UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION




Washington,
      D.C. 20549




FORM
      10-QSB




QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For
      the
      quarterly period ended June 30, 2007




Commission
      file number: 000-28153




**QPC
      Lasers, Inc.**


(Exact
      name of registrant as specified in its charter)




Nevada




(State
      of
      incorporation)




20-1568015




(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. x Yes 
      o No.




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




There
      were 38,659,283 shares of the registrant's common stock outstanding as of June
      30, 2007.




Transitional
      Small Business Disclosure Format (Check one): o Yes x No









INDEX
      TO FORM 10QSB


PART
                  I FINANCIAL INFORMATIONPAGEItem
                  1.
              Condensed
                  Financial Statements
              3-6Condensed
                  Consolidated Balance Sheets at June 30, 2007 (unaudited) and
                  December 31, 2006
              3Condensed
                  Consolidated Statements of Operations for the three and six month
periods
                  ended June 30, 2007 and June 30, 2006 (unaudited)
              4Condensed
                  Consolidated Statement of Stockholders' Deficiency (unaudited)
              5Condensed
                  Consolidated Statements of Cash Flows for the six month periods
ended
                  June 30, 2007 and June 30, 2006 (unaudited)
              6Notes
                  to Unaudited Condensed Consolidated Financial Statements
              7Item2.
              Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              21Item
                  3.
              Controls
                  and Procedures
              35PART
                  II OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              36Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              36Item
                  3.
              Defaults
                  Upon Senior Securities
              36Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              36Item
                  5.
              Other
                  Information
              36Item
                  6.
              Exhibits
              36SIGNATURES
              40









**Part
      I - Financial Information**




Item
      1.
      Condensed Consolidated Financial Statements





**QPC
      LASERS, INC. and Subsidiary**




**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**June
                  30, 2007**
                **(Unaudited)**
              
              
              **December
                  31, 2006****ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              10,655,973
              
              $
              1,429,077Accounts
                  receivable, commercial customers, net of allowance for doubtful
                  accounts
                  and returns and discounts of $3,735 as of June 30, 2007 and $19,810
                  as of
                  December 31, 2006
              
              
              933,628
              
              
              667,908Accounts
                  receivable, government contracts
              
              
              221,674
              
              
              383,935Other
                  receivables
              
              
              351,640
              
              
              -Unbilled
                  revenue
              
              
              852,125
              
              
              42,692Inventory
              
              
              554,550
              
              
              550,655Prepaid
                  expenses and other current assets
              
              
              195,420
              
              
              272,418Total
                  current assets
              
              
              13,765,010
              
              
              3,346,685Property
                  and equipment, net of accumulated depreciation of $5,707,072 as
                  of June
                  30, 2007 and $5,276,320 as of December 31, 2006
              
              
              3,594,246
              
              
              3,961,796Capitalized
                  loan fees, net
              
              
              -
              
              
              38,039Other
                  assets
              
              
              235,498
              
              
              88,780**TOTAL
                ASSETS**
              
              $
              17,594,754
              
              $
              7,435,300
  **LIABILITIES
                  AND STOCKHOLDER’S DEFICIENCY**
  **CURRENT
                  LIABILITIES**Accounts
                  payable and accrued liabilities
              
              $
              1,329,770
              
              $
              1,234,004Embedded
                  derivative liability
              
              
              13,050,624
              
              
              -Current
                  portion of long-term debt
              
              
              639,700
              
              
              1,034,437Total
                  current liabilities
              
              
              15,020,094
              
              
              2,268,441Long-term
                  debt, less current portion
              
              
              7,081,866
              
              
              6,398,189Total
                  liabilities
              
              
              22,101,960
              
              
              8,666,630
  **STOCKHOLDERS’
                  DEFICIENCY**Preferred
                  stock, $0.001 par value, 20,000,000 shares authorized, none issued
              
              
              -
              
              
              -Common
                  stock, $0.001 par value, 180,000,000 shares authorized,
                  38,659,283 shares issued and outstanding
              
              
              38,659
              
              
              38,559Additional
                  paid-in capital
              
              
              50,610,007
              
              
              50,236,504Accumulated
                  deficit
              
              
              (55,155,872
              )
              
              (51,506,393
              )Total
                  stockholders’ deficiency
              
              
              (4,507,206
              )
              
              (1,231,330
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS’ DEFICIENCY**
              
              $
              17,594,754
              
              $
              7,435,300


**See
                  accompanying notes to condensed consolidated financial statements.**




3




**QPC
                  LASERS, INC. and Subsidiary****CONDENSED
                  CONSOLIDATED STATEMENTS OF
                  OPERATIONS (Unaudited)**
  **Three
                  months ended June 30,**
              
              
              **Six
                  months ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****REVENUE**
              
              $
              1,823,005
              
              $
              577,346
              
              $
              2,929,584
              
              $
              842,910**COST
                  OF SALES**
              
              
              960,162
              
              
              495,022
              
              
              1,815,943
              
              
              774,748**GROSS
                  PROFIT**
              
              
              862,843
              
              
              82,324
              
              
              1,113,641
              
              
              68,162**OPERATING
                  EXPENSES**Research
                  and development
              
              
              1,060,761
              
              
              1,134,986
              
              
              2,073,560
              
              
              2,258,778General and
                  administrative
              
              
              1,407,889
              
              
              2,498,459
              
              
              2,624,413
              
              
              3,577,304Total
                  operating expenses
              
              
              2,468,650
              
              
              3,633,445
              
              
              4,697,973
              
              
              5,836,082**LOSS FROM
                  OPERATIONS**
              
              
              (1,605,807
              )
              
              (3,551,121
              )
              
              (3,584,332
              )
              
              (5,767,920
              )Interest
                  income
              
              
              46,223
              
              
              6,463
              
              
              47,977
              
              
              6,473Interest
                  expense
              
              
              (2,012,187
              )
              
              (550,382
              )
              
              (2,480,586
              )
              
              (1,610,359
              )Merger
                  expense
              
              
              -
              
              
              (336,322
              )
              
              -
              
              
              (336,322
              )Private
                  placement expense
              
              
              (17,740,180
              )
              
              -
              
              
              (17,740,180
              )
              
              -Change
                  in fair value of derivative liability
              
              
              20,054,927
              
              
              28,626
              
              
              20,054,927
              
              
              28,626Other
                  income
              
              
              20,751
              
              
              17,437
              
              
              52,715
              
              
              33,607**NET
                  LOSS**
              
              $
              (1,236,273
              )
              $
              (4,385,299
              )
              $
              (3,649,479
              )
              $
              (7,645,895
              )**LOSS
                  PER SHARE**—
                  Basic and Diluted
              
              $
              (0.03
              )
              $
              (0.14
              )
              $
              (0.09
              )
              $
              (0.25
              )**WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING -**
                basic
                  and diluted
              
              
              38,609,283
              
              
              31,459,137
              
              
              38,584,283
              
              
              31,156,221
  **See
                  accompanying notes to condensed consolidated financial
                  statements.**




4


**QPC
                    LASERS. Inc. and Subsidiary****CONDENSED
                    CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
                    DEFICIENCY****For
                    the six months ended June 30, 2007
                    (unaudited)**
  Common
                    Stock
                
                
                Additional
                
                
                AccumulatedShares
                
                
                Amount
                
                
                Paid-in
                    Capital
                
                
                Deficit
                
                
                TotalBalance,
                    January 1, 2007
                
                
                38,559,283
                
                $
                38,559
                
                $
                50,236,504
                
                $
                (51,506,393
                )
                $
                (1,231,330
                )Fair
                    value of vested stock options
                
                
                -
                
                
                -
                
                
                215,758
                
                
                -
                
                
                215,758Fair
                    value of common stock issued to private placement agents
                
                
                100,000
                
                
                100
                
                
                134,900
                
                
                -
                
                
                135,000Fair
                    value of modification of warrants
                
                
                
                
                
                
                
                
                22,845
                
                
                
                
                
                22,845Net
                    loss for the six months ended June 30, 2007
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,649,479
                )
                
                (3,649,479
                )Balance,
                    June 30, 2007
                
                
                38,659,283
                
                $
                38,659
                
                $
                50,610,007
                
                $
                (55,155,872
                )
                $
                (4,507,206
                )
  **See
                    accompanying notes to condensed consolidated financial statements.**




5




**QPC
                LASERS, INC. And Subsidiary****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**  **Six
                  Months Ended June 30,****2007**
              
              
              **2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES****Net
                  loss**
              
              $
              (3,649,479
              )
              $
              (7,645,895
              )**Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:****Depreciation
                  and amortization**
              
              
              430,789
              
              
              600,688**Compensation
                  cost of vested options**
              
              
              215,758
              
              
              74,395**Private
                  Placement Costs**
              
              
              1,148,160
              
              
              -**Amortization
                  of loan discount**
              
              
              1,757,320
              
              
              637,242**Amortization
                  of Capitalized Loan Fees**
              
              
              38,039
              
              
              72,822**Shares
                  of common stock issued for services**
              
              
              135,000
              
              
              1,500,000**Change
                  in fair value of embedded derivative liability**
              
              
              (20,054,927
              )
              
              (28,626
              )**Fair
                  value of warrants issued for services and private placement costs**
              
              
              16,427,020
              
              
              777,598**Fair
                  value of modification of warrants**
              
              
              22,845
              
              
              -**Changes
                  in operating assets and liabilities:****Accounts
                  receivable**
              
              
              (455,099
              )
              
              (116,776
              )**Inventory**
              
              
              (3,895
              )
              
              39,453**Unbilled
                  revenue**
              
              
              (809,433
              )
              
              (104,312
              )**Other
                  assets**
              
              
              (146,718
              )
              
              40,635**Prepaid
                  expenses**
              
              
              76,998
              
              
              43,776**Accounts
                  payable and other current liabilities**
              
              
              95,766
              
              
              20,469**Net
                  cash used in operating activities**
              
              
              (4,771,856
              )
              
              (4,088,531
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:****Purchase
                  of property and equipment**
              
              
              (63,240
              )
              
              (78,721
              )**Net
                  cash used in investing activities**
              
              
              (63,240
              )
              
              (78,721
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:****Exercise
                  of stock options**
              
              
              -
              
              
              11,000**Proceeds
                  from borrowing, net of offering costs**
              
              
              14,425,740
              
              
              -**Principal
                  payments on debt**
              
              
              (363,748
              )
              
              (1,059,891
              )**Proceeds
                  from unit sales allocated to embedded derivatives**
              
              
              -
              
              
              211,835**Proceeds
                  from sale of common stock**
              
              
              -
              
              
              10,737,706**Net
                  cash provided by financing activities**
              
              
              14,061,992
              
              
              9,900,6509,226,896
              
              
              5,733,398**NET
                  INCREASE IN CASH****CASH —
                  Beginning of period**
              
              
              1,429,077
              
              
              69,440**CASH —
                  End of period**
              
              $
              10,655,973
              
              $
              5,802,838**Supplemental
                  Disclosures of Cash Flow Information****Cash
                  paid during the period for:****Interest**
              
              $
              676,572
              
              $
              196,012**Income
                  taxes**
              
              
              -
              
              
              -
 SUPPLEMENTAL
          DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
  During
          the six months ended June 30, 2007, the Company issued 100,000 shares of
          common
          stock valued at $135,000 as private placement fees.
  During
          the six months ended June 30, 2007 the Company issued warrants to purchase
          29,256,318 shares of common stock valued at $33,105,551 to investors, placement
          agents and advisors.
 **See
                  accompanying notes to condensed consolidated financial statements.**




6




**QPC
      LASERS, INC. AND SUBSIDIARY**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
      (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, 2006, 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 is 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 $18,692,607 and utilized cash of
      $8,219,053 in operating activities during the year ended December 31, 2006,
      and
      had working capital of $1,078,244 at December 31, 2006. During the six months
      ended June 30, 2007, the Company had a net loss of $3,649,479 and utilized
      cash
      of $4,771,856 in operating activities. At June 30, 2007 the Company had a
      stockholders’ deficiency of $4,507,206. 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




Effective
      April 16, 2007 and May 29, 2007, we entered into securities purchase agreements
      with certain investors, pursuant to which the Company issued the Investors
      secured convertible debentures in the aggregate principal amount of $18,530,646
      at an original issue discount of 10% for an aggregate consideration of
      $16,678,531.




The
      net
      cash proceeds to us from the April 2007 Debenture Offering and May 2007
      Debenture Offering was approximately $13,900,000 net of closing costs and
      private placement fees. Our negative cash flow in recent months has been
      approximately $800,000 a month. Accordingly, we currently expect such funds
      will
      be sufficient to meet our cash requirements until late 2008. However, our
      expectations may prove incorrect and we may need to raise additional funds.
      Moreover, if we do not generate positive cash flow from operations and we expend
      our current cash resources to meet our ongoing requirements, then we will not
      have sufficient cash 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.




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Impairment
      of Long-Lived Assets




Management
      regularly reviews property, equipment and other long-lived assets for possible
      impairment in accordance with 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. 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.




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 determined that the deferred tax
      assets, which had been written down, 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.




8




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




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, 2006 or June 30, 2007. 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, 2006,
      there was no deferred revenue and approximately $42,692 of unbilled receivables
      related to these government contracts. At June 30, 2007 there was no deferred
      revenue and $852,125 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.




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
      June
      30, 2007, management has concluded that neither a reserve for product returns
      nor a warranty liability is required.




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.




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.




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 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




9




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




The
      Company recognizes compensation cost for equity-based compensation for all
      new
      or modified grants issued after December 31, 2005. In addition, commencing
      January 1, 2006, the Company recognized the unvested portion of the grant date
      fair value of awards issued prior to adoption of SFAS No. 123R based on the
      fair
      values previously calculated for disclosure purposes over the remaining vesting
      period of the outstanding stock options and warrants.




Loss
      per Common Share




Basic
      loss per share is calculated by dividing net loss available to common
      stockholders by the weighted average number of common shares outstanding during
      the period. Weighted average number of shares outstanding have been
      retroactively restated for the equivalent number of shares received by the
      accounting acquirer as a result of the exchange transaction as if these shares
      had been outstanding as of the beginning of the earliest period
      presented. The
      4,166,378 shares issued to the legal acquirer are in included in the weighted
      average share calculation from May 12, 2006, the date of the exchange agreement.




Diluted
      loss per share is calculated assuming the issuance of common shares, if
      dilutive, resulting from the exercise of stock options and warrants. At June
      30,
      2007 and 2006, potentially dilutive securities consisted of outstanding common
      stock purchase warrants and stock options to acquire an aggregate of 41,698,449
      and 11,266,429 shares, respectively. Since
      we
      reported a net loss for the three and six months ended June 30, 2007 and 2006,
      these potentially dilutive common shares were excluded from the diluted loss
      per
      share calculation because they were anti-dilutive.




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, 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, included in other income.




Adoption
      of New Accounting Policy




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 June 30, 2007, the Company does not have
      a
      liability for unrecognized tax benefits.




10




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




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.




The
      Company’s policy is to record interest and penalties on uncertain tax provisions
      as income tax expense. As of June 30, 2007, the Company has no accrued interest
      or penalties related to uncertain tax positions.




Recent
      Accounting Pronouncements




In
      September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
      No. 157, "Fair Value Measurements" ("SFAS No. 157"), which establishes a formal
      framework for measuring fair value under GAAP. SFAS No. 157 defines and codifies
      the many definitions of fair value included among various other authoritative
      literature, clarifies and, in some instances, expands on the guidance for
      implementing fair value measurements, and increases the level of disclosure
      required for fair value measurements.




Although
      SFAS No. 157 applies to and amends the provisions of existing FASB and AICPA
      pronouncements, it does not, of itself, require any new fair value measurements,
      nor does it establish valuation standards. SFAS No. 157 applies to all other
      accounting pronouncements requiring or permitting fair value measurements,
      except for: SFAS No. 123(R), share-based payment and related pronouncements,
      the
      practicability exceptions to fair value determinations allowed by various other
      authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9
      that deal with software revenue recognition. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years.




In
      February 2007, the Financial
      Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities  — Including an amendment of FASB Statement
      No. 115” (SFAS 159). ** SFAS 159,
      which becomes effective for the company on January 1, 2008, permits
      companies to choose to measure many financial instruments and certain other
      items at fair value and report unrealized gains and losses in earnings. Such
      accounting is optional and is generally to be applied instrument by instrument.
      The company does not anticipate that election, if any, of this fair-value option
      will have a material effect on its consolidated ** financial
      condition, results of operations, cash flows or disclosures.




NOTE
      3 -
      INVENTORY




Inventory
      consists of the following:




June
                30, 2007
              (Unaudited)
            
            December
                31,
              2006Raw
                materials
            
            $
            519,670
            
            $
            552,521Work
                in process
            
            
            36,503
            
            
            12,177Reserve
                for slow moving and obsolescence
            
            
            (1,623
            )
            
            (14,043
            )$
            554,550
            
            $
            550,655




11




NOTE
      4 -
      PROPERTY AND EQUIPMENT




Property
      and equipment consist of the following:




June
                30, 2007 (Unaudited)
            
            December
                31,
              2006
            
            Useful
              LivesComputer
                software
            
            $
            66,932
            
            $
            66,932
            
            
            3
                yearsFurniture
                and fixtures
            
            
            123,222
            
            
            121,558
            
            
            6
                yearsComputer
                equipment
            
            
            154,316
            
            
            146,000
            
            
            3
                yearsOffice
                equipment
            
            
            69,362
            
            
            69,362
            
            
            6
                yearsLab
                and manufacturing equipment
            
            
            5,014,407
            
            
            4,964,608
            
            
            6
                yearsLeasehold
                improvements
            
            
            3,873,079
            
            
            3,869,656
            
            
            14
                years9,301,318
            
            
            9,238,116Less
                accumulated depreciation and amortization
            
            
            (5,707,072
            )
            
            (5,276,320
            )Property
                and equipment, net
            
            $
            3,594,246
            
            $
            3,961,796




Depreciation
      and amortization expense related to property and equipment amounted to $430,789
      and $600,688, respectively for the six months ended June 30, 2007 and 2006.


12




NOTE
      5 -
      NOTES PAYABLE




As
      of
      December 31, 2006, notes payable consist of the following:




Loan
              Balance
            
            Loan
              Discount
            
            Current
              Portion
            
            Non-current
              PortionSenior
                Secured Notes  (a)
            
            $
            729,518
            
            $
            (367,923
            )
            $
            361,595
            
            $
            --Subordinated
                Secured Convertible Notes  (b)
            
            
            1,280,000
            
            
            (136,267
            )
            
            363,800
            
            
            779,933Finisar
                Secured Note (c)
            
            
            5,927,298
            
            
            --
            
            
            309,042
            
            
            5,618,256$
            7,936,816
            
            $
            (504,190
            )
            $
            1,034,437
            
            $
            6,398,189










As
      of
      June 30, 2007 notes payable consist of the following (Unaudited):




Loan
              Balance
            
            Loan
              discount
            
            Current
              portion
            
            Noncurrent
              PortionSenior
                Secured Notes  (a)
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --Subordinated
                Secured Convertible Notes  (b)
            
            
            230,000
            
            
            (17,490
            )
            
            188,508
            
            
            24,002Finisar
                Secured Note (c)
            
            
            5,776,514
            
            
            --
            
            
            324,357
            
            
            5,452,157Secured
                Equipment Financing (d)
            
            
            461,923
            
            
            --
            
            
            126,835
            
            
            335,088April
                Secured Debentures (e)
            
            
            7,976,146
            
            
            (7,145,298
            )
            
            --
            
            
            830,848May
                Secured Debentures (f)
            
            
            10,554,500
            
            
            (10,114,729
            )
            
            --
            
            
            439,771$
            24,999,083
            
            $
            (17,277,517
            )
            $
            639,700
            
            $
            7,081,866




(a)
            Senior
                Secured Notes Payable




During
      2004, the Company issued $3,250,000 of notes payable to Investors. The term
      of
      the notes are 24 months, bearing interest at 10% per annum, with no principal
      and interest payments required for the initial 3 months. The remaining 21 months
      required principal and interest payments sufficient to pay the loan in full
      at
      the end of 24 months. The notes are secured by all of the assets of the Company,
      including its intellectual property. The note holders received one warrant
      for
      every $1.33 of principal, with each warrant being exerciseable into one share
      of
      common stock at $3.75 per share. The warrants are immediately vested and have
      a
      six year term. The Company determined there was no accounting value to be
      assigned to the warrants at the date of issuance, based a calculation using
      an
      option pricing model. In January 2006, we adjusted the exercise price of
      2,325,000 of these warrants to $1.25. The Company recorded the difference in
      the
      value of the warrants immediately prior to the modification and the value of
      the
      warrants following modification of $744,000 as additional loan discount to
      be
      amortized over the remaining life of the loan. Interest expense includes
      $218,824 related to the amortization of this discount during the six months
      ended June 30, 2007. Of the total notes above, $2,500,000 was subscribed to
      by a
      limited partnership of which an officer of the Company is an owner, of which
      there was no outstanding balance as of June 30, 2007.




13




NOTE
      5 -
      NOTES PAYABLE  (CONTINUED)




In
      addition, warrants to purchase 840,000 shares of common stock were issued to
      the
      five note holders who elected to defer principal payments on their loans. The
      warrants were valued at $0.71 a warrant or $596,400, using an option pricing
      model and were reflected as a loan discount amount, which is netted against
      the
      loan principal balance. The assumptions used in the model were: risk free
      interest rate, 4.41%, expected life, 4.66 years, expected volatility, 70%,
      no
      expected dividends. The loan discount fee is being amortized over the remaining
      life of the loan. Interest expense includes $149,100 and $178,920 related to
      the
      amortization of this discount during the six months ended June 30, 2007 and
      June
      30, 2006 respectively. The effective interest rate on these loans, giving effect
      for the modified terms and the loan discount is 24.4%.




During
      2005, five of the seven note holders agreed to modify the terms of their notes.
      The modifications include deferring principal payments from April 2005 to March
      2006, thereafter principal payments are due until the notes are fully paid
      in
      May 2007. During April 2007, four of the note holders converted the remaining
      principal balance of their notes into the April 2007 Debentures (see (e) below),
      and the remaining balance was paid off. The total amount of principal converted
      into the April 2007 debentures was $554,631. As of June 30, 2007, there is
      no
      balance due on the Senior Secured Notes Payable.




(b)
            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 will be paid in full over the next twelve months. The
      loans
      are secured by all the assets of the Company but take a secondary position
      to
      the Senior Secured Notes. 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 a 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 into the April 2007 Debentures (see (e)
      below).




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 are 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 $166,636 and $38,934 relating to the amortization of this discount
      during the six months ending June 30, 2007 and June 30, 2006. The effective
      interest rate on these loans, giving effect for the modified terms and the
      loan
      discount is 22%.




In
      April
      2007, the exercise price of the warrants was reduced to $1.05 per the terms
      of
      the warrants as a result of the April 2007 Debenture offering. As
      a result of the $0.20 warrant exercise price reduction provided to the note
      holders, the Company recorded a charge to operations during the three months
      ended June 30, 2007 for the aggregate fair value of such exercise price
      reductions of $22,845 relating to the warrants held by the Subordinated Secured
      Convertible Notes Payable holders in April 2007.  This amount was
      calculated by determining the difference between the fair value of the warrants
      held by the subordinated notes payable note holders, based on a comparison
      of
      updated Black-Scholes calculations using the original $1.25 exercise price
      and
      the reduced $1.05 exercise price.  The Company utilized revised
      Black-Scholes input metrics to reflect updated changes, in particular to
      estimated life and volatility.  The result was that the Black-Scholes value
      of these warrants was $0.67, based on the original $1.25 exercise price, as
      compared to a Black-Scholes value of $0.74, based on the reduced exercise price
      of $1.05.  This charge to operations was presented as reduction in exercise
      price of warrants and was included in other income (expense) in the statement
      of
      operations.




14




NOTE
      5 -
      NOTES PAYABLE  (CONTINUED)




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 shares
      that required to be issued **** and
      there
      are no provisions that could require a net cash settlement.




(c)
            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 and is subject to an
      inter-creditor agreement with the senior secured note holders (see paragraph
      (a)
      above).




(d)
            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 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.




(e)
            April
                Secured Debentures




Between
      April 16 and April 19, 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 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 approximately $4,738,682 using a complex
      Binomial Lattice pricing model using the assumptions provided below.




15




NOTE
      5 -
      NOTES PAYABLE  (CONTINUED)




The
      purchase price consisted of (i) $ 5,013,900 in cash, (ii) conversion of
      outstanding notes in the aggregate principal amount of $1,604,631 which were
      exchanged for 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 financing: (i)
      $404,068 in cash, (ii) warrants to purchase up to 212,796 shares of common
      stock
      valued at $188,750, and (iii) 100,000 shares of common stock valued at
      $135,000.




At
      June
      30, 2007, $350,000 of such funds have not yet been collected by the company
      and
      have been reflected in other receivables in the accompanying balance sheet
      as of
      June 30, 2007.




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. 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%, and (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 carrying amount of the loan is reflected as
      a
      loan discount which has been netted against principal balance, to be amortized
      over the term of the loan. Interest expense includes $830,849 related to the
      amortization of this discount during the six months ended June 30, 2007. The
      excess $7,672,741 fair value of the embedded derivative was charged to private
      placement costs during the three months ended June 30, 2007.




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




(f)
            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%.
      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 -
      NOTES PAYABLE  (CONTINUED)




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. 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%, and (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 the $9,500,000 carrying amount of the loan is
      reflected as a loan discount which has been netted against principal balance,
      to
      be amortized over the term of the loan. Interest expense includes $439,771
      related to the amortization of this discount during the six months ended June
      30, 2007. The excess $6,657,720 fair value of the embedded derivative was
      charged to private placement costs during the three months ended June 30, 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.




NOTE
      6 -
      COMPOUND EMBEDDED DERIVATIVE




Between
      April 16 and April 19, 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,
                2007


o
            $6,000,000
                in revenues for the six (6) month period ending June 30,
                2008.




17




NOTE
      6 -
      COMPOUND EMBEDDED DERIVATIVE (CONTINUED)




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 content 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 .




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 if 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.




We
      recorded the fair value of the compound embedded derivative as a liability
      on
      the date of issuance. The value of the compound embedded derivative relating
      to
      the April Secured Debentures was $15,040,022 on April 16, 2007. The value of
      the
      compound embedded derivative relating to the May Secured Debentures was
      $18,065,529 on May 29, 2007. The value of the compound embedded derivative
      up to
      the face amount of debentures was reflected as a loan discount to be amortized
      over the two year term of the debentures, and the excess $16,427,020 is
      reflected as a private placement cost during the six months ended June 30,
      2007
      in the accompanying statement 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. Change in fair value of embedded
      derivative liability was $20,054,927 for the three and six months ended June
      30,
      2007 principally due to the reduction in market price of the Company’s common
      stock. The Company concluded the accounting in the balance sheet and income
      statement is in accordance with existing Generally Accepted Accounting
      Principles.




18




NOTE
      7 -
      STOCK OPTIONS AND WARRANTS




A
      summary
      of option activity as of June 30, 2007 and changes during the six months then
      ended is presented below:


Options
              
              
              Shares
              
              
              Weighted-Average
                Exercise
                  Price
              
              
              Weighted-Average
                Remaining
                  Contractual
                Term
                  (Years)
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at January 1, 2007
              
              
              3,541,083
              
              $
              0.83Granted
              
              
              507,083
              
              $
              1.21Exercised
              
              
              --Forfeited
                  or expired
              
              
              (62,500
              )Outstanding
                  at June 30, 2007
              
              
              3,985,666
              
              $
              0.87
              
              
              7.47
              
              $
              630,660Exercisable
                  at June 30, 2007
              
              
              2,361,569
              
              $
              0.56
              
              
              7.05
              
              $
              630,660




For
      the
      six months ended June 30, 2007 and 2006, the value of options vesting during
      the
      period was $215,758 and $74,395 respectively, and has been reflected as
      compensation cost. As of June 30, 2007, the Company has unvested options of
      $2,366,928 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 options for the three
      and six months ended June 30, 2007 and 2006 was calculated based on the
      following assumptions: an average risk-free interest rate for the period of
      4.65%; dividend yield of 0%; volatility factor of 63% to 70%; and a weighted
      average expected life of the options of 7 years. The expected term was
      determined using the “shortcut method” described in Staff Accounting Bulletin
      Topic 14.D.2, which is based on a calculation to arrive at the midpoint between
      the vesting date and the end of the contractual term. 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.




A
      summary
      of the Company’s warrant activity for the six months ended June 30, 2007
      follows:





Number
                of WarrantsWarrants
                outstanding at January 1, 2007
            
            
            8,456,464Granted
            
            
            29,256,319Exercised
            
            
            -Cancelled
            
            
            -Warrants
                outstanding at June 30, 2007
            
            
            37,712,783




See
      Notes
      5 and 6 for a description of the warrants issued during the six months ended
      June 30, 2007.




19




NOTE
      8 -
      INCOME TAXES




At
      December 31, 2006, the Company had available Federal and state net
      operating loss carryforwards to reduce future taxable income. The amounts
      available were approximately $33,000,000 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 will recognize a deferred tax
      asset
      at that time.




Management
      is evaluating the value of its carryforwards given the change of control which
      has occurred. Management does not believe the carrying value of the deferred
      tax
      asset will change materially from that presented above.




20




**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 REPORT ON FORM 10-QSB. THIS DISCUSSION
      SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING OUR OPERATING RESULTS, FINANCIAL
      CONDITIONS AND LIQUIDITY AND CASH-FLOW FOR THE THREE AND SIX MONTHS ENDED JUNE
      30, 2006 AND 2007. THIS DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT
      INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED ON JUDGMENTS CONCERNING VARIOUS
      FACTORS THAT ARE BEYOND OUR CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
      FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
      VARIOUS FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REPORT
      ON
      FORM 10-QSB, PARTICULARLY UNDER THE CAPTION "FORWARD LOOKING STATEMENTS."




**FORWARD
      LOOKING STATEMENTS**




This
      Report contains statements that involve expectations, plans or intentions (such
      as those relating to future business or financial results, new features or
      services, or management strategies). These statements are forward-looking and
      are subject to risks and uncertainties, so actual results may vary materially.
      You can identify these forward-looking statements by words such as “may,”
“ should,”
      “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other
      similar expressions. You should consider our forward-looking statements in
      light
      of the
      risks discussed under the heading “Factors That May Affect Future Performance”
below, as well as  our
      financial statements, related notes, and the other financial information
      appearing elsewhere in this Report and our other filings with the Commission.
      Our actual results could differ materially from those anticipated in these
      forward-looking statements as a result of certain factors ,
      including but not limited to those set forth under “Factors That May Affect
      Future Performance” and elsewhere in this Report on Form 10-QSB . Except
      as required by law or regulation, we assume no obligation to update any
      forward-looking statements.




**Overview**




**Background**




QPC
      Lasers, Inc. designs and manufactures laser diodes through its wholly-owned
      subsidiary, Quintessence Photonics Corporation (“Quintessence”). 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 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.




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 industrial and medical
      applications, as well as the burgeoning defense/homeland security laser market.




We
      released our Generation I products in the second quarter of 2004, and released
      some of our Generation II products in the fourth quarter of 2005 through the
      second quarter of 2006. We expect to release some Generation III prototypes
      during calendar year 2007. Generation I and II products have been sold to
      customers in the medical, printing, and defense industries.




21




We
      were
      awarded four 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 funded development of semiconductor lasers to be used for directed
      energy weapons; 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 June 30, 2007, we have recognized $760,000 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 will
      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 June 30, 2007
      we
      have recognized $541,348 of revenue from this contract.




In
      the
      second quarter of 2007, the
      United States Navy awarded QPC two contracts totaling $1 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 U.S. Defense Advanced Research Projects Agency (DARPA), the U.S.
      Army, the Missile Defense Agency, and the Israeli Ministry of Defense. As
      of
      June 30, 2007, we have recognized $509,645 of revenue from these
      contracts.




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.




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.




**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.




22




**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, 2006 or June 30, 2007. 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, 2006,
      there was no deferred revenue and approximately $42,692 of unbilled receivables
      related to these government contracts. At June 30, 2007, there was no deferred
      revenue and approximately $852,125 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. 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. Accounts receivable are
      reviewed for collectibility quarterly. When management determines that there
      is
      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 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.




**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




23




**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, 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, included in other income.




**QUARTER
      ENDED June 30, 2007 COMPARED TO THE QUARTER ENDED June 30,
      2006**




REVENUE.
      During the quarter ended June 30, 2007, QPC had revenue of $1,823,005 as
      compared to revenue of $577,346 during the quarter ended June 30, 2006, an
      increase of approximately 216%. This increase is attributable to an increase
      in
      both commercial sales and government contracts. We continue to increase our
      product offerings and expand our sales and marketing resources. We continued
      to
      perform and bill on government contracts awarded to us in prior periods and
      to
      ship to customers for orders placed in 2006. Additionally we were awarded two
      government contracts during the quarter ended June 30, 2007.




COST
      OF
      SALES. Cost of sales, which consists of direct labor, material costs and
      overhead, was $960,162 or 53% of revenue for the quarter ended June 30, 2007
      as
      compared to $495,022 or 86% of revenue for the quarter ended June 30, 2006.
      As a
      percentage of revenue, cost of sales decreased as we recognized improved
      efficiencies as a result of allocating our fixed costs over a higher number
      of
      units, and achieved higher yields on direct materials and labor.




GROSS
      PROFIT. Gross profit was $862,843 for the quarter ended June 30, 2007 as
      compared to $82,324 for the quarter ended June 30, 2006, representing gross
      margins of approximately 47% and 14%, respectively. As mentioned above, the
      increase in our gross profits is attributable to increased efficiencies in
      our
      operations.




RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
      professional and technical support fees, material used by our research and
      development team and overhead, totaled $1,060,761 for the quarter ended June
      30,
      2007, as compared to $1,134,986 for the quarter ended June 30, 2006 a decrease
      of approximately 7%. The decrease in research and development costs is
      attributable to the shift of some of our resources from development resources
      to
      manufacturing as a result of increased orders for our products.




GENERAL
      AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
      $1,407,889 the quarter ended June 30, 2007, as compared to $2,498,459 for the
      quarter ended June 30, 2007, a decrease of approximately 44%. Of this decrease,
      $1,531,000 was due to non-cash investor relations expense for the issuance
      of
      common stock that occurred in the quarter ended June 30, 2006, partially off-set
      by an increase in selling and marketing costs of approximately $109,500, an
      increase of approximately $64,000 in employee stock option compensation , and
      increased legal and insurance fees. We expect these categories of expenses
      to
      increase in future quarters, based on anticipated growth of the Company.




24




OTHER
      INCOME AND EXPENSE. Other Income and Expense reflects the significant impact
      on
      our Statement of Operations of the transactions undertaken in connection with
      the sale of the Secured Debentures in April and May 2007. In those transactions,
      we sold Secured Debentures and warrants. The conversion feature and detached
      warrants have been bifurcated and are treated as embedded derivatives. As of
      the
      date of issuance, the value of such embedded derivative liabilities aggregated
      $33,105,551. However, because the price of our common stock was lower on June
      30, 2006 than it was on the dates that the Secured Debentures and warrants
      were
      issued, the fair value of the embedded derivative liability declined by
      $20,054,927 which is treated as Other Income.




Effect
      of embedded derivative liability on the three months ended June 30,
      2007




April
                Secured Debentures and Detached Warrants
            
            May
                Secured Debentures and Detached Warrants
            
            TotalValue
                of compound embedded derivative at issuance:Value
                of conversion feature
            
            $
            4,738,682
            
            $
            4,974,818
            
            $
            9,713,500Value
                of detached warrants (investor warrants)
            
            
            10,112,590
            
            
            11,182,902
            
            
            21,295,492Value
                of detached warrants (issued to dealers)
            
            
            188,750
            
            
            1,907,809
            
            
            2,096,559Total
                Value of compound embedded derivative at issuance (April 16, 2007
                and May
                29, 2007
            
            
            15,040,022
            
            
            18,065,529
            
            
            33,105,551Total
                value of compound embedded derivative at June 30, 2007
            
            
            5,220,043
            
            
            7,830,581
            
            
            13,050,624Change
                in fair value of embedded derivative liability
            
            
            9,819,979
            
            
            10,234,948
            
            
            20,054,927




Other
      Income also includes $46,233 of interest income during the three months ended
      June 30, 2007 compared to interest income of $6,463 during the three months
      ended June 30, 2006.




Other
      Income is offset by interest expense of $2,012,187 and $550,382 for the three
      months ended June 30, 2007 and June 30, 2006 respectively. Interest expense
      includes non-cash interest for the amortization of loan discount which was
      $1,517,100 for the second quarter 2007 compared to $240,221 for the second
      quarter 2006. This increase in loan discount amortization is due to the
      amortization of loan discount for the Secured Debentures which totaled
      $1,270,620 for the three months ended June 30, 2007.




Other
      Income is also offset by the placement costs associated with the sale of the
      Secured Debentures and warrants. Placement costs of $17,740,180 are included
      in
      Other Expense for the three months ended June 30, 2007 which includes $2,231,559
      for the value of warrants and shares of common stock issued to placement
      agents, and $14,330,461 for the value of the conversion feature and warrants
      issued to investors in the Secured Debentures, and $1,178,160 fees paid to
      placement agents, finders and advisors.




NET
      LOSS.
      QPC had a net loss of $1,236,273 for the quarter ended June 30, 2007 as compared
      to a net loss of $4,385,299 for the quarter ended June 30, 2006. This reduction
      in net loss is due to an increase in gross profit together with a decrease
      in
      operating expenses and an increase in other income.




25




**SIX
      MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
      2006**




REVENUE.
      During the six months ended June 30, 2007, the Company had revenue of $2,929,584
      as compared to revenue of $842,910 during the six months ended June 30, 2006,
      an
      increase of approximately 248%. This increase is attributable to an increase
      in
      both commercial sales and government contract work which are a result of our
      expanded sales and marketing resources and our increase in released products.
      Additionally, we were awarded two government contracts for which we began to
      perform and bill.




COST
      OF
      SALES. Cost of sales, which consists of direct labor, material costs and
      overhead, was $1,815,943 or 62% of revenue for the six months ended June 30,
      2007 as compared to $774,748 or 92% of revenue for the six months ended June
      30,
      2006. As a percentage of revenue, cost of sales decreased as we recognized
      improved efficiencies as a result of allocating our fixed costs over a higher
      number of units, and achieved higher yields on direct materials and labor.





GROSS
      PROFIT. Gross profit was $1,113,641 for the six months ended June 30, 2007
      as
      compared to $68,162 for the six months ended June 30, 2006, representing gross
      margins of approximately 38% and 8%, respectively. Costs include
      non-recurring engineering expenses for custom orders and government contracts.
      As mentioned above, the increase in our gross profits is attributable to
      increased efficiencies in our operations, and the allocation of overhead costs
      to increased production units.





RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
      professional and technical support fees, material and overhead, totaled
      $2,073,560 for the six months ended June 30, 2007, as compared to $2,258,778
      for
      the six months ended June 30, 2006, a decrease of approximately 8%. While we
      expect to maintain our current level of research and development spending,
      we
      expect research and development spending to decrease as a percentage of revenue
      as our revenues increase.




GENERAL
      AND ADMINISTRATIVE EXPENSES. General and administrative expenses totaled
      $2,624,413 for the six months ended June 30, 2007, as compared to $3,577,304
      for
      the six months ended June 30, 2006, a decrease of approximately 27%. $1,531,000
      of this expense in 2006 was a non-cash expense attributable to the fair value
      of
      shares issued to investor relations consultants. The decrease in non-cash
      investor relations expenses was partially offset by increased sales and
      marketing expenses, increased stock option compensation expense, legal and
      insurance fees.




OTHER
      INCOME AND EXPENSE. Other Income and Expense reflects the significant impact
      on
      our Statement of Operations of the transactions undertaken in connection with
      the sale of the Secured Debentures in April and May 2007. In those transactions,
      we sold Secured Debentures and warrants. The conversion feature and detached
      warrants have been bifurcated and are treated as embedded derivatives. As of
      the
      date of issuance, the value of such embedded derivative liabilities aggregated
      $33,105,551. However, because the price of our common stock was lower on June
      30, 2006 than it was on the dates that the Secured Debentures and warrants
      were
      issued, the fair value of the embedded derivative liability declined by
      $20,054,927 which is treated as Other Income.




Other
      Income also includes $47,977 of interest income during the six months ended June
      30, 2007 compared to interest income of $6,473 during the six months ended
      June
      30, 2006. Other Income is offset by interest expense of $2,480,586 and
      $1,610,359 for the six months ended June 30, 2007 and June 30, 2006
      respectively. Interest expense includes non-cash interest for the amortization
      of loan discount which was $1,757,320 for the six months ended June 30, 2007
      compared to $636,242 for the six months ending June 30, 2006. This increase
      in
      loan discount amortization is due to the amortization of loan discount for
      the
      Secured Debentures which totaled $1,270,620 for the six months ended June 30,
      2007. Interest expense during the six months ended June 30, 2006 also included
      $690,000 for the issuance of warrants as loan fees.




Other
      Income is also offset by the placement costs associated with the sale of the
      Secured Debentures and warrants. Placement costs of $17,740,180 are included
      in
      other expense for the six months ended June 30, 2007 which includes $16,562,020
      for the value of the embedded derivatives including warrants issued to placement
      agents and shares of common stock issued to placement agents in excess of the
      face amount of the debentures.




26




NET
      LOSS.
      QPC had a net loss of $3,649,479 for the six months ended June 30, 2007 as
      compared to a net loss of $7,645,895 for the six months ended June 30, 2006.
      The
      decrease in net loss is primarily attributable in an increase in gross profit
      together with a decrease operating expenses and an increase in other income
      less
      other expenses.




**Liquidity
      and Capital Resources**




Overview




We
      continue to operate with a negative cash flow from operations, and depend upon
      external financing to maintain our operations. QPC lost $3,649,479 during the
      six months ended June 30, 2007 and has a cumulative deficit of $55,155,872
      as of
      June 30, 2007. Our negative cash flow from operations during the six months
      ended June 30, 2007 was in excess of $800,000 per month. We
      currently anticipate that we will continue to have a negative cash flow from
      operations for at least the next 12 months.




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 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 debenture-holders five year
      warrants to purchase up to 11,394,495 shares of our common stock at an exercise
      price of $1.05 per share, subject to certain adjustments. The aggregate purchase
      price for the 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
      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 financing: (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.




In
      May
      2007, we issued to certain investors additional secured convertible debentures
      in the aggregate principal amount of $10,554,500 at an original issue discount
      of 10%. These debentures are also 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 May Investors 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 debentures and warrants sold in May 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.





The
      net
      cash proceeds to us from the April 2007 Debenture Offering and May 2007
      Debenture Offering was approximately $13,900,000. Our negative cash flow in
      recent months has been approximately $800,000 a month. Accordingly, we currently
      expect such funds will be sufficient to meet our cash requirements until late
      2008. However, our expectations may prove incorrect and we may need to raise
      additional funds. Moreover, if we do not generate positive cash flow from
      operations and we expend our current cash resources to meet our ongoing
      requirements, then we will not have sufficient cash 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. Unless most of the Secured
      Debentures convert prior to maturity, we will likely default on our obligations
      to the Secured Debentureholders unless we can raise additional funds through
      a
      new financing.




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.




27




If
      we
      need to raise additional funds in the future, it is likely we will seek to
      issue
      additional equity securities. 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 any 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 year ended December 31,
      2006.




Current
      Debt Obligations




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


Payments
                  by PeriodRemainder
                  of 2007
              
              
              2008
              
              
              2009
              
              
              2010
                  and BeyondSubordinated
                  Secured Notes Payable
              
              
              103,020
              
              
              141,545
              
              
              --
              
              
              --Finisar
                  Secured Note Payable
              
              
              435,607
              
              
              871,214
              
              
              5,653,408
              
              
              --Secured
                  Equipment Financing
              
              
              95,455
              
              
              263,880
              
              
              178,180
              
              
              221,250April
                  Secured Debentures
              
              
              398,807
              
              
              797,615
              
              
              8,275,251
              
              
              --May
                  Secured Debentures
              
              
              527,725
              
              
              1,055,450
              
              
              10,994,271
              
              
              --Total
              
              $
              1,560,614
              
              $
              3,129,704
              
              $
              25,101,110
              
              $
              221,250




On
      February 8, 2007, the Company completed a financing transaction with Boston
      Financial and Equity Corporation, a financing company that is secured by certain
      manufacturing equipment purchased by the company between July and December
      2006.
      The gross amount of the loan was $500,000 and the Company paid a security
      deposit of $125,000 and first and last months payment of $43,980 upon closing
      for net proceeds of $331,020. Payments are to be made on the first of each
      calendar month for $21,990 through July 2009 and $4,850 through January 2012
      consisting of principal and interest to pay off $400,000 of the loan by January
      2012, with a final payment of the remaining $100,000 balance in January 2012.
      The effective interest rate of this note is 33.65%.




**Capital
      Expenditures**




From
      January 1, 2007 to June 30, 2007 we spent approximately $63,240 on manufacturing
      and computer equipment and leasehold improvements and furniture. We expect
      our
      capital expenditures to increase based on growth of our operations, and
      increased orders and personnel. We are considering expanding our manufacturing
      area by up to 10,000 square feet. Our facility has warehouse space that is
      contiguous to our present manufacturing area that we are considering using
      for
      the manufacturing area expansion. We expect that expansion, should we choose
      to
      proceed, to cost in the range of $1 million to $2 million.




Recent
      Accounting Pronouncements




In
      February 2006, the FASB issued SFAS 155 Accounting for Certain Hybrid Financial
      Instruments, an amendment of SFAS 133 and 140. These SFAS’s deal with derivative
      and hedging activities, accounting for transfers and servicing of financial
      instruments and extinguishment of liabilities. SFAS 155 is effective for all
      financial instruments acquired or issued in an entity’s first fiscal year
      beginning after September 15, 2006. The Company does not engage in the
      activities described in these SFAS’s and does not have any intention of engaging
      in those activities when SFAS 155 becomes effective. The Company is evaluating
      the impact the adoption of SFAS 155 will have to the
      Company's overall results of operations or financial position.




28




In
      September 2006, the Financial Accounting Standards Board ("FASB") issued
      Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
      ("SFAS No. 157"), which establishes a formal framework for measuring fair value
      under GAAP. SFAS No. 157 defines and codifies the many definitions of fair
      value
      included among various other authoritative literature, clarifies and, in some
      instances, expands on the guidance for implementing fair value measurements,
      and
      increases the level of disclosure required for fair value measurements.




Although
      SFAS No. 157 applies to and amends the provisions of existing FASB and AICPA
      pronouncements, it does not, of itself, require any new fair value measurements,
      nor does it establish valuation standards. SFAS No. 157 applies to all other
      accounting pronouncements requiring or permitting fair value measurements,
      except for: SFAS No. 123(R), share-based payment and related pronouncements,
      the
      practicability exceptions to fair value determinations allowed by various other
      authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9
      that deal with software revenue recognition. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years.




In
      February 2007, the Financial
      Accounting Standards Board (FASB) issued FASB Statement No. 159, “The Fair Value Option for Financial Assets
      and Financial Liabilities  — Including an amendment of FASB Statement
      No. 115” (FAS 159). ** FAS 159,
      which becomes effective for the company on January 1, 2008, permits
      companies to choose to measure many financial instruments and certain other
      items at fair value and report unrealized gains and losses in earnings. Such
      accounting is optional and is generally to be applied instrument by instrument.
      The company does not anticipate that election, if any, of this fair-value option
      will have a material effect on its ( *consolidated)* financial
      condition, results of operations, cash flows or disclosures.




29




**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 [PLEASE UPDATE RISK FACTORS TO CONFORM WITH THE
      SB-2/A.




**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 report for
      the
      fiscal year ended December 31, 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 to 15 months and that we will continue to operate on a
      negative cash flow basis for at least the next 9 to 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. We believe such
      funds will be sufficient to sustain our operations for the next 20 months based
      upon our current expectations. If such expectations prove incorrect, or if
      we continue to operate on a negative cash flow basis at the end of such period,
      then we will likely need to raise additional funds through the sale of
      securities.




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
      June 30, 2007, we had $24,999,083 of debt secured by our fixed assets and
      intellectual property. $7,976,146 accrues interest at a rate of 10% per annum
      and requires monthly interest payments until April 2009, when the balance is
      due
      in full; $10,554,500 accrues interest at a rate of 10% per annum and requires
      monthly interest payments until May 2009 when the balance is due in full;
      $230,000 debt accrues interest at a rate of 10% per annum and requires monthly
      payments until September 30, 2008; $5,776,514 of debt 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 $461,923 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 our revenues fail to
      increase sufficiently, our debt service requirements may affect our working
      capital and, therefore, adversely affect our ability to operate our business.
      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.




30




**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.




**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.




**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.




31




**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.




**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.




**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.




32




**Our
      internal controls over financial reporting may not be effective, and our
      independent auditors may not be able to certify as to their effectiveness,
      which
      could have a significant and adverse effect on our
      business.** We are
      subject to various regulatory requirements, including the Sarbanes-Oxley Act
      of
      2002. We, like all other public companies, must incur additional expenses and,
      to a lesser extent, diversion of our management’s time in our efforts to comply
      with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal controls
      over financial reporting. We have not evaluated our internal controls over
      financial reporting in order to allow management to report on, and our
      independent auditors to attest to, our internal controls over financial
      reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and
      the
      rules and regulations of the SEC, which we collectively refer to as Section
      404.
      We have never performed the system and process evaluation and testing required
      in an effort to comply with the management assessment and auditor certification
      requirements of Section 404, which will initially apply to us as of December
      31,
      2007. Our lack of familiarity with Section 404 may unduly divert management’s
      time and resources in executing the business plan. If, in the future, management
      identifies one or more material weaknesses, or our external auditors are unable
      to attest that our management’s report is fairly stated or to express an opinion
      on the effectiveness of our internal controls, this could result in a loss
      of
      investor confidence in our financial reports, have an adverse effect on our
      stock price and/or subject us to sanctions or investigation by regulatory
      authorities.




**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
      June
      30, 2007, we had approximately 525 stockholders and our market capitalization
      was approximately $ 27,061,498. 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.




**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.




33




**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.




**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.




34




**Our
      executive officers and directors beneficially own or control at least 21.2%
      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
      21.2% 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.




**Future
      sales of our equity securities could put downward selling pressure on our
      securities, and adversely affect the stock price.** There is
      a risk that this downward pressure may make it impossible for an investor to
      sell his securities at any reasonable price, if at all. 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 securities, 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. 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 the date of this Prospectus, 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, 17,867,282 shares of our common stock are issuable upon the
      conversion of our convertible debt at a conversion price of $1.05 and 4,046,083
      shares of our common stock are issuable upon exercise of options.




Item
      3.
      CONTROLS AND PROCEDURES




(a)
      Evaluation of Disclosure Controls and Procedures.




Our
      management, with the participation of our principal executive officer and
      principal financial officer, has evaluated the effectiveness of the design
      and
      effectiveness of our disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
      as of the end of the period covered by this quarterly report. Based on this
      evaluation, our principal executive officer and principal financial officer
      concluded, as of the end of such period, that these disclosure controls and
      procedures are effective and designed to ensure that the information required
      to
      be disclosed in our reports filed or submitted under the Securities Exchange
      Act
      of 1934 is recorded, processed, summarized and reported within the requisite
      time periods.




(b)
      Changes in Internal Controls.




There
      was
      no change in our internal control over financial reporting (as defined in Rules
      13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
      identified in connection with the evaluation of our internal control performed
      during our last fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting.




35




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




See
      Reports on Form 8-K filed April 20 and May 31, 2007.




**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)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)




36




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. (10)10.11
            
            Consulting
                Agreement by and between Quintessence and Capital Group Communications,
                Inc. dated as of April 3, 2006 (4)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)




37




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 (9)(**)10.25
            
            Securities
                Purchase Agreement dated April 16, 2007 (8)10.26
            
            Form
                of Secured Debenture (8)10.27
            
            Form
                of Warrant (8)10.28
            
            Form
                of Registration Rights Agreement (8)10.29
            
            Security
                Agreement (8)


31.01
              Chief
                  Executive Officer's Certification pursuant to Section 302 of the
 Sarbanes-OxleyAct
                  of 2002 (11)
 31.02
              Chief
                  Financial Officer's Certification pursuant to Section 302 of the
 Sarbanes-OxleyAct
                  of 2002 (11)
 32.01
              Chief
                  Executive Officer's Certification pursuant to Section 906 of the
                  Sarbanes-Oxley
 Act
                  of 2002 (11)
 32.02
              Chief
                  Financial Officer's Certification pursuant to Section 906 of the
                  Sarbanes-Oxley
 Act
                  of 2002 (11)




38




(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(8)
            Filed with
                the Registrant’s Current Report on Form 8-K filed on May 31,
                2007(9)
            Filed
                with the Registrant’s Registration Statement on Form SB-2 filed on June
                15, 2007(10)
            Filed
                with Pre-Effective Amendment No. 1 to Registrant’s Registration Statement
                on Form SB-2, filed on August 1, 2007(11)
            Filed
              herewith.(**)
            Confidential
                treatment requested as to portions of the Exhibit. Omitted materials
                filed
                separately with the Commission.




39




**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:
                August 14, 2007
            **QPC
                Lasers, Inc.**/s/ George
              LintzGeorge
                LintzChief
                Operating Officer, Chief Financial Officer




/s/ Jeffrey
              UngarChief
                Executive Officer




40