. The Company is currently assessing the impact of SFAS 161 on its
      consolidated financial statements.





32




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements.





**RISK
      FACTORS THAT MAY AFFECT FUTURE PERFORMANCE**




You
      should carefully consider the following risk factors, the other information
      included herein and the information included in our other reports and filings.
      Our business, financial condition, and the trading price of our common stock
      could be adversely affected by these and other risks.





RISKS
      OF
      THE BUSINESS





**Our
      consolidated**  **financial
      statements have been prepared assuming that the Company will continue as a
      going
      concern.** The
      factors described below raise substantial doubt about our ability to continue
      as
      a going concern. Our consolidated financial statements do not include any
      adjustments that might result from this uncertainty. Our independent registered
      public accounting firm has included an explanatory paragraph expressing doubt
      about our ability to continue as a going concern in their audit reports for
      the
      fiscal years ended December 31, 2007 and 2006.




**We
      have relied upon outside financing to fund our operations. As a result, our
      ability to sustain and build our business has depended upon our ability to
      raise
      capital from investors and we do not know if we will be able to continue to
      raise sufficient funds from investors.** We have
      operated on a negative cash flow basis since our inception and we have never
      earned a profit. We anticipate that we will continue to incur losses for at
      least the next 12 months and that we will continue to operate on a negative
      cash
      flow basis for at least the next 12 months.  We have financed our
      operations to date through the sale of stock, other securities and certain
      borrowings.




In
      April
      and May 2007 we received net proceeds of approximately $13,900,000 through
      the
      sale of Secured Debentures and common stock purchase warrants. Most of these
      funds have been used to sustain our operations and we need to raise additional
      funds to continue operations and to meet our debt obligations as discussed
      below.




If
      we
      raise additional funds through the issuance of equity securities, this may
      cause
      significant dilution of our common stock, and holders of the additional equity
      securities may have rights senior to those of the holders of our common stock.
      If we obtain additional financing by issuing debt securities, the terms of
      these
      securities could restrict or prevent us from paying dividends and could limit
      our flexibility in making business decisions.




**We
      do not have sufficient revenues to service our debt.** As of
      April 30, 2008, we had $23,791,013 of debt secured by our fixed assets and
      intellectual property. Of this amount, $7,828,379 accrues interest at a rate
      of
      10% per annum and requires monthly interest payments until April 2009, when
      the
      balance is due in full; $9,999,000 accrues interest at a rate of 10% per annum
      and requires monthly interest payments until May 2009 when the balance is due
      in
      full; $68,169 accrues interest at a rate of 10% per annum and requires monthly
      payments until September 30, 2008; $5,536,211 accrues interest at a rate of
      10%
      per annum and requires monthly payments until September 18, 2009 at which time
      the balance of $5,031,872 is due and payable; and $359,254 accrues interest
      at a
      rate of 33.65% and requires monthly payments until January 2012. If we are
      unable to service our debt, our assets, including our patents and other
      intellectual property, may be subject to foreclosure. Accordingly, if the
      Secured Debentures are not converted we will default unless we are able to
      raise
      additional funds through the sale of new securities. It is our expectation
      that
      most or all of the Secured Debentures will be converted into shares of common
      stock. However, we can not predict how many Secured Debentures will be converted
      and, even if all the Secured Debentures are converted, we will still owe more
      than $5,800,000 in 2009. We do not currently have the ability to service this
      debt without obtaining additional cash resources. If we are unable to service
      our debt, our assets, including our patents and other intellectual property,
      may
      be subject to foreclosure and our common stock may become worthless. We are
      currently exploring a number of alternatives to address our inability to service
      our debt. A number of these alternatives would require the consent of 67% or
      our
      Secured Debentures and will also require the consent of 67% of the debentures
      to
      be sold in the Convertible Note Financing. We do not know if such consents
      can
      be obtained, or if an acceptable financing plan can be implemented to enable
      us
      to service our outstanding debt. In addition, if our revenues fail to increase
      sufficiently, our debt service requirements may reduce our working capital
      and,
      therefore, adversely affect our ability to operate our business.




33




**Failure
      to collect our accounts receivable will diminish our cash resources, resulting
      in increased reliance upon outside sources of financing to meet our cash
      requirements.** At
      March
      31, 2008, we had accounts receivable of approximately $2,900,000, with an
      average age of 58 days. During the quarter, we recorded an allowance for
      doubtful accounts of $225,000 in connection with the bankruptcy filing of one
      of
      our major customers. We believe that financial difficulties and credit
      constraints faced by some of our customers may result in additional allowances
      for doubtful accounts. As an emerging company seeking to establish new customer
      relationships, we generally do not impose strict credit requirements for new
      customers, nor do we generally require deposits or stand-by letters of credit
      before accepting purchase orders. As a result, we may face an elevated risk
      of
      non-payment or slow payment from certain customers, particularly during
      difficult economic times. At March 31, 2008, three customers accounted for
      a
      total of 68% of the accounts receivable balance, and each of these customers
      individually accounted for more than 10% of the accounts receivable balance.
      Failure to timely collect our accounts receivable will result in our having
      less
      cash available to fund our operations and will increase our dependence upon
      outside sources for financing.




**We
      are an early stage company with a short operating history and limited
      revenues.** We were
      formed in November 2000. Since that time, we have engaged in the formulation
      of
      a business strategy and the design and development of technologically advanced
      products. We have recorded limited revenues from various government-funded
      research programs, and we have generated only limited revenues from the sale
      of
      products. Our ability to implement a successful business plan remains unproven
      and no assurance can be given that we will ever generate sufficient revenues
      to
      sustain our business.




**Our
      products are not proven.** We are
      currently engaged in the design and development of laser diode products for
      certain medical, industrial and defense applications. Our first commercial
      sales
      occurred in 2004. Our most advanced technologies, including without limitation,
      our “Generation III” products, are in the design or prototype stage. While we
      have shipped Generation I and Generation II products, most of our products
      do
      not have an established commercial track record. We have received only a limited
      number of purchase orders for our products and we only have a limited number
      of
      contractual arrangements to sell our products.





**We
      are dependent on our customers and vulnerable to their sales and production
      cycles.** For the
      most part, we do not sell end-user products. We sell laser components that
      are
      incorporated by our customers into their products. Therefore, we are vulnerable
      to our customers’ prosperity and sales growth. Failure of our customers to sell
      their products will ultimately hurt their demand for our products, and thus,
      have a material adverse effect on our revenues.


**We
        depend on a limited number of customers for a substantial portion of our
        revenue, and the loss of, or a significant reduction in orders from, any
        key
        customer could significantly reduce our revenue.** The
        loss
        of any of our key customers, or a significant reduction in sales to any one
        of
        them, could significantly reduce our revenue and adversely affect our business.
        Three large customers accounted for 77% and 63% of our total revenue for
        the
        first quarter of 2008 and 2007, respectively.  The largest three customers
        were different customers during the first quarter of 2008 compared to the
        first
        quarter of 2007.  In 2007, four customers accounted for 33% of our total
        revenue.   As an emerging company, we are dependent on sales to
        certain large customers, some of whom are in turn development stage companies.
        Our operating results in the foreseeable future will continue to depend on
        our
        ability to effect sales to these customers, as well as the ability of these
        customers to sell products that utilize our technologies and products. In
        the
        future, these customers may decide not to incorporate our technologies for
        use
        in their systems, purchase fewer products than they did in the past or alter
        their purchasing patterns. The loss of, or a significant reduction in purchases
        by, any of our major customers could adversely affect our business, financial
        condition, results of operations and cash flows.


****


**Unusually
      long sales cycles may cause us to incur significant expenses without offsetting
      revenue.** Customers often view the purchase of our products as a significant strategic
      decision. Accordingly, customers carefully evaluate and test our products before
      making a decision to purchase them, resulting in a long sales cycle. While
      our
      customers are evaluating our products and before they place an order, we may
      incur substantial expenses for sales and marketing and research and development
      to customize our products to the customer's needs. After evaluation, a potential
      customer may not purchase our products. As a result, these long sales cycles
      may
      cause us to incur significant expenses without ever receiving revenue to offset
      those expenses.




**The
      markets for our products are subject to continuing change that may impair our
      ability to successfully sell our products.** The
      markets for laser diode products are volatile and subject to continuing change.
      For example, since 2001, the market for telecommunications and data
      communications products has been severely depressed while a more robust market
      for defense and homeland security applications has developed. We must
      continuously adjust our marketing strategy to address the changing state of
      the
      markets for laser diode products. We may not be able to anticipate changes
      in
      the market and, as a result, our product strategies may be
      unsuccessful.




**Our
      products may become obsolete if we are unable to stay abreast of technological
      developments** .
      The
      photonics industry is characterized by rapid and continuous technological
      development. If we are unable to stay abreast of such developments, our products
      may become obsolete. We lack the substantial research and development resources
      of some of our competitors. This may limit our ability to remain technologically
      competitive.




34




**We
      are dependent for our success on a few key executive officers. Our inability
      to
      retain those officers would impede our business plan and growth strategies,
      which would have a negative impact on our business and the value of your
      investment.** Our
      success depends on the skills, experience and performance of key members of
      our
      management team. We are heavily dependent on the continued services of Jeffrey
      Ungar, our Chief Executive Officer, George Lintz, our Chief Financial Officer
      and Chief Operating Officer and Paul Rudy, our Senior Vice President of
      Marketing and Sales. We do not have long-term employment agreements with any
      of
      the members of our senior management team. Each of those individuals may
      voluntarily terminate his employment with the Company at any time upon short
      notice. Were we to lose one or more of these key executive officers, we would
      be
      forced to expend significant time and money in the pursuit of a replacement,
      which would result in both a delay in the implementation of our business plan
      and the diversion of limited working capital. We maintain $8.0 million and
      $2.0
      million key man insurance policies on Mr. Ungar and Mr. Lintz, respectively.




**We
      are also dependent for our success on our ability to attract and retain
      technical personnel, sales and marketing personnel and other skilled
      management.** Our
      success depends to a significant degree upon our ability to attract, retain
      and
      motivate highly skilled and qualified personnel. Failure to attract and retain
      necessary technical personnel, sales and marketing personnel and skilled
      management could adversely affect our business. If we fail to attract, train
      and
      retain sufficient numbers of these highly qualified people, our prospects,
      business, financial condition and results of operations will be materially
      and
      adversely affected. Although we intend to issue stock options or other
      equity-based compensation to attract and retain employees, such incentives
      may
      not be sufficient to attract and retain key personnel.




**Our
      business is dependent upon proprietary intellectual property
      rights.** We have
      employed proprietary information to design our products. We believe that our
      proprietary technology is critical to our ability to compete. We seek to protect
      our intellectual property rights through a combination of patent filings,
      trademark registrations, confidentiality agreements and inventions agreements.
      However, no assurance can be given that such measures will be sufficient to
      protect our intellectual property rights. Competitors may challenge the validity
      of patents we obtain. They may also contend that our patents do not prevent
      them
      from selling products that are similar but not identical to our products. Patent
      litigation is expensive and time-consuming. Competitors may seek to take
      advantage of our limited financial resources by contesting our patent and other
      intellectual property rights. If we cannot protect our rights, we may lose
      our
      competitive advantage. Moreover, if it is determined that our products infringe
      on the intellectual property rights of third parties, we may be prevented from
      marketing our products.




**We
      currently rely on R&D Contracts with the U.S. Government.** Currently,
      a significant part of our near term revenue is expected to be derived from
      research contracts from the U.S. Government. Changes in the priorities of the
      U.S. Government may affect the level of funding of certain defense and homeland
      security programs. Changes in priorities of government spending may diminish
      interest in sponsoring research programs in our area of expertise.  For
      example, current defense priorities emphasize support for on-going ground
      operations in Iraq and Afghanistan which appears to have delayed a number of
      programs that might have resulted in additional awards to the Company. In
      addition, budgetary constraints faced by defense and homeland security agencies
      may result in cancellation or delay of programs in which we have an interest,
      thereby diminishing our prospects for future Government revenues.




**We
      face intense competition, including competition from companies with
      significantly greater resources than ours, and if we are unable to compete
      effectively with these companies, our market share may not grow and our business
      could be harmed.** The
      laser diode industry is highly competitive with numerous competitors from
      well-established manufacturers to innovative start-ups. A number of our
      competitors have significantly greater financial, technological, engineering,
      manufacturing, marketing and distribution resources than we do. Their greater
      capabilities in these areas may enable them to compete more effectively on
      the
      basis of price and production and more quickly develop new products and
      technologies. In addition, new companies may enter the markets in which we
      compete, further increasing competition in the laser industry. As we expand
      our
      marketing efforts, we expect to increasingly compete with companies that produce
      diode-pumped solid state and fiber lasers. We may face substantial resistance
      from prospective customers who are reluctant to change incumbent technologies.
      We believe that our ability to compete successfully and grow our business
      depends on a number of factors, including the strength of our technology
      platform and related intellectual property rights, the capabilities of our
      scientists and technical staff and our reputation for product innovation and
      reliability. We may not be able to compete successfully in the future, and
      increased competition may result in price reductions, reduced profit margins,
      lost growth opportunities and an inability to generate cash flows that are
      sufficient to maintain or expand our development and marketing of new products.




35




**If
      our facilities were to experience catastrophic loss, our operations would be
      seriously harmed.** Our
      facilities could be subject to a catastrophic loss from fire, flood, earthquake
      or terrorist activity. All of our research and development activities,
      manufacturing, our corporate headquarters and other critical business operations
      are located near major earthquake faults in Sylmar, California, an area with
      a
      history of seismic events. Any such loss at this facility could disrupt our
      operations, delay production, and revenue and result in large expenses to repair
      or replace the facility. While we have obtained insurance to cover most
      potential losses, we cannot assure you that our existing insurance coverage
      will
      be adequate against all other possible losses.




**The
      relative lack of public company experience of our management team may put us
      at
      a competitive disadvantage.** Our **** management
      team lacks public company experience, which could impair our ability to comply
      with legal and regulatory requirements such as those imposed by Sarbanes-Oxley
      Act of 2002. The individuals who now constitute our senior management have
      never
      had responsibility for managing a publicly traded company. Such responsibilities
      include complying with federal securities laws and making required disclosures
      on a timely basis. Our senior management may not be able to implement programs
      and policies in an effective and timely manner that adequately respond to such
      increased legal, regulatory compliance and reporting requirements. For example,
      we concluded that our disclosure controls were not effective as of June 30,
      2006
      and September 30, 2006. Our failure to comply with all applicable requirements
      could lead to the imposition of fines and penalties and distract our management
      from attending to the growth of our business. In addition, our failure to comply
      with applicable requirements could result in re-statements or other disclosures
      which could result in a loss of investor confidence in our financial reports
      and
      a decline in our stock price.





MARKET
      RISKS.





**Our
      common stock is thinly traded, so you may be unable to sell at or near ask
      prices or at all if you need to sell your shares to raise money or otherwise
      desire to liquidate your shares.** Prior to
      the Share Exchange in May 2006, QPC’s shares were not publicly traded. Through
      this Share Exchange, QPC has essentially become public without the typical
      initial public offering procedures which usually include a large selling group
      of broker-dealers who may provide market support after going public. Thus,
      we
      have undertaken efforts to develop market recognition for our stock. As of
      April
      30, 2008, we had approximately 1,800 stockholders and our market capitalization
      was approximately $29,116,455. As a result, there is limited market activity
      in
      our stock and we are too small to attract the interest of many brokerage firms
      and analysts. We cannot give you any assurance that a broader or more active
      public trading market for our common stock will develop or be sustained. While
      we are trading on the OTC Bulletin Board, the trading volume we will develop
      may
      be limited by the fact that many major institutional investment funds, including
      mutual funds, as well as individual investors follow a policy of not investing
      in Bulletin Board stocks and certain major brokerage firms restrict their
      brokers from recommending Bulletin Board stocks because they are considered
      speculative, volatile and thinly traded.





**Future
      sales of our equity securities could put downward selling pressure on our stock
      and adversely affect the stock price.** Future
      sales of substantial amounts of our equity securities in the public market,
      or
      the perception that such sales could occur, could put downward selling pressure
      on our stock and adversely affect the market price of our common stock. This
      downward pressure could be magnified as a result of the large number of shares
      issuable upon the exercise of outstanding warrants, the conversion of our
      convertible debt and the exercise of outstanding options. We have filed a
      registration statement that has been declared effective with respect to the
      shares issuable upon conversion of our Secured Debentures. Certain of our
      outstanding warrants, including the warrants issued in connection with the
      April
      2007 Debenture Offering and the May 2007 Debenture Offering, have registration
      rights. As of April 30, 2008, 37,712,783 shares of our common stock are issuable
      upon exercise of warrants at an exercise price ranging between $1.05 to $1.50,
      17,043,379 shares of our common stock are issuable upon the conversion of our
      convertible debt at a conversion price of $1.05 and 5,017,666 shares of our
      common stock are issuable upon exercise of options. In order to meet our
      on-going cash requirements, we might restructure our current debt in a manner
      that would increase the number of shares issuable upon conversion of the Secured
      Debentures. In addition, any restructuring might increase the likelihood that
      current holders of our Secured Debentures and warrants will exercise their
      rights to acquire shares of our common stock. Moreover, the notes and warrants
      being offered in the Convertible Note Financing may be converted into, or
      exercised for shares of our common stock. We might issue additional securities
      that could be converted into, or exercised to acquire, shares of our common
      stock. The prospect of such additional shares being sold into the market could
      result in further downward pressure on our stock price.




36




**The
      application of the “penny stock” rules to our common stock could limit the
      trading and liquidity of the common stock, adversely affect the market price
      of
      our common stock and increase your transaction costs to sell those
      shares.** As long
      as the trading price of our common stock is below $5 per share, the open-market
      trading of our common stock will be subject to the “penny stock” rules, unless
      we otherwise qualify for an exemption from the “penny stock” definition. The
“penny stock” rules impose additional sales practice requirements on certain
      broker-dealers who sell securities to persons other than established customers
      and accredited investors (generally those with assets in excess of $1,000,000
      or
      annual income exceeding $200,000 or $300,000 together with their spouse). These
      regulations, if they apply, require the delivery, prior to any transaction
      involving a penny stock, of a disclosure schedule explaining the penny stock
      market and the associated risks. Under these regulations, certain brokers who
      recommend such securities to persons other than established customers or certain
      accredited investors must make a special written suitability determination
      regarding such a purchaser and receive such purchaser’s written agreement to a
      transaction prior to sale. These regulations may have the effect of limiting
      the
      trading activity of our common stock, reducing the liquidity of an investment
      in
      our common stock and increasing the transaction costs for sales and purchases
      of
      our common stock as compared to other securities.




**The
      market price for our common stock may be particularly volatile given our status
      as a relatively unknown company with a small and thinly traded public float,
      limited operating history and lack of profits which could lead to wide
      fluctuations in our share price.** The
      market price of our common stock could be subject to wide fluctuations in
      response to:




·
            quarterly
                variations in our revenues and operating expenses;





·
            announcements
                of new products or services by us;





·
            fluctuations
                in interest rates;·
            significant
                sales of our common stock, including “short” sales;





·
            the
                operating and stock price performance of other companies that investors
                may deem comparable to us; and





·
            news
                reports relating to trends in our markets or general economic conditions.




The
      stock
      market in general, and the market prices for penny stock companies in
      particular, have experienced volatility that often has been unrelated to the
      operating performance of such companies. These broad market and industry
      fluctuations may adversely affect the price of our stock, regardless of our
      operating performance. In addition, there are approximately 31,341,662 shares
      of
      our common stock which were sold in private transactions, which are now eligible
      for sale in accordance with Rule 144 under the Securities Act.




Stockholders
      should be aware that, according to SEC Release No. 34-29093, the market for
      penny stocks has suffered in recent years from patterns of fraud and abuse.
      Such
      patterns include: (1) control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; (2)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (3) boiler room practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (4) excessive and undisclosed bid-ask differential and markups
      by
      selling broker-dealers; and (5) the wholesale dumping of the same securities
      by
      promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. Our management is aware of the abuses that have
      occurred historically in the penny stock market. Although we do not expect
      to be
      in a position to dictate the behavior of the market or of broker-dealers who
      participate in the market, management will strive within the confines of
      practical limitations to prevent the described patterns from being established
      with respect to our securities. The occurrence of these patterns or practices
      could increase the volatility of our share price.




37




**Limitations
      on director and officer liability and indemnification of our officers and
      directors by us may discourage stockholders from bringing suit against a
      director.** QPC’s
      Articles of Incorporation and Bylaws provide, with certain exceptions as
      permitted by governing state law, that a director or officer shall not be
      personally liable to us or our stockholders for breach of fiduciary duty as
      a
      director, except for acts or omissions which involve intentional misconduct,
      fraud or knowing violation of law, or unlawful payments of dividends. These
      provisions may discourage stockholders from bringing suit against a director
      for
      breach of fiduciary duty and may reduce the likelihood of derivative litigation
      brought by stockholders on our behalf against a director. In addition, QPC’s
      Articles of Incorporation and Bylaws provide for mandatory indemnification
      of
      directors and officers to the fullest extent permitted by governing state law.




**We
      do not expect to pay dividends for the foreseeable future, and we may never
      pay
      dividends.** We
      currently intend to retain any future earnings to support the development and
      expansion of our business and do not anticipate paying cash dividends in the
      foreseeable future. Our payment of any future dividends will be at the
      discretion of our Board of Directors after taking into account various factors,
      including but not limited to, our financial condition, operating results, cash
      needs, growth plans and the terms of any credit agreements that we may be a
      party to at the time. In addition, our ability to pay dividends on our common
      stock may be limited by state law. Accordingly, investors must rely on sales
      of
      their common stock after price appreciation, which may never occur, as the
      only
      way to realize their investment. In addition, the Company is contractually
      prohibited from paying dividends based on the terms of certain outstanding
      indebtedness.




**Our
      executive officers and directors beneficially own or control at least 20% of
      our
      outstanding common stock, which may limit your ability and the ability of our
      other stockholders, whether acting alone or together, to propose or direct
      the
      management or overall direction of our Company.** Additionally, this concentration of ownership could discourage or prevent a
      potential takeover of our Company that might otherwise result in you receiving
      a
      premium over the market price for your shares. We estimate that approximately
      20% of our outstanding shares of common stock is beneficially owned and
      controlled by a group of insiders, including our directors and executive
      officers. Such concentrated control of the Company may adversely affect the
      price of our common stock. Our principal stockholders may be able to control
      matters requiring approval by our stockholders, including the election of
      directors, mergers or other business combinations. Such concentrated control
      may
      also make it difficult for our stockholders to receive a premium for their
      shares of our common stock in the event we merge with a third party or enter
      into different transactions which require stockholder approval. These provisions
      could also limit the price that investors might be willing to pay in the future
      for shares of our common stock. In addition, certain provisions of Nevada law
      could have the effect of making it more difficult or more expensive for a third
      party to acquire, or of discouraging a third party from attempting to acquire,
      control of us. Accordingly, the existing principal stockholders together with
      our directors and executive officers will have the power to control the election
      of our directors and the approval of actions for which the approval of our
      stockholders is required. If you acquire shares of our common stock, you may
      have no effective voice in the management of the Company.





**Item
      3 Quantitative and Qualitative Disclosures About Market
      Risk**





Not
      applicable.





**Item
      4 Control and Procedures**




Not
        applicable.




38





**Item
      4T Controls and Procedures**


(a)
              Under
                  the supervision and with the participation of our management, including
                  our Chief Executive Officer and our Chief Financial Officer, we
                  have
                  evaluated the effectiveness of our disclosure controls and procedures
                  (as
                  defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange
                  Act
                  of 1934, as amended). Based upon that evaluation, our Chief Executive
                  Officer and our Chief Financial Officer concluded that our disclosure
                  controls and procedures were effective as of the end of the period
                  covered
                  by this quarterly report.(b)
              During
                  the first quarter of 2008, there were no changes in our internal
                  control
                  over financial reporting (as defined in Rule 13a-15(f) under the
                  Securities Exchange Act of 1934) that materially affected, or are
                  reasonably likely to materially affect, our internal control over
                  financial reporting.Because
                of its inherent
                limitations, internal control over financial reporting may not prevent
                or
                detect misstatements. A control system, no matter how well conceived
                or
                operated, can provide only reasonable, not absolute assurance, that
                its
                objectives will be met. In addition, projections of any evaluation
                of
                effectiveness to future periods are subject to the risk that controls
                may
                become inadequate because of changes in conditions, or that the degree
                of
                compliance with the policies and procedures may deteriorate.


39




**PART
      II- Other Information**




**Item
      1 Legal Proceedings**




From
      time
      to time, the Company is involved in legal actions arising in the ordinary course
      of business. We do not believe that any pending legal proceedings, if decided
      adversely to us, would have a material adverse effect upon our business, results
      of operations or financial condition and are not aware of any threatened or
      contemplated proceeding by any governmental authority against our Company.
      Absolute assurance cannot be given that third party assertions will be resolved
      without costly litigation in a manner that is not adverse to the Company's
      financial position, results of operations or cash flows.




Item
      1A Risk Factors


Please
        see the discussion entitled "Risk Factors That May Affect Future Performance"
        under Item 2 Management's Discussion and Analysis of Financial Condition
        and
        Results of Operations of Part I of this Form 10-Q.





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




Not
      applicable




**Item
      3. Defaults Upon Senior Securities**




Not
      applicable




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




Not
      applicable




**Item
      5. Other Information**




Not
      applicable




**Item
      6. Exhibits**





Exhibit
              Number
            
            Description
                of Document2.1
            
            Share
                Exchange Agreement by and among Quintessence, the Company, the
                stockholders of Quintessence, and Julie Morin dated May 12, 2006
                (1)3.1
            
            Articles
                of Incorporation of QPC Lasers, Inc. as filed with the State of Nevada,
                as
                amended. (1)3.2
            
            Bylaws
                of QPC Lasers, Inc. (1)4.1
            
            Registration
                Rights Agreement (2)4.2
            
            Form
                of Investor Warrant (2)4.3
            
            Form
                of Placement Agent Warrant (2)4.4
            
            Form
                of Warrant dated September 2005 (3)




40




4.5
            
            Form
                of Amended and Restated Warrant dated May 2004 (3)4.6
            
            Form
                of Warrant dated April 2005 (3)4.7
            
            Form
                of Consultant Warrant (3)4.8
            
            Form
                of Promissory Note, as amended (4)4.9
            
            Form
                of Warrant issued on or about January 25, 2006 (4)4.10
            
            Secured
                Promissory Note dated September 18, 2006, issued by Quintessence
                to
                Finisar (6)4.11
            
            Form
                of Subordinated Secured Note dated as of August 1, 2005
                (4)4.12
            
            Form
                of Warrant issued in connection with Subordinated Secured Note
                (4)4.13
            
            Form
                of Senior Secured Note dated as of May 24, 2004 (4)4.14
            
            Form
                of Warrant issued in connection with Senior Secured Note (“Original Senior
                Secured Warrant”) (4)4.15
            
            Form
                of Amended and Restated Warrant amending the Original Senior Secured
                Warrant (4)4.16
            
            Form
                of First Amendment to Senior Secured Note dated as of March 24, 2005
                (4)10.1
            
            2006
                Stock Option Plan (2)10.2
            
            Bridge
                Loan Agreement (2)10.3
            
            Real
                Property Lease (2)10.4
            
            License
                Agreement dated September 16, 2003 by and between Quintessence and
                Finisar
                (2)10.5
            
            Form
                of Subscription Agreement (2)10.6
            
            Lock-up
                Agreement by the Company and George Lintz (3)10.7
            
            Lock-up
                Agreement by the Company and Jeffrey Ungar (3)10.8
            
            Purchase
                Agreement between Rafael Ltd. and the Company dated June 6, 2005
                (3)10.9
            
            Subcontract
                Agreement effective as of June 2, 2006 by and between the Company
                and
                Fibertek, Inc. (3)10.10
            
            Agreement
                of Collaboration dated April 27, 2006 between the Company and Telaris,
                Inc. (3) *10.11
            
            Consulting
                Agreement by and between Quintessence and Capital Group Communications,
                Inc. dated as of April 3, 2006 (4)




41




10.12
            
            Loan
                Agreement by and among Quintessence and Jeffrey Ungar and George
                Lintz
                dated as of November 25, 2005 (4)10.13
            
            First
                Amendment to Loan Agreement by and among Quintessence and Jeffrey
                Ungar
                and George Lintz dated as of January 25, 2006 (4)10.14
            
            Security
                Agreement by and among Quintessence and M.U.S.A. Inc., Jeffrey Ungar
                and
                George Lintz dated as of August 1, 2005 (4)10.15
            
            License
                Termination Agreement dated September 18, 2006, by and between
                Quintessence and Finisar(6)10.16
            
            Security
                Agreement dated September 18, 2006, by and between Quintessence and
                Finisar (6)10.17
            
            Form
                of Series C Preferred Stock Offering (Tranche I) Subscription Agreement
                (4)10.18
            
            Form
                of Series C Preferred Stock Offering (Tranche II) Subscription Agreement
                (4)10.19
            
            Security
                Agreement by and between Quintessence and DBA Money USA, as collateral
                agent, dated as of August 1, 2005 (4)10.20
            
            Loan
                Agreement by and among the Quintessence and senior secured lenders
                dated
                as of May 21, 2004 (4)10.21
            
            Security
                Agreement by and between the Company and DBA Money USA, as collateral
                agent, dated as of May 21, 2004 (“Security Agreement regarding Senior
                Secured Notes”) (4)10.22
            
            First
                Amendment to Loan Agreement by and among Quintessence and senior
                secured
                lenders dated as of March 24, 2005 (4)10.23
            
            First
                Amendment to Security Agreement regarding Senior Secured Notes dated
                as of
                March 24, 2005 (4)10.24
            
            Phase
                II Award/Contract dated as of March 24, 2006 by and between the U. S.
                Army and the Company (7) **10.25
            
            April
                Securities Purchase Agreement***10.26
            
            Form
                of April Secured Debenture (8)10.27
            
            Form
                of April Warrant (8)10.28
            
            April
                Registration rights Agreement ((8)10.29
            
            April
                Security Agreement (8)10.30
            
            May
                Securities Purchase Agreement***




42




10.31
            
            Form
                of May Secured Debenture (9)10.32
            
            Form
                of May Warrant (9)10.33
            
            May
                Registration Rights Agreement (9)10.34
            
            May
                Security Agreement (9)10.35
            
            Intercreditor
                Agreement (9)10.36
            
            Transaction
                Fee Agreement by and between the Company and T.R. Winston & Company,
                LLC*10.37
            
            Joint
                Development and Supply Agreement by and between the Company
                and Purchaser, dated November 21, 2007 (10)***16.1
            
            Letter
                on change of certifying accountant, dated November 7, 2006 from Bagell
                Josephs, Levine & Company, L.L.C. to the Commission
                (5)21.1
            
            Subsidiaries
                of the Company (8)31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002. (11)31.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002. (11)32.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002. (11)32.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002. (11)





(1)
            Filed
                with the Registrant’s Current Report on Form 8-K filed on May 12,
                2006(2)
            Filed
                with the Registrant’s Quarterly Report on Form 10-QSB for the quarter
                ended June 30, 2006 filed on August 15, 2006(3)
            Filed
                with the Registrant’s Registration Statement on Form SB-2 filed on
                September 18, 2006(4)
            Filed
                with the Registrant's Amendment No. 2 to the Registration Statement
                on
                Form SB-2 filed on December 1, 2006(5)
            Filed
                with the Registrant’s Current Report on Form 8-K filed on November 8,
                2006(6)
            Filed
                with the Registrant’s Current Report on Form 8-K filed on November 2,
                2006(7)
            Filed
                with the Registrant’s Registration Statement on Form SB-2/Pre-Effective
                Amendment No. 3 filed on January 26,
                2007




43




(8)
            Filed
                with Registrant’s Current Report on Form 8-K on April 20,
                2007(9)
            Filed
                with Registrant’s Current Report on Form 8-K on May 31,
                2007(10)
            Filed
                with Registrant’s Current Report on Form 8-K on November 30,
                2007(11)
            Filed
                Herewith(*)
            Confidential
                treatment requested as to portions of the Exhibit. Omitted materials
                filed
                separately with the Commission.(**)
            Filed
                with Registrant’s Pre Effective Amendment No. 1 to Form SB-2 filed on
                August 1, 2007(***)
            Confidential
                treatment requests have been granted by the Commission. Omitted materials
                filed separately with the
                Commission.





44


**SIGNATURES**




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




Dated:
                May 15, 2008
            **QPC
                Lasers, Inc.**/s/
                George LintzGeorge
                LintzChief
                Operating Officer, Chief Financial Officer/s/
                  Jeffrey UngarJeffrey
                Ungar
              Chief
                Executive Officer





45