**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM 10-Q**




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


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      the quarterly period ended June 30, 2008**




**Commission
      File Number: 000-28153**




**QPC
      LASERS, INC**


(Exact
      name of registrant as specified in its charter)




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




**(818)
      986-0000**


(Registrant’s
      telephone number, including area code)




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




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




Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filero
              (Do
              not
                check if a smaller
              reporting
                company)
            Smaller
                reporting companyx




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




As
      of
      August 1, 2008, there were 42,729,187 shares of the registrant’s Common Stock
      outstanding.









**INDEX
      TO FORM 10-Q**




PAGEPART
                I FINANCIAL INFORMATIONItem
                1. Condensed Consolidated Financial Statements
            3Condensed
                Consolidated Balance Sheets at June 30, 2008 (unaudited) and December
                31,
                2007
            3Condensed
                Consolidated Statements of Operations for the three and six month
                periods
                ended June 30, 2008 and June 30, 2007 (unaudited)
            4Condensed
                Consolidated Statements of Stockholders' Deficiency (unaudited)
            5Condensed
                Consolidated Statements of Cash Flows for the three and six month
                periods
                ended June 30, 2008 and June 30, 2007 (unaudited)
            6Notes
                to Unaudited Condensed Consolidated Financial Statements
            8Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            28Item
                3. Quantitative and Qualitative Disclosures about Market Risk
            48Item
                4. Control and Procedures
            48Item
                4T. Control and Procedures
            48PART
                II OTHER INFORMATIONItem
                1. Legal Proceedings
            49Item
                2. Unregistered Sales of Equity Securities and Use of Proceeds
            49Item
                3. Defaults Upon Senior Securities
            49Item
                4. Submission of Matters to a Vote of Security Holders
            49Item
                5. Other Information
            50Item
                6. Exhibits
            50SIGNATURES
            55




2




**Item
      1 Condensed Consolidated Financial Statements.**




**QPC
      LASERS, INC.** and Subsidiary


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**June
                  30, 2008**
                **(Unaudited)**
              
              **December
                  31, 2007****CURRENT
                  ASSETS**Cash
              
              $
              463,383
              
              $
              6,431,744Restricted
                  Cash
              
              
              235,000
              
              
              -Accounts
                  receivable, Commercial customers, net of allowance for doubtful
                  accounts
                  of $221,397 at June 30, 2008 and $3,735 at December 31,
                  2007
              
              
              2,235,656
              
              
              2,283,425Accounts
                  receivable, Government contracts, net
              
              
              271,391
              
              
              609,874Unbilled
                  Revenue
              
              
              361,893
              
              
              194,537Inventory
              
              
              1,075,775
              
              
              688,364Prepaid
                  expenses and other current assets
              
              
              138,738
              
              
              226,466**Total
                  Current Assets**
              
              
              4,781,836
              
              
              10,434,410Property
                  and equipment, net of accumulated depreciation of $6,387,446 at
                  June 30,
                  2008 and $6,051,713 at December 31, 2007
              
              
              3,142,008
              
              
              3,359,711Other
                  assets
              
              
              203,415
              
              
              203,415**TOTAL
                  ASSETS**
              
              $
              8,127,259
              
              $
              13,997,536**LIABILITIES
                  AND STOCKHOLDER’S DEFICIENCY****CURRENT
                  LIABILITIES**Accounts
                  payable and other current liabilities
              
              $
              1,789,187
              
              $
              1,737,581Embedded
                  Derivative Liability
              
              
              12,665,851
              
              
              10,283,181Current
                  portion of long term debt
              
              
              10,753,088
              
              
              624,834**Total
                  Current Liabilities**
              
              
              25,208,126
              
              
              12,645,596Subscriptions
                  to pending offering
              
              
              235,000
              
              
              -Long
                  term debt, less current portion
              
              
              5,419,715
              
              
              11,435,133**Total
                  Liabilities**
              
              
              30,862,841
              
              
              24,080,729**STOCKHOLDERS’
                  DEFICIENCY**Preferred
                  stock, $.001 par value, 20,000,000 shares authorized, none issued
              
              
              -
              
              
              -Common
                  stock, $.001 par value, 180,000,000 shares authorized,
                  39,441,561 issued and outstanding at June 30, 2008 and 38,676,783
                  issued
                  and outstanding at December 31, 2007
              
              
              39,442
              
              
              38,677Additional
                  paid in capital
              
              
              52,214,073
              
              
              51,095,087Accumulated
                  deficit
              
              
              (74,989,097
              )
              
              (61,216,957
              )Total
                  stockholders’ deficiency
              
              
              (22,735,582
              )
              
              (10,083,193
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS’ DEFICIENCY**
              
              $
              8,127,259
              
              $
              13,997,536




**See
      accompanying Notes to Condensed Consolidated Financial
      Statements**




3




**QPC
      LASERS, INC. and Subsidiary**


**CONDENSED
      CONSOLIDTED STATEMENTS OF OPERATIONS**


**For
      the three and six months ended June 30, 2008 and 2007**


**(Unaudited)**




**Three
                  months ended June 30,**
              
              **Six
                  months ended June 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****REVENUE**
              
              
              1,306,882
              
              
              1,823,005
              
              $
              2,955,076
              
              $
              2,929,584**COST
                  OF SALES**
              
              
              888,711
              
              
              960,162
              
              
              1,739,804
              
              
              1,815,943**GROSS
                  PROFIT**
              
              
              418,171
              
              
              862,843
              
              
              1,215,272
              
              
              1,113,641**OPERATING
                  EXPENSES**Research
                  and Development
              
              
              1,437,527
              
              
              1,060,761
              
              
              2,864,060
              
              
              2,073,560Selling,
                  General and Administrative
              
              
              2,504,629
              
              
              1,407,889
              
              
              5,158,370
              
              
              2,624,413Total
                  operating expenses
              
              
              3,942,156
              
              
              2,468,650
              
              
              8,022,430
              
              
              4,697,973**LOSS FROM
                  OPERATIONS**
              
              
              (3,523,985
              )
              
              (1,605,807
              )
              
              (6,807,158
              )
              
              (3,584,332
              )Interest
                  Income
              
              
              4,775
              
              
              46,223
              
              
              34,036
              
              
              47,977Interest
                  Expense
              
              
              (3,327,041
              )
              
              (2,012,187
              )
              
              (6,280,919
              )
              
              (2,480,586
              )Change
                  in fair value of embedded derivative
              
              
              2,330,673
              
              
              20,054,927
              
              
              (596,983
              )
              
              20,054,927Private
                  placement expense
              
              
              (162,320
              )
              
              (17,740,180
              )
              
              (162,320
              )
              
              (17,740,180
              )Other
                  income
              
              
              15,662
              
              
              20,751
              
              
              41,204
              
              
              52,715**NET
                  LOSS**
              
              $
              (4,662,236
              )
              $
              (1,236,273
              )
              $
              (13,772,140
              )
              $
              (3,649,479
              )**LOSS
                  PER COMMON SHARE**—
                  Basic and Diluted
              
              $
              (0.12
              )
              $
              (0.03
              )
              $
              (0.35
              )
              $
              (0.09
              )**WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING,**
                basic
                  and diluted
              
              
              39,344,304
              
              
              38,609,283
              
              
              39,010,544
              
              
              38,584,283




**See
      accompanying Notes to Condensed Consolidated Financial Statements**




4




**QPC
      LASERS, INC. and Subsidiary**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
DEFICIENCY**


**For
      the six months ended June 30, 2008 (Unaudited)**




Common
                  Stock
              
              Additional
              
              AccumulatedShares
              
              Amount
              
              Paid-in
                  Capital
              
              Deficit
              
              TotalBalance,
                  January 1, 2008
              
              
              38,676,783
              
              $
              38,677
              
              $
              51,095,087
              
              $
              (61,216,957
              )
              $
              (10,083,193
              )Fair
                  value of vested stock options
              
              
              -
              
              
              -
              
              
              293,951
              
              
              -
              
              
              293,951Conversion
                  of debentures
              
              
              669,778
              
              
              670
              
              
              702,597
              
              
              -
              
              
              703,267Elimination
                  of beneficial conversion feature derivative liability upon conversion
                  of
                  debenture
              
              
              -
              
              
              -
              
              
              94,983
              
              
              -
              
              
              94,983Issuance
                  of stock upon option exercise
              
              
              95,000
              
              
              95
              
              
              27,455
              
              
              -
              
              
              27,550Net
                  loss for the six months ended June 30, 2008
              
              
              -
              
              
              -
              
              
              -
              
              
              (13,772,140
              )
              
              (13,772,140
              )Balance,
                  June 30, 2008
              
              
              39,441,561
              
              $
              39,442
              
              $
              52,214,073
              
              $
              (74,989,097
              )
              $
              (22,735,582
              )




**See
      accompanying Notes to Condensed Consolidated Financial Statements**




5




**QPC
      LASERS, INC. and Subsidiary**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**For
      the six months ended June 30, 2008 and 2007**


**(Unaudited)**




**Six
                  Months Ended****2008**
              
              **2007****CASH
                  FLOWS FROM OPERATING ACTIVITIES****Net
                  Loss**
              
              $
              (13,772,140
              )
              $
              (3,649,479
              )**Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:****Depreciation
                  and amortization**
              
              
              335,733
              
              
              430,789**Amortization
                  of loan discount**
              
              
              5,011,126
              
              
              1,757,320**Amortization
                  of Capitalized Loan Fees**
              
              
              -
              
              
              38,039**Change
                  in fair value of embedded derivatives**
              
              
              596,983
              
              
              (20,054,927
              )**Fair
                  value of vested options**
              
              
              293,951
              
              
              215,758**Private
                  placement costs**
              
              
              162,320
              
              
              1,148,160**Shares
                  of common stock issued for services**
              
              
              -
              
              
              135,000**Fair
                  value of warrants issued for services and private placement costs**
              
              
              -
              
              
              16,427,020**Fair
                  value of modification of warrants**
              
              
              -
              
              
              22,845**Changes
                  in operating assets and liabilities:****Accounts
                  receivable**
              
              
              386,252
              
              
              (455,099
              )**Inventory**
              
              
              (387,411
              )
              
              (3,895
              )**Unbilled
                  revenue**
              
              
              (167,356
              )
              
              (809,433
              )**Other
                  assets**
              
              
              -
              
              
              (146,718
              )**Prepaid
                  Expenses**
              
              
              87,728
              
              
              76,998**Accounts
                  payable and other current liabilities**
              
              
              51,606
              
              
              95,766**Net
                  cash used in operating activities**
              
              
              (7,401,208
              )
              
              (4,771,856
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:****Purchase
                  of property and equipment**
              
              
              (118,029
              )
              
              (63,240
              )**Net
                  cash used in investing activities**
              
              
              (118,029
              )
              
              (63,240
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:****Proceeds
                  from borrowing, net of offering costs**
              
              
              1,826,500
              
              
              14,425,740**Exercise
                  of Options**
              
              
              27,550
              
              
              -**Principal
                  payments on debt**
              
              
              (303,174
              )
              
              (363,748
              )**Net
                  cash provided by financing activities**
              
              
              1,550,876
              
              
              14,061,992**NET
                  INCREASE IN CASH**
              
              
              (5,968,361
              )
              
              9,226,896**CASH —
                  Beginning of period**
              
              
              6,431,744
              
              
              1,429,077**CASH —
                  End of period**
              
              $
              463,383
              
              $
              10,655,973**Supplemental
                  Disclosures of Cash Flow Information****Cash
                  paid during the period for:****Interest**
              
              $
              1,269,793
              
              $
              676,572**Taxes**
              
              
              -
              
              
              -





**See
        accompanying Notes to Condensed Consolidated Financial Statements**




6




SUPPLEMENTAL
      DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:




During
      the six months ended June 30, 2008, the Company issued warrants to purchase
      4,840,035 shares of common stock and debentures with a conversion feature valued
      at $1,880,669 to investors and placement agents.





During
      the six months ended June 30, 2008, holders of our Secured Debentures converted
      $703,267 of principal into 669,778 shares of common stock.





During
      the six months ended June 30, 2008, the Company recorded an elimination of
      $94,983 of our embedded derivative liability as a result of the conversion
      of
      $703,267 of Secured Debentures.





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




7




**QPC
      LASERS, INC. AND SUBSIDIARY**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
      (UNAUDITED)**




NOTE
      1 -
      NATURE OF OPERATIONS AND BASIS OF PRESENTATION





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




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





ORGANIZATION
      AND NATURE OF OPERATIONS





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





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





GOING
      CONCERN




The
      accompanying condensed consolidated financial statements have been prepared
      in
      conformity with accounting principles generally accepted in the United States
      of
      America, which contemplate continuation of the Company as a going concern.
      However, the Company had a net loss of $9,710,564 and utilized cash of
      $8,561,410 in operating activities during the year ended December 31, 2007,
      and
      had a stockholders’ deficiency of $10,083,193 at December 31, 2007. During the
      six months ended June 30, 2008, the Company had a net loss of $13,772,140 and
      utilized cash of $7,401,208 in operating activities. At June 30, 2008 the
      Company had a stockholders’ deficiency of $22,735,582. 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.




8




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





Principles
      of Consolidation





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




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Revenue
      Recognition





A
      portion
      of the Company’s revenues result from fixed-price contracts with U.S. government
      agencies. Revenues from fixed-price contracts are recognized under the
      percentage-of-completion method of accounting, generally based on costs incurred
      as a percentage of total estimated costs of individual contracts (“cost-to-cost
      method”). Revisions in contract revenue and cost estimates are reflected in the
      accounting period as they are identified. Provisions for the entire amount
      of
      estimated losses on uncompleted contracts are made in the period such losses
      are
      identified. No contracts were determined to be in an overall loss position
      at
      December 31, 2007 or June 30, 2008. In addition, the Company has certain cost
      plus fixed fee contracts with U.S. Government agencies that are being recorded
      as revenue is earned based on time and costs incurred. At December 31, 2007,
      there was no deferred revenue and approximately $194,537 of unbilled receivables
      related to these government contracts. At June 30, 2008 there was no deferred
      revenue and $361,893 of unbilled receivables related to these government
      contracts.





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




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, 2008, management has concluded that neither a reserve for product returns
      nor a warranty liability is required. Our ability to estimate such future
      liabilities is limited by the lack of historical information available.





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





Management
      Estimates





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




9




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Stock-Based
      Compensation





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





Concentration
      of Credit Risk and Customer Concentration





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist primarily of cash and cash equivalents placed with high credit
      quality institutions and account receivable due from government agencies and
      commercial customers. The Company places its cash and cash equivalents with
      high
      credit quality financial institutions. From time to time such cash balances
      may
      be in excess of the FDIC insurance limit of $100,000. Accounts receivable are
      typically unsecured and are derived from revenues earned from customers. The
      Company performs ongoing credit evaluations of its customers and maintains
      reserves for potential credit losses; historically, such losses have been
      immaterial and within management's expectations. At June 30, 2008, three
      customers accounted for 10%, 19%, and 26% of our accounts receivable, for a
      total of 55% of the accounts receivable balance.


Three
        customers accounted for 5%, 21%, and 24% of revenue for the six months ended
        June 30, 2008.  During the six months ended June 30, 2007, three customers
        accounted for 10%, 12%, and 17% of total revenue.  The three largest
        customers during the first half of 2008 were different than the largest
        customers in the six months ended June 30, 2007 except for one customer that
        accounted for 21%  and 17% of revenue during the six months ended June 30,
        2008 and 2007, respectively.
 
 Three
        customers accounted for 11%, 15%, and 28% of revenue for the three months
        ended
        June 30, 2008.  For the three months ended June 20, 2007, three customers
        accounted for 14%, 15%, and 28% of revenue.  The three largest customers
        for the three months ended June 30, 2008 were not the same as the three largest
        customers for three months ended June 30, 2007, except for one customer that
        accounted for 28% of revenue for the three months ended June 30, 2008 and
        2007.




Allowance
      for Doubtful Accounts





The
      Company generally, requires no collateral or deposits from its customers and
      relies upon its own evaluation of a customer’s creditworthiness. The Company
      records an allowance for doubtful accounts receivable for credit losses at
      the
      end of each period based on an analysis of individual aged accounts receivable
      balances. As a result of this analysis, the Company believes that its allowance
      for doubtful accounts is adequate at June 30, 2008 and December 31, 2007. If
      the
      financial condition of the Company's customers should deteriorate, or other
      events occur which result in an impairment of collectability of the receivable,
      additional allowances will be recorded.





Loss
      per Common Share





Basic
      loss per share is calculated by dividing net loss by the weighted average number
      of common shares outstanding during the period. Diluted loss per share is
      calculated assuming the issuance of common shares, if dilutive, resulting from
      the exercise of stock options and warrants. At June 30, 2008 and 2007,
      potentially dilutive securities consisted of outstanding common stock purchase
      warrants and stock options to acquire an aggregate of 48,170,485 and 41,698,449
      shares, respectively. Since the Company reported a net loss for the three and
      six months ended June 30, 2008 and 2007, these potentially dilutive common
      shares were excluded from the diluted loss per share calculation because they
      were anti-dilutive.




10




NOTE
        2 -
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Accounting
      for Derivative Instruments





Statement
      of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” as amended, requires all derivatives to be
      recorded on the balance sheet at fair value. In September 2000, the Emerging
      Issues Task Force (“EITF”) issued EITF 00-19, “Accounting for Derivative
      Financial Instruments Indexed to and Potentially Settled in, a Company’s Own
      Stock,” (“EITF 00-19”) which requires freestanding contracts that are settled in
      a company’s own stock, including common stock warrants, to be designated as an
      equity instrument, asset or a liability. Under the provisions of EITF 00-19,
      a
      contract designated as an asset or a liability must be carried at fair value
      on
      a company’s balance sheet, with any changes in fair value recorded in the
      company’s results of operations. These derivatives, including embedded
      derivatives in the debentures issued in April and May 2007 and May 2008 that
      are
      discussed in Note 6, are separately valued and accounted for on our balance
      sheet, and revalued at each reporting period. The net change in the value of
      embedded derivative liability is recorded as change in fair value of derivative
      liability in the consolidated statement of operations, and is included in other
      income and expense.





Fair
      Value Instruments





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





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








**•**
            Level
                1 — quoted prices (unadjusted) in active markets for identical assets
                or liabilities that the Company has the ability to access as of the
                measurement date. Financial assets and liabilities utilizing Level
                1
                inputs include active exchange-traded securities and exchange-based
                derivatives.**•**
            Level
                2 — inputs other than quoted prices included within Level 1 that are
                directly observable for the asset or liability or indirectly observable
                through corroboration with observable market data. Financial assets
                and
                liabilities utilizing Level 2 inputs include fixed income securities,
                non-exchange-based derivatives, mutual funds, and fair-value
                hedges.


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




11




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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





The
      following table presents the embedded derivative, the Company’s only financial
      assets measured and recorded at fair value on the Company’s Consolidated Balance
      Sheets on a recurring basis and their level within the fair value hierarchy
      during the three months ended June 30, 2008:




**Fair Value****As of June 30, 2008**
            
            **Level 1**
            
            **Level 2**
            
            **Level 3**
            
            **Total**Embedded
                derivative liabilities
            
            $
            -
            
            $
            12,665,851
            
            $
            -
            
            $
            12,665,851




The
      following table reconciles, for the period ended June 30, 2008, the
      beginning and ending balances for financial instruments that are recognized
      at
      fair value in the consolidated financial statements:





Balance
                of Embedded derivative at December 31, 2007
            
            $
            10,283,181Fair
                Value of warrants and conversion feature of the May 2008 debenture
                at
                issuance
            
            
            1,880,669Conversion
                of convertible debentures into common stock
            
            
            (94,982
            )Gain
                on fair value adjustments to embedded derivatives
            
            
            596,983Balance
                at June 30, 2008
            
            $
            12,665,851





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





Income
      Taxes





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




12




NOTE
      2 -
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Recent
      Accounting Pronouncements





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





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





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




13




NOTE
      3 -
      INVENTORY





Inventory
      consists of the following:




June
                30, 2008
              (Unaudited)
            
            December 31,
                2007Raw
                materials
            
            $
            654,261
            
            $
            549,792Work
                in process
            
            
            352,726
            
            
            126,003Finished
                Goods
            
            
            70,411
            
            
            14,192Reserve
                for slow moving and obsolescence
            
            
            (1,623
            )
            
            (1,623
            )$
            1,075,775
            
            $
            688,364







NOTE
      4 -
      PROPERTY AND EQUIPMENT





Property
      and equipment consist of the following:




June
                30, 2008
              (Unaudited)
            
            December 31,
                 2007
            
            Useful
              LivesComputer
                software
            
            $
            86,804
            
            $
            86,803
            
            
            3
                yearsFurniture
                and fixtures
            
            
            124,381
            
            
            124,380
            
            
            6
                yearsComputer
                equipment
            
            
            173,127
            
            
            161,310
            
            
            3
                yearsOffice
                equipment
            
            
            73,258
            
            
            72,230
            
            
            5
                yearsLab
                and manufacturing equipment
            
            
            5,142,810
            
            
            5,071,681
            
            
            5
                yearsLeasehold
                improvements
            
            
            3,892,081
            
            
            3,886,670
            
            
            14
                yearsConstruction
                in progress
            
            
            36,993
            
            
            8,3509,529,454
            
            
            9,411,424Less
                accumulated depreciation and amortization
            
            
            (6,387,446
            )
            
            (6,051,713
            )Property
                and equipment, net
            
            $
            3,142,008
            
            $
            3,359,711





Depreciation
      and amortization expense related to property and equipment amounted to $335,733
      and $430,789, respectively for the six months ended June 30, 2008 and 2007.




14





NOTE
      5 -
      LONG TERM DEBT





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





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





As
      of
      June 30, 2008, long term debt consisted of the following:





Loan
              Balance
            
            Loan
              discount
            
            Current
              portion
            
            Noncurrent
              PortionSubordinated
                Secured Convertible Notes  (a)
            
            $
            48,517
            
            $
            (3,498
            )
            $
            45,019
            
            $
            —Finisar
                Secured Note (b)
            
            
            5,480,401
            
            
            —
            
            
            385,545
            
            
            5,094,856Secured
                Equipment Financing (c)
            
            
            335,088
            
            
            —
            
            
            176,753
            
            
            158,335April
                Secured Debentures (d)
            
            
            7,828,379
            
            
            (3,098,733
            )
            
            4,729,646
            
            
            —May
                Secured Debentures (e)
            
            
            9,999,000
            
            
            (4,582,875
            )
            
            5,416,125
            
            
            —2008
                Secured Debentures (f)
            
            
            2,209,579
            
            
            (2,043,055
            )
            
            —
            
            
            166,524$
            25,900,964
            
            $
            (9,728,161
            )
            $
            10,753,088
            
            $
            5,419,715





(a)
      Subordinated Secured Convertible Notes Payable





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




15




NOTE
      5 -
      LONG TERM DEBT (CONTINUED)





The
      Company issued warrants to purchase 320,000 shares of the Company’s common stock
      in connection with this debt offering during 2005. The warrants were valued
      at
      $0.73 a warrant or $233,600, using an option pricing model and were reflected
      as
      a loan discount amount, which has been netted against the loan principal
      balance. The assumptions used in the model were: risk free interest rate, 4.41%,
      expected life, 5 years, expected volatility, 70%, no expected dividends. The
      loan discount fee is being amortized over the life of the loan. Interest expense
      includes $6,996 and $118,777 relating to the amortization of this discount
      during the six months ended June 30, 2008 and 2007, respectively. The effective
      interest rate on these loans, giving effect for the modified terms and the
      loan
      discount is 22%.





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





(b) Finisar
      Senior Secured Note





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





(c) Secured
      Equipment Financing





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





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





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




16




NOTE
      5 -
      LONG TERM DEBT (CONTINUED)





(d) April
      Secured Debentures





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





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





The
      aggregate fair value of the conversion feature and the investor warrants was
      $14,851,272 on the date of issuance. The value of the compound embedded
      derivative up to the $7,178,531 amount of the loan less the original issue
      discount was accounted for as a loan discount which has been netted against
      principal balance, to be amortized over the term of the loan. Interest expense
      includes $2,052,528 and $830,849 related to the amortization of this discount
      during the six months ended June 30, 2008 and 2007, respectively. The excess
      $7,672,741 fair value of the embedded derivative was charged to private
      placement costs during the year ended December 31, 2007.





During
      April 2008, certain investors converted $147,767 of the April 2007 Debentures
      into our common stock at a conversion price of $1.05 per share for 140,730
      shares of common stock. At
      the
      date of the conversion of Debentures into common stock, the pro rata portion
      of
      the related unamortized discount on debt of $76,962 was charged to operations
      and included in interest expense.





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




17




NOTE
      5 -
      LONG TERM DEBT (CONTINUED)




(e) May
      Secured Debentures





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





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




The
      aggregate fair value of the conversion feature and the investor warrants was
      $16,157,720 on the date of issuance. The value of the compound embedded
      derivative up to $9,500,000, the amount of the loan less the original issue
      discount was accounted for as a loan discount which has been netted against
      principal balance, to be amortized over the term of the loan. Interest expense
      includes $2,893,229 and $439,771 related to the amortization of this discount
      during the six months ended June 30, 2008 and 2007, respectively. The excess
      $6,657,720 fair value of the embedded derivative was charged to private
      placement costs during the year ended December 31, 2007.





During
      April 2008, certain investors converted $555,500 of the May 2007 Debentures
      into
      our common stock at a conversion price of $1.05 per share for 529,048 shares
      of
      common stock. At
      the
      date of the conversion of Debentures into common stock, the pro rata portion
      of
      the related unamortized discount on debt of $324,042 was charged to operations
      and included in interest expense.





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.




18




NOTE
      5 -
      LONG TERM DEBT (CONTINUED)




(e) 2008
      Secured Debentures





During
      May 2008, the Company entered into securities purchase agreements with certain
      investors (the “2008 Investors”), pursuant to which the Company agreed to issue
      to the Investors secured convertible debentures in the aggregate principal
      amount of up to $3,888,500 at an original issue discount of 10% (the “2008
      Secured Debentures”). The 2008 Secured Debentures are convertible into shares of
      the Company’s common stock (the “Common Stock”) at an initial conversion price
      of $1.05 per share, subject to customary adjustments including full-ratchet
      and
      other standard anti-dilution protection. The first closing under the Securities
      Purchase Agreement occurred on May 19, 2008, on which date the Company issued
      an
      aggregate of $2,209,579 in principal amount of the 2008 Secured Debentures
      and
      warrants to acquire 4,208,726 shares of Common Stock, for an aggregate purchase
      price of $1,988,820 of which $1,822,500 was received in cash and $19,000 was
      received in the form of a promissory note. The remaining balance of $147,320
      represents TR Winston & Company’s (“TRW”) fee for services rendered as
      placement agent for this financing. TRW received payment of such fee in the
      form
      of a Secured Debenture for the principal amount of $163,673 and Warrants to
      purchase 311, 757 shares of common stock of the Company. In addition, TRW
      received warrants to purchase 631,309 shares of common stock in connection
      with
      this financing.





In
      connection with the May 2008 Debenture Offering, the Company granted warrants
      to
      purchase 4,208,726 shares of common stock to the 2008 Investors and warrants
      to
      purchase 631,309 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 expire five years from the date of
      issuance. The initial fair value of the warrants was estimated at approximately
      $1,447,170 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 69.7%,
      (3)
      risk-free interest rate of 3.09%, (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 features and the warrants was $1,880,669
      on the date of issuance. The value of the compound embedded derivative was
      accounted for as a loan discount which has been netted against principal
      balance, to be amortized over the term of the loan. Interest expense includes
      $58,373 related to the amortization of this discount during the six months
      ended
      June 30, 2008.





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





The
      2008
      Secured Debentures are secured by substantially all of the Company’s assets
      including the common stock of Quintessence Photonics Corporation, a wholly
      owned
      subsidiary of the Company.




19




NOTE
      6 -
      COMPOUND EMBEDDED DERIVATIVE





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




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




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




The
      company did not meet the revenue milestone for the six month period ending
      June
      30, 2008. The conversion price of the Debentures and the exercise price of
      the
      Warrants, as well as the conversion and exercise price for the debentures and
      warrants issued by the Company in May 2008 (see below and Note 5), is subject
      to
      adjustment as a result of the Company’s failure to meet the revenue milestone.
      The extent of any such adjustment cannot be determined at this time.





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.




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




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




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




20




NOTE
      6 -
      COMPOUND EMBEDDED DERIVATIVE (CONTINUED)





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 of the funds raised. See Note 5 for a description of the assumptions
      used
      in the complex binomial lattice pricing model to determine the fair value of
      the
      compound embedded derivative at issuance.





In
      April
      2008, holders of $147,767 of the April 2007 Debentures and holders of $555,500
      of the May 2007 Debentures converted their debentures into shares of the
      Company’s common stock. At the date of the conversion of Debentures into common
      stock, the pro rata portion of the fair value of the related embedded derivative
      liability was transferred to additional paid-in capital. During the six months
      ended June 30, 2008, we recorded $94,983 for the elimination of the prorated
      portion of the embedded derivative liability associated with the conversions
      of
      the April 2007 debentures and May 2007 debentures.




As
      of
      June 30, 2008 the fair value of the embedded derivative liability related to
      our
      April and May debentures’ conversion features and the detached warrants was
      $10,430,176 an increase of $241,977 from the fair value of $10,283,181 at
      December 31, 2007 after taking into account the elimination of the prorated
      portion of the derivative liability of $94,983 for the debenture conversions
      that occurred in April 2008. The change in fair value of the derivative
      liability was recorded in other losses in the accompanying statement of
      operations.





During
      May 2008, the Company entered into securities purchase agreements with certain
      investors (the “2008 Investors”), pursuant to which the Company agreed to issue
      to the Investors secured convertible debentures in the aggregate principal
      amount of up to $3,888,500 at an original issue discount of 10% (the “2008
      Secured Debentures”). The 2008 Secured Debentures are convertible into shares of
      the Company’s common stock (the “Common Stock”) at an initial conversion price
      of $1.05 per share, subject to customary adjustments including full-ratchet
      and
      other standard anti-dilution protection. The first closing under the Securities
      Purchase Agreement occurred on May 19, 2008, on which date the Company issued
      an
      aggregate of $2,209,579 in principal amount of the 2008 Secured Debentures
      and
      warrants to acquire 4,208,726 shares of Common Stock, for an aggregate purchase
      price of $1,988,820 of which $1,822,500 was received in cash and $19,000 was
      received in the form of a promissory note. The remaining balance of $147,320
      represents TR Winston & Company’s (“TRW”) fee for services rendered as
      placement agent for this financing. TRW received payment of such fee in the
      form
      of a Secured Debenture for the principal amount of $163, 673 and Warrants to
      purchase 311, 757 shares of common stock of the Company. In addition, TRW
      received warrants to purchase 631,309 shares of common stock in connection
      with
      this financing.





In
      connection with the May 2008 Debenture Offering, the Company granted warrants
      to
      purchase 4,208,726 shares of common stock to the 2008 Investors and warrants
      to
      purchase 631,309 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 expire five years from the date of
      issuance.




21




NOTE
      6 -
      COMPOUND EMBEDDED DERIVATIVE (CONTINUED)





We
      concluded that both the debentures conversion features and the detached warrants
      issued in the May 2008 Debenture financing should be accounted for as a compound
      embedded derivative, based on the analysis described above, and had a valuation
      performed which concluded that the value of these features was $1,880,669 as
      of
      May 19, 2008. See Note 5 for a description of the assumptions used in the
      complex binomial lattice pricing model to determine the fair value of the
      compound embedded derivative at issuance. The value of these derivatives was
      $2,235,675 as of June 30, 2008. The $355,006 increase in fair value of the
      derivative liability was recorded in other losses in the accompanying statement
      of operations.





As
      of
      June 30, 2008, the company did not meet the revenue milestone included in the
      April 2007 and May 2007 convertible debentures and stock purchase warrants.
      The
      reset of the conversion price of the 2007 Debentures and the 2007 Warrants
      (see
      above) would trigger a reset of the 2008 Debenture conversion price and also
      the
      exercise price of the warrants issued to the investors in the May 2008 Debenture
      financing. The extent of any such adjustment cannot be determined at this time.




22




NOTE
      7 -
      STOCK OPTIONS AND WARRANTS




A
      summary
      of option activity as of June 30, 2008 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, 2008
            
            
            4,417,666
            
            $
            0.84
            
            
            7.7Granted
            
            
            870,000
            
            $
            0.68
            
            
            10Exercised
            
            
            (95,000
            )
            
            0.29Forfeited
                or expired
            
            
            (75,000
            )
            $
            0.75Outstanding
                at June 30, 2008
            
            
            5,117,666
            
            $
            0.83
            
            
            7.7
            
            $
            526,365Exercisable
                at June 30, 2008
            
            
            2,877,472
            
            $
            0.72
            
            
            6.6
            
            $
            513,540





The
      value
      of options vesting during the six months ended June 30, 2008 and 2007 was
      $293,951 and 215,758 respectively, and has been reflected as compensation cost.
      As of June 30, 2008, the Company has unvested options valued at $2,372,886
      which
      will be reflected as compensation cost in future periods as the options
      vest.




The
      Company calculates the fair value of employee stock options using a
      Black-Scholes option pricing model at the time the stock options are granted
      and
      that amount is amortized over the vesting period of the options, which is
      generally four years. The fair value for employee stock option grants for the
      six months ended June 30, 2008 and 2007 was calculated based on the
      following assumptions: risk-free interest rate of 3.02% to 4.5%; dividend yield
      of 0%; volatility factor of 63% to 73.5%; and a weighted average expected life
      of the options of 7 years. The risk-free interest rate was based on the applied
      yield currently available on U.S treasury zero-coupon issues. The expected
      weighted-average volatility factor is based on the historical stock prices
      of
      competitors of the Company whose shares are publicly traded over the most recent
      period.





A
      summary
      of the Company’s warrant activity for the six months ended June 30, 2008
      follows:




Number
                of WarrantsWarrants
                outstanding at January 1, 2008
            
            
            38,212,783Granted
            
            
            4,840,035Exercised
            
            
            -Cancelled
            
            
            -Warrants
                outstanding at June 30, 2008
            
            
            43,052,818





There
      was
      no intrinsic value to any of the warrants outstanding at June 30, 2008 as all
      of
      the outstanding warrants have an exercise price higher than the stock price
      on
      June 30, 2008.




23




NOTE
      8 -
      INCOME TAXES





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




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





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




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





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




24




NOTE
      9 -
      DEVELOPMENT AND ROYALTY AGREEMENT





On
      June
      30, 2008, QPC Lasers, Inc. (the “ Company ”)
      and
      its wholly-owned subsidiary, Quintessence Photonics Corporation (“ Quintessence ”),
      entered into a Development and Royalty Agreement (the “ Agreement ”)
      with a
      domestic company in the video gaming/entertainment industry (“Customer”),
      pursuant to which the Company and Quintessence agreed to provide non-recurring
      engineering services relating to the development of laser chips and modules
      intended for use as a three-dimensional light source for display projection
      products and systems (the “ Products ”).
      The
      development items relating to these Products, including a preliminary design
      of
      a laser module for a 3-D projection system, were delivered to Customer as of
      the
      effective date of the Agreement. In consideration for such services, together
      with the purchase rights, royalty rights and right of participation granted
      to
      Customer under the Agreement as further described below, Customer agreed to
      pay
      a development fee of $2 million (the “ Development
      Fee ”)
      payable in eleven installments beginning on June 30, 2008 and ending on June
      30,
      2009.





The
      Company analyzed the terms of the development contract and compared the terms
      to
      our revenue recognition policy, and determined that although the development
      items relating to these Products, including a preliminary design module for
      a
      3-D projection system, were delivered to Customer as of June 30, the customer
      lacks sufficient credit history to verify collectability of the development
      payment. In applying our revenue recognition policy, the Company has determined
      that the revenue should be recorded as received. The Company will reevaluate
      this policy as a credit history develops.





*Purchase
      Rights* .
      In
      partial consideration for the Development Fee, the Company grants Customer
      the
      right to purchase the Products directly from QPC at a price that is no less
      favorable than the price offered by the Company to any third party for similar
      quantities during the five-year term of the Agreement. Customer may use such
      Products purchased from the Company to incorporate into display projector
      devices subject to the license grant and restrictions set forth in the
      Agreement.





*Royalty
      Payments.* During
      the five-year term of the Agreement, the Company agrees to make royalty payments
      (“ Royalty
      Payments ”)
      to
      Customer in the following amounts: (1) ten percent (10%) of Net Revenue (as
      defined in the Agreement) actually received by the Company or Quintessence
      from
      the sale of the Products for use in three dimensional display/ projection
      applications in connection with the 3-D display and projection business, and
      (2)
      three present (3%) of Net Revenues actually received by the Company and
      Quintessence from the sale of the Products for use in display/ projection
      applications other than in 3-D display/projection applications. The Company
      shall pay Royalty Payments in the form of shares of its unregistered common
      stock. For the purposes of calculating the number of shares of common stock
      due
      to Customer under the Agreement, the value of a share of the Company’s common
      stock shall be fixed at $1.05 per share throughout the term of the Agreement,
      subject to adjustment for stock splits and dividends.





*Right
      of Participation* .
      In the
      event the Company or Quintessence elects to form a separate company to service
      and otherwise operate its laser display and projection business, Customer shall
      have a right of first offer to purchase up to ten percent (10%) of the equity
      interest in the separate company being offered upon its formation on the terms
      and conditions that are identical to those offered to other third party
      investors.





*Termination* .
      The
      term of the Agreement is five years, unless terminated sooner pursuant to the
      Agreement. The Company has the option to terminate the Agreement at any time
      for
      any reason upon delivery of written notice of termination and payment of a
      termination fee in the amount of five million dollars ($5,000,000) to Customer.




25




NOTE
      10 -
      SUBSEQUENT EVENTS





During
      July 2008, holders of our April and May Debentures converted $881,254 of
      principal into 839,290 shares of common stock in accordance with the original
      terms of the debentures (see Note 5). These conversions reduce the amount of
      principal that is to be repaid to the debenture holders by the Company. These
      conversions are subject to certain terms of the debentures that will require
      the
      company to issue additional shares to the debenture holders if the conversion
      price is adjusted downwards following the filing of this Form 10Q. We are unable
      to determine how many additional shares may need to be issued upon a reset
      of
      the conversion price.





On
      July
      8, 2008, the Company completed a second closing under the 2008 Secured Debenture
      offering by entering into a securities purchase agreement, dated as of July
      8,
      2008, with the investor signatories thereto (“Tranche II Investors”), pursuant
      to which the Company issued to Tranche II Investors an aggregate of $355,520
      in
      principal amount of the Secured Debentures and Warrants to acquire 677,181
      shares of Common Stock, for an aggregate purchase price of $320,000 which was
      received in cash. In connection with placement agent services in Tranche II,
      the
      Company will pay a placement agent fee of $25,600 in cash and Warrants to
      acquire 101,577 shares of Common Stock.





The
      terms
      and conditions of the Secured Debentures and Warrants issued in Tranche II
      are
      substantially identical to those issued in Tranche I which closed on May 19,
      2008 (see Note 5).





In
      an
      effort to cut operating costs and preserve cash resources, the Company, and
      certain of its employees and executive officers, have entered into a letter
      agreement, dated July 21, 2008, pursuant to which such employees have agreed
      to
      a reduction in salary and a 15% increase in health insurance premium cost.
      The
      salary reductions will remain in effect until such time that, in the judgment
      of
      the Company’s board of directors, conditions have improved sufficiently to allow
      such reductions to be relaxed or rescinded.




As
      consideration for the salary reduction and increased insurance premium costs,
      the Company’s board of directors has agreed to grant each employee accepting a
      reduction in salary a number of shares of restricted common stock of the Company
      equal to three shares of restricted common stock per dollar of reduced
      compensation. As a result of such agreements, the Company issued 1,461,248
      restricted shares on July 21, 2008 to certain employees and officers. The
      restricted common stock vests on July 21, 2009. Until that time, they are
      forfeitable upon termination of employment for any reason.





The
      Company and holders of at least 67% of the outstanding principal amount of
      the
      Company’s 10% Secured Convertible Debentures due April 16, 2009 (the
“ April
      2009 Debentures” )
      and its
      10% Secured Convertible Debentures due May 22, 2009 (the “ May
      2009 Debentures, ”
      together with the April 2009 Debentures, each a “ Debenture ”
and,
      collectively, the “ Debentures ”)
      have
      entered into an agreement (the “ Waiver
      Agreement ”)
      that
      waives any requirement for the Company to undertake a Conversion Cap Redemption
      (as defined in the Debentures) under Section 9(a) of the Debentures as it
      relates to any additional shares of common stock issued or issuable to the
      Debenture holders upon an adjustment to the conversion price resulting from
      any
      of the following events (each, an “ Exempt
      Event ”)
      (i) a
      milestone failure for the last milestone period ending June 30, 2008 under
      Sections 3(f)(iii) and 3(f)(iv) of the Debentures; (ii) any subsequent equity
      financing transaction the Company undertakes that is consummated on or prior
      to
      August 31, 2008, which results in an adjustment in the conversion price under
      Section 3(f)(i) of the Debentures; and (iii) any voluntary reduction of the
      conversion price undertaken by the Company’s Board of Directors prior to the
      effectiveness of any milestone adjustment resulting from a milestone failure
      for
      the last milestone period.




26




NOTE
      10 -
      SUBSEQUENT EVENTS (CONTINUED)





In
      addition, certain Debenture holders executing the Waiver Agreement also agreed
      to defer the payment of interest due under the Debentures on July 1, August
      1
      and September 1, 2008 under the terms of the Waiver Agreement in consideration
      for the issuance to such holder of a number of shares of common stock equal
      to
      three shares for each dollar of interest being deferred by such holder. As
      of
      July 30, 2008, the aggregate amount of deferred interest for these three months
      was $304,029 and the aggregate number of shares issuable in consideration for
      the agreement to defer interest was 912,088.





On
      August
      4, 2008, the Board of Directors approved a resolution to offer holders of
      warrants that are not subject to adjustments in exercise price or that are
      subject to a limited adjustment of the exercise price, the ability to adjust
      their exercise price to equal the exercise price of the April 2007, May 2007,
      May 2008 and July 2008 Warrants respectively if and when the exercise price
      on
      those warrants are reset to a lower price. The offer is subject to the holder’s
      agreement to not exercise on a cashless or net exercise basis for six months
      after the adjustment, or after six months after the adjustment to the extent
      that the Company has an effective registration statement covering the shares
      underlying the warrants.





On
      August
      11, 2008, the Company announced that it has retained both U.S. and
      Japanese-based financial advisers to assist the company in exploring strategic
      alternatives designed to accelerate the Company’s entry in to the consumer
      electronics market. Through a strategic partnership the Company is seeking
      capital, worldwide distribution channels and other key resources that might
      enable the Company to more aggressively penetrate the consumer electronics
      market.




27




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





THE
      FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE CONSOLIDATED
      FINANCIAL STATEMENTS OF QPC LASERS, INC. AND THE NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTS INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-KSB. THIS
      DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING OUR OPERATING RESULTS,
      FINANCIAL CONDITIONS AND LIQUIDITY AND CASH-FLOW FOR THE PERIOD ENDED JUNE
      30,
      2008.





**FORWARD
      LOOKING STATEMENTS**




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




**Background**




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




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




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




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




28




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




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





Our
      product development efforts have been advanced by a number of government
      contracts. We have been awarded five Phase I “Small Business Innovation
      Research” contracts; three of them have progressed to Phase II contracts. In
      general, these contracts are cancelable and in some cases include multiple
      phases associated with meeting technical milestones. In the second quarter
      of
      2006, we signed a sub-contract with Telaris, Inc. as part of a team working
      on a
      project for the Defense Advance Research Project Agency (“DARPA”). Our portion
      of the DARPA contract was $3.1 million; of which $1.8 million was Phase I and
      the remainder was to be included in Phase II of the contract. As of June 30,
      2008 we completed Phase I and have recognized $1.3 million of revenue from
      Phase
      I; and the Phase II has yet to be commenced. There is no guaranty that the
      project will continue with Phase II.. This contract funded development of
      semiconductor lasers to be used for directed energy weapons and the technology
      overlaps with our development of lasers for the industrial materials processing
      markets.




In
      the
      second quarter of 2006, QPC was also awarded a subcontract with Fibertek, Inc.
      as part of a team working on a project for the United States Missile Defense
      Agency to develop lasers that emit mid-infrared wavelengths. Management believes
      these lasers may be used in systems designed to defend military and commercial
      aircraft against heat seeking missiles. We also believe that this effort will
      bring us closer to creating a compact and affordable system for detection of
      biochemical agents in public places. The contract is a Phase III follow-on
      contract from an earlier contract that QPC completed which demonstrated the
      early phases of feasibility of our technology. Our portion of this Phase III
      contract is $800,000 and is to be performed over twelve months through June
      2007. As of June 30,2008, we have recognized $790,000 of revenue from this
      contract. No additional funds have been awarded as of June 30, 2008 and there
      are no plans to continue this development until we have acquired additional
      funding.




The
      United States Army Research Laboratory awarded us a Phase II development
      contract in the first quarter of 2006 and we began performing under this
      contract in the second quarter of 2006. The contract is a follow-on contract
      from an earlier contract with the same customer in which QPC demonstrated its
      ability to develop diode lasers that emit wavelengths that are safer to the
      human eye than conventional high power diode wavelengths. Management believes
      that upon successful completion of the diode laser project, these lasers may
      be
      used in both military and commercial systems to limit accidental damage to
      human
      eyes of system operators, friendly forces, and bystanders. The Army contract
      amount is $673,028 and is to be performed by March 2008. As of June 30, 2008,
      we
      have recognized $673,028 of revenue from this contract. As of June 30, 2008,
      we
      have already produced and sold several diode laser products to commercial
      customers based on technology developed under this contract.




During
      the second quarter of 2007, the United States Navy awarded us two contracts
      totaling $1.5 million to deliver high-energy laser engine prototypes for naval
      aviation directed energy weapons applications. The concurrent nine-month
      contracts build upon the Company's previous high-brightness chip-based laser
      development for the U.S. Navy, as well as for the DARPA, the U.S. Army, the
      Missile Defense Agency, and the Israeli Ministry of Defense. As of June 30,
      2008, we have recognized $1.5 million 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.




29




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





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




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




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




**Impairment
      of Long-Lived Assets**




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





**Revenue
      Recognition**





A
      portion
      of the Company’s revenues result from fixed-price contracts with U.S. government
      agencies. Revenues from fixed-price contracts are recognized under the
      percentage-of-completion method of accounting, generally based on costs incurred
      as a percentage of total estimated costs of individual contracts (“cost-to-cost
      method”). Revisions in contract revenue and cost estimates are reflected in the
      accounting period as they are identified. Provisions for the entire amount
      of
      estimated losses on uncompleted contracts are made in the period such losses
      are
      identified. No contracts were determined to be in an overall loss position
      at
      December 31, 2007 or June 30, 2008. In addition, the Company has certain cost
      plus fixed fee contracts with U.S. Government agencies that are being recorded
      as revenue is earned based on time and costs incurred. At December 31, 2007,
      there was no deferred revenue and approximately $194,537 of unbilled receivables
      related to these government contracts. At June 30, 2008 there was no deferred
      revenue and $361,893 of unbilled receivables related to these government
      contracts.




30




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




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, 2008, management has concluded that neither a reserve for product returns
      nor a warranty liability is required.




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





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





**Management
      Estimates**





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





**Accounting
      for Derivative Instruments**





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




31




**Stock
      Based Compensation**





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





**Fair
      Value Instruments**





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





The
      following table presents the embedded derivative, the Company’s only financial
      assets measured and recorded at fair value on the Company’s Consolidated Balance
      Sheets on a recurring basis and their level within the fair value hierarchy
      during the three months ended June 30, 2008:




**Fair Value****As of June 30, 2008**
            
            **Level 1**
            
            **Level 2**
            
            **Level 3**
            
            **Total**Embedded
                derivative liabilities
            
            $
            -
            
            $
            12,665,851
            
            $
            -
            
            $
            12,665,851





The
      following table reconciles, for the period ended June 30, 2008, the beginning
      and ending balances for financial instruments that are recognized at fair value
      in the consolidated financial statements:





Balance
                of Embedded derivative at December 31, 2007
            
            $
            10,283,181Fair
                Value of warrants and conversion feature of the May 2008 debenture
                at
                issuance
            
            
            1,880,669Conversion
                of convertible debentures into common stock
            
            
            (94,982
            )Gain
                on fair value adjustments to embedded derivatives
            
            
            596,983Balance
                at June 30, 2008
            
            $
            12,665,851





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




32




**THREE
      MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
      2007**





REVENUE.
      During the three months ended June 30, 2008, the Company recognized revenue
      of
      $1,306,882 as compared to revenue of $1,823,005 during the quarter ended June
      30, 2007. The decrease in revenues was due in significant part to a reduction
      in
      government contracts during 2008. Specifically, in the second quarter of 2007
      we
      recognized revenue from a subcontract funded by DARPA in the amount of $252,665,
      revenue of $150,869 on a contract with the United States Army, and a subcontract
      funded by the US Missile Defense Agency in the amount of $ 60,000. We recognized
      no revenue from these three customers during the second quarter of 2008. While
      we continue to seek work with U.S. Government defense agencies, we believe
      that
      funding for the programs where we might have opportunities has been deferred
      or
      reduced as defense spending prioritizes support for ground forces involved
      in
      active operations. Product sales increased from $850,000 in the second quarter
      of 2007 to $932,000 in the second quarter of 2008. This increase in product
      sales revenue was offset by the Company’s cessation of work for a major medical
      customer that commenced Chapter 11 proceedings during the first quarter of
      2008.
      In addition, the Company received a development order at the end of the second
      quarter for development of visible lasers for use in consumer display products.
      Although the development deliverables were complete as of June 30, 2008, the
      Company has not recognized revenue from this contract as we are unable to
      reasonably assure collectability and the payment is due over a period of ten
      months. We will recognize revenue on this $2,000,000 development contract as
      the
      payments are received.





We
      believe that our expanded product offerings, our entry into the consumer
      electronics market and opportunities in the defense and medical markets offer
      potential for significant growth. We channeled significant resources into
      developing products for the consumer electronics market in the second quarter
      of
      2008. However, the opportunities in this market are at an early stage and we
      did
      not recognize significant revenues from that market sector during the quarter.
      Our ability to grow our revenues is subject to significant risks including,
      without limitation, our limited financial resources, our limited marketing
      budget, the limited track record for our products, difficulties encountered
      in
      trying to displace incumbent products and technologies, the long sales and
      qualification process required for our products and the risk that our
      competitors will develop products that diminish or eliminate any technological
      advantages of our products. In addition, our ability to grow our revenues could
      be adversely affected by uncertain economic conditions, financial difficulties
      encountered by some of our customers and shifting defense
      priorities.




COST
      OF
      REVENUE; GROSS PROFIT. Cost of revenue, which consists of direct labor, overhead
      and material costs, was $888,711 or 68% of revenues for the quarter ended June
      30, 2008 as compared to $960,162 or 53% of revenues for the quarter ended June
      30, 2007. As a percentage of revenue, cost of sales increased as we saw a drop
      in non-recurring engineering revenues and revenues from government programs,
      both of which typically have higher margins than sales of existing products.
      Gross profit was also adversely impacted as a result of allocating our fixed
      costs over a lower number of units sold. As a result of the foregoing, gross
      profit was $418,171 for the three months ended June 30, 2008 as compared to
      $862,843 for the three months ended June 30, 2007.





RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
      professional and technical support fees, material and overhead, totaled
      $1,437,527 for the three months ended June 30, 2008, as compared to $1,060,761
      for the three months ended June 30, 2007. This increase in research and
      development spending is attributable to additional costs incurred as we develop
      new products for the consumer electronics markets. We currently expect research
      and development costs to increase moderately as we seek to maintain our
      technological edge and develop new products for various
      applications.





SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative
      expenses totaled $2,504,629 for the quarter ended June 30, 2008, as compared
      to
      $1,407,889 for the quarter ended June 30, 2007. This year-over-year increase
      in
      selling, general and administrative costs is a result of several factors
      including approximately $350,000 in sales and marketing costs, and $720,000
      in
      investor relations costs. Management has undertaken to curtail some of the
      more
      costly investor relations activities in the coming quarters. , We have also
      implemented certain other cost reductions; including a reduction in force and
      salary reductions, and as a result expect selling, general and administrative
      costs to decrease in future periods.




33




OTHER
      INCOME AND EXPENSE. Other Income and Expense includes interest expense of
      $3,327,041for the three months ended June 30, 2008 compared to $2,012,187 in
      the
      second quarter of 2007. The increase in interest expenses includes the
      amortization of loan discounts of $2,691,297 and $1,517,099 for the second
      quarters of 2008 and 2007 respectively. This increase in interest expense
      relates to the loan discount amortization and cash interest paid to holders
      of
      debentures that were issued in April 2007, May 2007 and May 2008. Other income
      includes $2,330,673 for the change in fair value of the embedded derivative
      liability during the three months ended June 30, 2008, compared to $20,054,927.
      The change in fair value during the second quarters of 2007 and 2008 was
      primarily caused by a decrease in our stock price from the date of issuance
      to
      June 30, 2007 and from March 31, 2008 to June 30, 2008. The conversion feature
      and detached warrants have been bifurcated and are treated as embedded
      derivatives.





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




Other
      Expenses includes $162,320 of private placement expenses during the second
      quarter of 2008 compared to $17,740,180 in the second quarter of 2007. Private
      placement expenses in the second quarter of 2008 includes $147,320 for placement
      fees that were paid in convertible debentures. Private placement fees in the
      second quarter of 2007 included a cash fee of $1,148,160 and the value of
      warrants and the beneficial conversion feature of the April and May 2007
      debentures in excess of the face amount of the debentures.





NET
      LOSS.
      As a result of the foregoing factors, QPC had a net loss of $4,662,236 for
      the
      quarter ended June 30, 2008 as compared to a net loss of $1,236,273 for the
      quarter ended June 30, 2007.





**SIX
      MONTHS ENDED JUNE 30, 2008 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
      2007**





REVENUE.
      During the six months ended June 30, 2008, the Company recognized revenue of
      $2,955,076 as compared to revenue of $2,929,584 during the six months ended
      June
      30, 2007. While revenues were relatively flat, there was a decrease in
      government contract revenue of $802,000 during the period, offset by an increase
      in product sales revenue including non-recurring engineering revenue of
      $828,000. Specifically, in the six months ended June 30, 2007 we recognized
      revenue from a subcontract funded by DARPA in the amount of $288,000, revenue
      of
      $269,000 from a contract funded by the United States Army, and a subcontract
      funded by the US Missile Defense Agency in the amount of $360,000. These
      contracts did not continue into subsequent phases and we recognized no revenue
      from these customers during the six months ended June 30, 2008.




COST
      OF
      REVENUE; GROSS PROFIT. Cost of revenue, which consists of direct labor, overhead
      and material costs, was $1,739,804 or 59% of revenues for the six months ended
      June 30, 2008 as compared to $1,815,943 or 62% of revenues for the six months
      ended June 30, 2007. As a percentage of revenue, cost of sales decreased as
      a
      result of increased non-recurring engineering revenue recorded in the first
      quarter of 2008 related to the completion of development of the initial phase
      of
      a development contract for a medical customer. This increase in gross profits
      for the six month period was partially offset by lower revenues from development
      contracts in the second quarter of 2008. As a result of the foregoing, gross
      profit was $1,215,272 for the six months ended June 30, 2008 as compared to
      $1,113,641 for the six months ended June 30, 2007.




34




RESEARCH
      AND DEVELOPMENT COSTS. Research and development costs which consist of salaries,
      professional and technical support fees, material and overhead, totaled
      $2,864,060 for the six months ended June 30, 2008, as compared to $2,073,560
      for
      the six months ended June 30, 2007. This increase in research and development
      spending is attributable to additional costs incurred as we develop new products
      including visible lasers for use in consumer electronic devices.





SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative
      expenses totaled $5,158,370 for the first half of 2008, as compared to
      $2,624,413 for the first half 2007. This year-over-year increase in selling,
      general and administrative costs is a result of several factors including
      approximately $719,000 in sales and marketing costs as we expanded our sales
      and
      marketing staff; $1,300,000 in investor relations costs, as well as newsletters
      and brochures to prospective investors; $78,000 in option compensation expense;
      and $168,000 in additional employee costs including payroll and benefits.





OTHER
      INCOME AND EXPENSE. Other Income and Expense includes interest expense of
      $6,280,919 for the six months ended June 30, 2008 compared to $2,480,586 in
      the
      first half of 2007. The increase in interest expenses includes the amortization
      of loan discounts of $5,011,126 and $1,757,320 for the first half of 2008 and
      2007 respectively. This increase in interest expense relates to the loan
      discount amortization and cash interest paid to holders of debentures that
      were
      issued in April 2007, May 2007 and May 2008. Other income/(expenses) includes
      a
      loss of $596,983 for the change in fair value of the embedded derivative
      liability during the six months ended June 30, 2008, compared to a gain of
      $20,054,927 during the first half of 2007. The change in fair value during
      the
      second quarter of 2007 was primarily caused by a decrease in our stock price
      from the date of issuance to June 30, 2007 and the increase in the fair value
      during the first of 2008 was caused by a slight increase in our stock price
      from
      December 31, 2007 to June 30, 2008. The conversion feature and detached warrants
      have been bifurcated and are treated as embedded derivatives.





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




Other
      Expenses includes $162,320 of private placement expenses during the six months
      ended June 30, 2008 compared to $17,740,180 in the six months ended June 30,
      2007. Private placement expenses in the 2008 includes $147,320 for placement
      fees that were paid in convertible debentures. Private placement fees in the
      second quarter of 2007 included the value of warrants and the beneficial
      conversion feature of the April and May 2007 debentures in excess of the face
      amount of the debentures.





NET
      LOSS.
      As a result of the foregoing factors, QPC had a net loss of $13,772,140 for
      the
      six months ended June 30, 2008 as compared to a net loss of $3,649,479 for
      the
      six months ended June 30, 2007.





CASH
      FLOWS FROM OPERATING ACTIVITIES. Our net loss has been significantly impacted
      by
      non-cash items including the amortization of loan discount and the change in
      fair value of embedded derivative liability. During the six months ended June
      30, 2008, we had a negative cash flow from operations of approximately
      $7,400,000, an increase of approximately $2,600,000 as compared to our negative
      cash flow from operations of approximately $4,800,000 in the six months ended
      June 30, 2007. The increase in negative cash flow is related to increased
      research and development spending and purchase of additional inventory to
      prepare for the fulfillment of several customer orders and for materials for
      the
      development of visible lasers for use in consumer electronic devices, and an
      increase in selling, general and administrative expenses as discussed above.
      In
      addition, interest payments for the first half of 2008 totaled $1,269,793
      compared to $676,572 during the first half of 2007. We do not anticipate
      becoming cash flow positive in the immediate future.




35




**Liquidity
      and Capital Resources**




We
      require additional funding to sustain our operations. The funds we raised
      through the recent financings discussed below have in large part been expended
      to support our continuing operations, and we do not expect to become cash flow
      positive in the next 12 months. We are actively exploring a number of
      strategic alternatives to increase our cash resources and to establish strategic
      partnerships which might enhance our ability to pursue our business objectives.
      However, these discussions are at an early stage and we do not know if we will
      be successful in these efforts. If we are not successful, we will not be able
      to
      sustain our current business operations.





We
      continue to operate with a negative cash flow from operations, and have depended
      upon external financing to maintain our operations. QPC lost $13,772,140 during
      the six months ended June 30, 2008 and has a cumulative deficit of $74,989,097
      at June 30, 2008. Our negative cash flow from operations during the six months
      ended June 30, 2008 was $7,401,208. We currently anticipate that we will
      continue to have a negative cash flow from operations for at least the next
      12
      months.





We
      do not
      have sufficient funds or sources of liquidity 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. 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.





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




**Payments
      by Period**





Remainder of
              2008
            
            2009
            
            2010 and
              BeyondSubordinated
                Secured Notes Payable
            
            
            49,399
            
            
            —
            
            
            —Finisar
                Secured Note Payable
            
            
            508,208
            
            
            5,653,408
            
            
            —Secured
                Equipment Financing
            
            
            131,940
            
            
            178,180
            
            
            221,250April
                2007 Secured Debentures
            
            
            264,916
            
            
            7,401,150
            
            
            —May
                2007 Secured Debentures
            
            
            278,356
            
            
            10,456,914
            
            
            —2008
                Debentures Tranche I
            
            
            110,478
            
            
            220,958
            
            
            2,430,5372008
                Debentures Tranche II
            
            
            17,776
            
            
            35,552
            
            
            391,072Total
            
            $
            1,361,073
            
            $
            23,946,162
            
            $
            3,042,859




During
      July 2008, holders of our April and May Debentures converted $881,254 of
      principal into 839,290 shares of common stock. These conversions reduce the
      amount of principal that is to be repaid to the debenture holders by the Company
      during 2009. The table above reflects these conversions and the reduction in
      principal that is no longer outstanding.





In
      addition, certain Debenture holders agreed to defer the payment of interest
      due
      under the Debentures on July 1, August 1 and September 1, 2008. In consideration
      for the deferral of interest payments, the Company has issued to each debenture
      holder a number of shares of common stock equal to three shares for each dollar
      of interest being deferred by such holder. As of July 30, 2008, the aggregate
      amount of deferred interest for these three months was $304,029 and the
      aggregate number of shares issuable in consideration for the agreement to defer
      interest was 912,088.




36




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





**Financing
      History**




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




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




In
      the
      third quarter of 2003, we raised a second round of equity financing. Finisar
      converted the $5 million remaining principal balance on their term loan into
      our
      Series B Preferred Stock and we raised an additional $2.8 million in new cash.
      The price per share of Series B Preferred Stock was $3.118998. Three of the
      five
      members of the Board of Directors at that time, founders Dr. Ungar and Mr.
      Lintz
      and independent director, Dr. Israel Ury, each purchased preferred stock in
      the
      Series B round of financing. As a condition to Finisar’s investment in Series B
      Preferred Stock, we granted Finisar a non-exclusive royalty free perpetual
      license to our existing and future intellectual property pursuant to a certain
      License Agreement, dated September 16, 2003, by and between Quintessence and
      Finisar (“License Agreement”). The License Agreement allowed for termination by
      us by paying a fee on or before September 18, 2008. We subsequently terminated
      the license by issuing a promissory note in the amount of $6 million to Finisar
      as of September 18, 2006. As of June 30, 2008, the outstanding principal
      balance of the Finisar secured note was $5,480,401.




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




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




37




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




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




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




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




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




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




Purchasers
      in the Brookstreet Tranche I and Tranche II were granted registration rights.
      The Company filed and later withdrew, prior to effectiveness, a registration
      statement filed on behalf of the Brookstreet investors. The shares of common
      stock purchased in these transactions are currently eligible for sale under
      rule
      144, and none of the Brookstreet investors are currently seeking registration
      of
      their shares.




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




38




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




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




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





During
      May 2008, the Company entered into securities purchase agreements with certain
      investors (the “2008 Investors”), pursuant to which the Company agreed to issue
      to the Investors secured convertible debentures in the aggregate principal
      amount of up to $3,888,500 at an original issue discount of 10% (the “2008
      Secured Debentures”). The 2008 Secured Debentures are convertible into shares of
      the Company’s common stock (the “Common Stock”) at an initial conversion price
      of $1.05 per share, subject to customary adjustments including full-ratchet
      and
      other standard anti-dilution protection. The first closing under the Securities
      Purchase Agreement occurred on May 19, 2008, on which date the Company issued
      an
      aggregate of $2,209,579 in principal amount of the 2008 Secured Debentures
      and
      warrants to acquire 4,208,726 shares of Common Stock, for an aggregate purchase
      price of $1,988,820 of which $1,822,500 was received in cash and $19,000 was
      received in the form of a promissory note. The remaining balance of $147,320
      represents TR Winston & Company’s (“TRW”) fee for services rendered as
      placement agent for this financing. TRW received payment of such fee in the
      form
      of a Secured Debenture for the principal amount of $163, 673 and Warrants to
      purchase 311, 757 shares of common stock of the Company. In addition, TRW
      received warrants to purchase 631,309 shares of common stock in connection
      with
      this financing.





In
      connection with the May 2008 Debenture Offering, the Company granted warrants
      to
      purchase 4,208,726 shares of common stock to the 2008 Investors and warrants
      to
      purchase 631,309 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 expire five years from the date of
      issuance.





On
      July
      8, 2008, the Company completed a second closing under the 2008 Secured Debenture
      offering by entering into a securities purchase agreement, dated as of July
      8,
      2008, with the investor signatories thereto (“Tranche II Investors”), pursuant
      to which the Company issued to Tranche II Investors an aggregate of $355,520
      in
      principal amount of the Secured Debentures and Warrants to acquire 677,181
      shares of Common Stock, for an aggregate purchase price of $320,000 which was
      received in cash. In connection with placement agent services in Tranche II,
      the
      Company will pay a placement agent fee of $25,600 in cash and Warrants to
      acquire 101,577 shares of Common Stock.




39




The
      terms
      and conditions of the Secured Debentures and Warrants issued in Tranche II
      are
      substantially identical to those issued in Tranche I which closed on May 19,
      2008 (see above).





On
      August
      4, 2008, the Board of Directors approved a resolution to offer holders of
      warrants that are not subject to adjustments in exercise price or that are
      subject to a limited adjustment of the exercise price, the ability to adjust
      their exercise price to equal the exercise price of the April 2007, May 2007,
      May 2008 and July 2008 Warrants respectively if and when the exercise price
      on
      those warrants are reset to a lower price. The offer is subject to the holder’s
      agreement to not exercise on a cashless or net exercise basis for six months
      after the adjustment, or after six months after the adjustment  to the
      extent that the Company has an effective registration statement covering the
      shares underlying the warrants.





**Capital
      Expenditures**




From
      January 1, 2008 to June 30, 2008, we spent approximately $118,029 on
      manufacturing equipment, office equipment, computer equipment and software,
      and
      furniture. We expect our capital expenditures to increase based on the growth
      of
      our operations, and increased orders and personnel. We had planned to expand
      our
      manufacturing area by up to 10,000 square feet in order to meet anticipated
      growth in our sales during 2008. Our facility has warehouse space that is
      contiguous to our present manufacturing area which we plan to use for the
      manufacturing area expansion. We expect the expansion to cost in the range
      of $1
      million to $3 million, However, our expansion plans are contingent on, among
      other things, raising the necessary capital to pay for the expansion.




**Recent
      Accounting Pronouncements**




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





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




40




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





**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements.





**RISK
      FACTORS THAT MAY AFFECT FUTURE PERFORMANCE**




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





RISKS
      OF
      THE BUSINESS





**We
      do not have sufficient funds to continue our operations beyond the next few
      months.** We
      currently operate on a negative cash flow basis and we have largely used the
      funds raised in prior financings to sustain our operations. We do not expect
      our
      cash flow from operations to become positive during the next 12 months. As
      a
      result, we will require additional funding to continue our operations. We are
      actively exploring a number of strategic alternatives to increase our cash
      resources and to establish strategic partnerships that might enhance our ability
      to pursue our business objectives. However, such discussions are at an early
      stage and we do not know if we will be successful in these efforts. We have
      also
      taken a number of steps to reduce our operating expenses, including a reduction
      in force, salary reductions and deferral of certain interest and lease payments.
      Nonetheless, our ability to continue in business will depend upon securing
      additional funding or a strategic business relationship in the immediate
      future.




**We
      do not have sufficient revenues to service our debt.** As of
      July 31, 2008, we had $25,298,696 of debt secured by our fixed assets and
      intellectual property. Of this amount, $7,101,254 accrues interest at a rate
      of
      10% per annum and requires monthly interest payments until April 2009, when
      the
      balance is due in full; $9,844,871accrues interest at a rate of 10% per annum
      and requires monthly interest payments until May 2009 when the balance is due
      in
      full; $28,700 accrues interest at a rate of 10% per annum and requires monthly
      payments until September 30, 2008; $5,423,684 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; $2,209,579 accrues interest at
      a
      rate of 10% per annum and requires monthly interest payments until May 2011
      when
      the balance is due in full; $355,520 accrues interest at a rate of 10% per
      annum
      and requires monthly interest payments until July 2011 when the balance is
      due
      in full; and $335,088 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
      and
      Convertible Notes will be converted into shares of common stock. However, we
      can
      not predict how many Secured Debentures and Convertible Notes will be converted
      and, even if all the Secured Debentures and Convertible Notes are converted,
      we
      will still owe more than $5,800,000 in 2009. We do not currently have the
      ability to service this debt without obtaining additional cash resources. If
      we
      are unable to service our debt, our assets, including our patents and other
      intellectual property, may be subject to foreclosure and our common stock may
      become worthless. We are currently exploring a number of alternatives to address
      our inability to service our debt. A number of these alternatives would require
      the consent of 67% or our Secured Debentures and will also require the consent
      of 67% of the Convertible Notes. We do not know if such consents can be
      obtained, or if an acceptable financing plan can be implemented to enable us
      to
      service our outstanding debt. In addition, if our revenues fail to increase
      sufficiently, our debt service requirements may reduce our working capital
      and,
      therefore, adversely affect our ability to operate our business.




41




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




Most
      of
      the funds we raised in recent financings have been used to sustain our
      operations and we need to raise additional funds to continue operations and
      to
      meet our debt obligations as discussed above.




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.





**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 reports for
      the
      fiscal years ended December 31, 2007 and 2006.





**Failure
      to collect our accounts receivable will diminish our cash resources, resulting
      in increased reliance upon outside sources of financing to meet our cash
      requirements.** At
      June
      30, 2008, we had accounts receivable of approximately $2,500,000, with an
      average age of 78 days. During the quarter ended March 31, 2008, we recorded
      an
      allowance for doubtful accounts of $225,000 in connection with the bankruptcy
      filing of one of our major customers. We believe that financial difficulties
      and
      credit constraints faced by some of our customers may result in additional
      allowances for doubtful accounts. As an emerging company seeking to establish
      new customer relationships, we generally do not impose strict credit
      requirements for new customers, nor do we generally require deposits or stand-by
      letters of credit before accepting purchase orders. As a result, we may face
      an
      elevated risk of non-payment or slow payment from certain customers,
      particularly during difficult economic times. At June 30, 2008, three customers
      accounted for a total of 55% of the accounts receivable balance, and each of
      these customers individually accounted for more than 10% of the accounts
      receivable balance. Failure to timely collect our accounts receivable will
      result in our having less cash available to fund our operations and will
      increase our dependence upon outside sources for financing.




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




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




42




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





**We
      depend on a limited number of customers for a substantial portion of our
      revenue, and the loss of, or a significant reduction in orders from, any key
      customer could significantly reduce our revenue.** The
      loss
      of any of our key customers, or a significant reduction in sales to any one
      of
      them, could significantly reduce our revenue and adversely affect our business.
      Three large customers accounted for 62% and 39% of our total revenue for the
      first six months of 2008 and 2007, respectively.  The largest three
      customers were different customers during the first quarter of 2008 compared
      to
      the first quarter of 2007, except for one customer which accounted for 21%
      and
      17% of our revenue for the six months ended June 30, 2008 and 2007,
      respectively.  In 2007, four customers accounted for 33% of our total
      revenue.   As an emerging company, we are dependent on sales to
      certain large customers, some of whom are in turn development stage companies.
      Our operating results in the foreseeable future will continue to depend on
      our
      ability to effect sales to these customers, as well as the ability of these
      customers to sell products that utilize our technologies and products. In the
      future, these customers may decide not to incorporate our technologies for
      use
      in their systems, purchase fewer products than they did in the past or alter
      their purchasing patterns. The loss of, or a significant reduction in purchases
      by, any of our major customers could adversely affect our business, financial
      condition, results of operations and cash flows.


****


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




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




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




**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.




43




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




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




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




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




44




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




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





MARKET
      RISKS.





**Our
      current shareholders may suffer substantial dilution as a result of a reduction
      in the conversion price for our outstanding Secured Debentures and Convertible
      Notes.** The
      conversion price of the Secured Debentures may be adjusted downward as a result
      of the Company’s failure to meet the revenue milestone for the six months ended
      June 30, 2008. Under the terms of the Secured Debentures, the conversion price
      will be adjusted to the market price of our common stock on the fifth trading
      day following the filing of this Report on Form 10-Q if such price is lower
      than
      the current conversion price of $1.05 per share. On August 11, 2008, our stock
      closed at $0.33 per share. Moreover, if the conversion price of our Secured
      Debentures is reduced, then the conversion price of our Convertible Notes will
      be reduced to the same conversion price. If our stock price is unchanged between
      August 11 and August 21, then, as a result of the reduction in the conversion
      price, we would be required to issue an additional 40,602,440 shares of common
      stock if all of the outstanding Secured Debentures and Convertible Notes were
      converted.





**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
      July
      31, 2008, we had approximately 3,100 stockholders and our market capitalization
      was approximately $28,200,000. 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.




45




**Future
      sales of our equity securities could put downward selling pressure on our stock
      and adversely affect the stock price.** Future
      sales of substantial amounts of our equity securities in the public market,
      or
      the perception that such sales could occur, could put downward selling pressure
      on our stock and adversely affect the market price of our common stock. This
      downward pressure could be magnified as a result of the large number of shares
      issuable upon the exercise of outstanding warrants, the conversion of our
      convertible debt and the exercise of outstanding options. We have filed a
      registration statement that has been declared effective with respect to the
      shares issuable upon conversion of our Secured Debentures. Certain of our
      outstanding warrants, including the warrants issued in connection with the
      April
      2007 Debenture Offering and the May 2007 Debenture Offering, have registration
      rights. As of July 31, 2008, 43,831,576 shares of our common stock are issuable
      upon exercise of warrants at an exercise price ranging between $1.05 to $1.50,
      18,609,452 shares of our common stock are issuable upon the conversion of our
      convertible debt at a conversion price of $1.05 and 4,912,666 shares of our
      common stock are issuable upon exercise of options. In order to meet our
      on-going cash requirements, we might restructure our current debt in a manner
      that would increase the number of shares issuable upon conversion of the Secured
      Debentures. In addition, any restructuring might increase the likelihood that
      current holders of our Secured Debentures and warrants will exercise their
      rights to acquire shares of our common stock. Moreover, the notes and warrants
      being offered in the Convertible Note Financing may be converted into, or
      exercised for shares of our common stock. We might issue additional securities
      that could be converted into, or exercised to acquire, shares of our common
      stock. The prospect of such additional shares being sold into the market could
      result in further downward pressure on our stock price.




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




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




·
            quarterly
                variations in our revenues and operating expenses;





·
            announcements
                of new products or services by us;





·
            fluctuations
                in interest rates;




·
            significant
                sales of our common stock, including “short” sales;





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





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




46




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.




**Our
      executive officers and directors beneficially own or control at least 13% 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
      13% 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.




47




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





Not
      applicable.





**Item
      4 Control and Procedures**




Not
      applicable.




**Item
      4T Controls and Procedures**




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




48




**PART
      II- Other Information**




**Item
      1 Legal Proceedings**




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




**Item
      1A Risk Factors**





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




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




Please
      see the Company’s Current Report on Form 8-K filed on May 20, 2008, as amended
      by Form 8-K/A filed on June 23, 2008 and as amended by Form 8-K/A filed on
      July
      8, 2008.




**Item
      3. Defaults Upon Senior Securities**




Not
      applicable




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




The
      Company held its 2008 Annual Meeting of Stockholders on May 8, 2008 (the “Annual
      Meeting”). The matters voted upon at the Annual Meeting and the results of the
      voting as to each such matter are set forth below:





(A)
      The
      following individuals were elected as directors of the Company to serve for
      a
      one-year term until the 2009 Annual Meeting of the stockholders or until their
      successors are duly elected and qualified.





Director
            Votes
                For
            Votes
                Against or WithheldRobert
                V. Adams
            22,732,710
            33,462General
                Merrill A. McPeak
            22,652,710
            112,462Israel
                Ury
            22,731,635
            33,537George
                Lintz
            22,732,135
            33,037Jeffery
                Ungar
            22,734,920
            33,537





(B)
      Approval of an amendment to the Articles of Incorporation of the Company to
      change the Company’s name to QPC Holdings, Inc.





Votes
                For
            Votes
                Against
            Number
                of Abstentions22,261,094
            427,878
            76,200




49




(C)
      Approval of an amendment to the Company’s 2006 Stock Incentive Plan to increase
      the maximum number of issuable shares under the plan to 11,400,000 shares of
      common stock of the Company.





Votes
                For
            Votes
                Against
            Number
                of Abstentions*9,618,676
            3,418,275
            95,710





(D)
      Ratified the appointment of Weinberg & Company P.A. as the Company’s
      independent auditors for fiscal year 2007.





Votes
                For
            Votes
                Against
            Number
                of Abstentions22,563,755
            164,117
            37,300





*
      In
      addition there were 9,632,511 broker non-votes.





**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)




50




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




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)




51




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




10.31
            
            Form
                of May Secured Debenture (9)10.32
            
            Form
                of May Warrant (9)10.33
            
            May
                Registration Rights Agreement (9)10.34
            
            May
                Security Agreement (9)




52




10.35
            
            Intercreditor
                Agreement (9)10.36
            
            Transaction
                Fee Agreement by and between the Company and T.R. Winston & Company,
                LLC*10.37
            
            Joint
                Development and Supply Agreement by and between the Company and Asian
                Optical Co., Inc., dated November 21, 2007 (10)**10.38
            
            May
                2008 Securities Purchase Agreement dated as of May 15, 2008 by and
                among
                the Company and each buyer identified on the signature pages
                (11)10.39
            
            Form
                of May 2008 Secured Debenture dated as of May 19,2008
                (11)10.40
            
            Form
                of May 2008 Warrant issued on May 19,2008 (11)10.41
            
            May
                Security Agreement dated as of May 19, 2008 by and among the Company
                and
                the holders of the Company’s 10% Secured Convertible Debentures due May
                19, 2011identified on the signature pages (11)10.42
            
            Subordination
                Agreement executed by each holder of the Company’s 10% Secured Convertible
                Debentures due May 19, 2011identified on the signature pages
                (11)10.43
            
            Subsidiary
                Guarantee made by the Company and its Subsidiaries in favor of each
                holder
                of the Company’s 10% Secured Convertible Debentures due May 19,
                2011identified on the signature pages (11)10.44
            
            Lock
                Up Agreement made by the Company and each officer and director of
                the
                Company (11)10.45
            
            Waiver
                and Amendment Agreement by and among the Company, and certain holders
                of
                the April 2007 and May 2007 Secured Debentures (11)10.46
            
            Development
                and Royalty Agreement, dated June 30, 2008, by and among the Company,
                Quintessence and Customer (12) *10.47
            
            Letter
                Agreement, dated July 21, 2008, between the Company and Jeffrey E.
                Ungar
                (13)10.48
            
            Letter
                Agreement, dated July 21, 2008, between the Company and George Lintz
                (13)10.49
            
            Letter
                Agreement, dated July 21, 2008, between the Company and Paul T. Rudy
                (13)10.50
            
            Letter
                Agreement, dated July 21, 2008, between the Company and Blima Tuller
                (13)10.51
            
            Form
                of Conversion Cap Waiver Agreement (13)16.1
            
            Letter
                on change of certifying accountant, dated November 7, 2006 from Bagell
                Josephs, Levine & Company, L.L.C. to the Commission
                (5)21.1
            
            Subsidiaries
                of the Company (8)




53




31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002. (14)31.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002. (14)32.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002. (14)32.2
            
            Certification
                of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002. (14)





(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 Registrant’s Current Report on Form 8-K on April 20,
                2007(9)
            Filed
                with Registrant’s Current Report on Form 8-K on May 31,
                2007(10)
            Filed
                with Registrant’s Current Report on Form 8-K on November 30,
                2007(11)
            Filed
                with Registrant’s Current Report on Form 8-K on May 20,
                2008(12)
            Filed
                with Registrant’s Current Report on Form 8-K on July 3,
                2008(13)
            Filed
                with Registrant’s Current Report on Form 8-K on July 21,
                2008(14)
            Filed
                herewith.(*)
            Confidential
                treatment requested as to portions of the Exhibit. Omitted materials
                filed
                separately with the Commission.(**)
            Confidential
                treatment requests have been granted by the Commission. Omitted materials
                filed separately with the
                Commission.




54




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




55