SB-2/A

As filed with the Securities and Exchange Commission on  __________, 2007

Registration No. ___________

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Pre-Effective Amendment No.1

FORM SB-2

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 QPC LASERS, INC.

(Exact name of Registrant as specified in its charter)

Nevada	3826	20-1568015
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

 15632 Roxford Street

Sylmar, California 91342

(818) 986-0000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

George Lintz

Chief Financial Officer

QPC Lasers, Inc.

15632 Roxford Street

Sylmar, California 91342

(818) 986-0000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With copies to

Hillel Cohn, Esq.

Morrison & Foerster LLP

555 West Fifth Street, Suite 3500

Los Angeles, CA 90013-1024

(213) 892-5200

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  o

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Amount to be Registered		Proposed Maximum Offering Price Per Share			Proposed Maximum Aggregate Offering Price		Amount of Registration Fee
Common stock to be issued upon conversion of secured debentures		17,355,379	$	0.86	(1)	$	14,925,625.94	$	$458.22

(1)   Estimated solely for the purpose of estimating the registration fee pursuant to Rule 457(c) promulgated pursuant to the Securities Act of 1933 based on the average of the bid and ask price of the Registrant's common stock as reported on the OTC Bulletin Board on June 11, 2007.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

Subject to Completion, dated July 31, 2007

PROSPECTUS

QPC LASERS, INC.

Up to 17,355,379Shares of Common Stock

This Prospectus covers the resale by selling stockholders of up to 17,355,379 shares of our common stock, $0.001 par value. The shares are issuable upon the exercise of certain convertible debentures.

The shares will be offered for sale by the selling stockholders identified in this Prospectus in accordance with the terms described in the section of this Prospectus entitled “Plan of Distribution.” We will not receive any of the proceeds from the sale of the common stock.

Our common stock is not listed on any national securities exchange. The common stock is quoted on the Over-the-Counter Bulletin Board under the symbol “QPCI”. On June 11, 2007, the closing sale price of our common stock on the Over-the-Counter Bulletin Board was $0.92.

An investment in our common stock involves a high degree of risk. You should purchase our common stock only if you can afford to lose your entire investment. See “Risk Factors” beginning on page 8 of this Prospectus.

Please read this Prospectus carefully. It describes our company as well as our products, technology, financial condition and operating performance. All of this information is important to enable you to make an informed investment decision.

You should rely only upon the information contained or incorporated by reference in this Prospectus to make your investment decision. We have not authorized anyone to provide you with different or additional information. The selling stockholders are not offering these shares in any state where such offer is not permitted. You should not assume that the information in this Prospectus is accurate as of any date other than the date set forth below.

Neither the Securities and Exchange Commission nor any state securities administrator has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Table of Contents

Prospectus Summary	2
Risk Factors	8
Use of Proceeds	13
Market for Common Equity and Related Stockholder Matters	13
Selling Security Holders	14
Additional Disclosure	24
Plan of Distribution	35
Description of Business	36
Description of Properties	45
Legal Proceedings	45
Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Directors, Executive Officers, Promoters and Control Persons	60
Security Ownership of Certain Beneficial Owners and Management	63
Executive Compensation	65
Certain Relationship and Related Transactions	69
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	70
Description of Securities	71
Interest of Named Experts and Counsel	72
Disclosure of Commission Position of Indemnification for Securities Act Liabilities	72
Reports to Security Holders	73
Where You Can Find More Information	73
Financial Information	F-1

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this Prospectus. This summary is not complete and does not contain all of the information you should consider before investing in our common stock. You should read the entire Prospectus carefully, including the "Risk Factors" section.Some of the statements contained in this Prospectus, including statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Business," are forward-looking statements and may involve a number of risks and uncertainties. Actual results and future events may differ significantly based upon a number of factors. You should not put undue reliance on these forward-looking statements, which speak only as of the date of this Prospectus.

In this Prospectus, we refer to QPC Lasers, Inc. and its subsidiaries as "we," "our," or the "Company."

QPC Lasers, Inc.

History

The Company was originally incorporated in the State of Nevada on August 31, 2004 under the name “Planning Force, Inc.” as a development stage company that planned 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 (the “Share Exchange Agreement”) by and among Julie Morin, its majority stockholder, and Quintessence Photonics Corporation, a Delaware corporation (“Quintessence”) and the stockholders of all of Quintessence (the “Quintessence Stockholders”). Quintessence was engaged in the design and production of semiconductor laser devices. Quintessence had been founded in 2000 by Dr. Jeffrey Ungar, a Caltech graduate and former head of Advanced Optoelectronic Device R&D at Ortel Corporation (“Ortel”), and George Lintz, an entrepreneur with fifteen years of investment banking and finance industry experience. In 2002, Quintessence opened an 18,000 square foot production facility in Sylmar, California, produced first light from its laser devices and procured its initial contracts from the U.S. Government. Quintessence began shipping its first products in 2004.

Pursuant to the Share Exchange Agreement, QPC issued one share of its common stock to the Quintessence Stockholders in exchange for each share of their Quintessence common stock and Quintessence became our wholly-owned subsidiary. In connection with the share exchange, our sole business became the business of Quintessence.

Our common stock is not listed on any national securities exchange. Our common stock currently trades on the Over-the-Counter Bulletin Board under the symbol “QPCI”. Our headquarters are located at 15632 Roxford Street, Sylmar, California 91342. Our phone number is (818) 986-0000. Our website address is www.qpclasers.com. Information contained on our website is not part of this Prospectus.

Our Business

We design and manufacture high brightness semiconductor lasers for a variety of defense, medical and industrial applications. We have developed multiple technology platforms, with five issued patents and eleven patents pending. We believe our proprietary technology positions us to gain market share with products that address important issues of laser performance including brightness, power, and the ability to produce laser light at specified wavelengths. We are vertically integrated, from semiconductor fabrication through packaging, and perform all critical production processes at our facility in Sylmar, California.

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“Laser” is an acronym for light amplification by stimulated emission of radiation. A laser converts electricity into light and delivers a large amount of energy to a small designated area. Lasers are widely used in a variety of applications including medical procedures, telecommunications, welding and other industrial applications, printing and various defense applications. There are three main types of commercial lasers: (i) gas lasers, (ii) solid-state or fiber lasers and (iii) diode lasers. Gas, solid-state and fiber lasers produce good quality beams; however they tend to be large and expensive. Diode, or semiconductor lasers, convert electricity directly into light in a semiconductor chip without any other medium. Semiconductor lasers are compact, use energy efficiently and may be inexpensively manufactured. However, standard diode lasers generate low optical quality beams; i.e., they lack “brightness” which limits their usefulness for certain applications.

We believe there is a significant opportunity for semiconductor lasers that can produce high power, high brightness beams with precise wavelength control. Such high performance characteristics, combined with the efficient use of energy and low cost of manufacture associated with semiconductor lasers, may offer potential advantages to a wide range of end-users.

We are currently producing and designing products for defense, medical and industrial applications. Such products may be used for direct diode applications such as target illumination, free-space communications, hair removal and other medical, defense and industrial applications. They may also be used to stimulate or “pump” a fiber or solid-state laser that may be employed in materials processing or other industrial medical, defense and industrial applications.

In 2005 and 2006, revenues from defense and defense-related applications accounted for 66% and 65%, respectively, of our total revenues; medical applications accounted for 24% and 20%, respectively, of our total revenues and industrial applications accounted for 10% and 15%, respectively, of our total revenues. Since our inception, we have received over $7 million in development contracts from various agencies of the U.S. Department of Defense as well as from U.S. and Israeli defense contractors.

Risk Factors

An investment in our stock involves a high degree of risk. You should purchase our stock only if you can afford to lose your entire investment. Among the principal risk factors which you should consider in this regard are the following:

·   We are an early stage company that has never earned a profit and which operates on a negative cash flow basis.

·   We have depended upon the sale of securities to sustain our operations.

·   We do not currently have sufficient cash resources to pay our outstanding debt and all of our assets are pledged as collateral on our outstanding debt.

·   Our products are not proven and the market for our products is subject to continuing change.

·   Our prospects depend to a significant extent upon the perceived technical advantages of our products and we may not be able to stay abreast of continuing technological developments in the photonics industry.

·   We face intense competition from nearly 40 companies, some of whom have proven products, long established customer relationships and substantially greater resources than ours.

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·   Our management team lacks experience running a public company.

·   Our stock is thinly traded and subject to the volatility associated with small-cap stocks.

·   Our common stock is subject to substantial downward price pressure based on the large number of shares which may be issued pursuant to outstanding warrants and options.

You should carefully consider the more complete information set forth under “Risk Factors” beginning on page 8 of this Prospectus before investing in our common stock.

Recent Financing History

Completion of Share Exchange

On May 12, 2006, we entered into a Share Exchange Agreement with Quintessence, and the Quintessence Stockholders, and closed the transaction on the same date (the “Share Exchange”). Prior to the Share Exchange, we had 24 stockholders of record. None of the shares held by these 24 stockholders are being registered under this Registration Statement. Pursuant to the Share Exchange Agreement, QPC issued one share of its common stock to the Quintessence Stockholders in exchange for each share of their Quintessence common stock. The Quintessence Stockholders transferred substantially all of the shares of equity stock of Quintessence, thereby making Quintessence a subsidiary of QPC, and QPC issued an aggregate of 26,986,119 shares of its common stock to the Quintessence Stockholders. Furthermore, all options, warrants and convertible notes (“Derivative Securities”) and preferred stock that may be exercised or converted into Quintessence common stock were exchanged for Derivative Securities that may be exercised or converted into shares of common stock of QPC. The number of shares of common stock of QPC underlying the new QPC Derivative Security was equal to the number of shares of common stock of QPC that would have been issued to the Quintessence Stockholders, had they exercised or converted the Quintessence Derivative Security into Quintessence common stock immediately prior to the closing of the Share Exchange. Pursuant to the Share Exchange Agreement, QPC issued options, warrants or convertible notes that may be exercised or converted, as the case may be, into 10,776,879 shares of common stock of QPC. After closing the Share Exchange, the Quintessence stockholders held at least 87% of the outstanding shares of common stock of QPC. We had 521 stockholders of record after the closing of the Share Exchange.

None of the shares of common stock of QPC or common stock of QPC issuable upon exercise or conversion of the QPC Derivative Securities issued in connection with the Share Exchange are being registered for resale under this Registration Statement.

April and May 2007 Financings

Issuance of Secured Debentures. Between April 16 and April 19, 2007, the Company entered into securities purchase agreements with certain investors, pursuant to which the Company issued the investors secured convertible debentures (the “April Secured Debentures”) in the aggregate principal amount of $7,976,146 at an original issue discount of 10% (the “April 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 customary adjustments as set forth therein and any applicable Milestone Adjustments.

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

o $5,000,000 in revenues for the nine (9) month period ending September 30, 2007,

o $7,750,000 in revenues for the twelve (12) month period ending December 31, 2007

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

If a Milestone Adjustment occurs the conversion price will be the lower of $1.05 or the market price as determined on the date that is five trading days after the Company files its next Form 10-Q with the SEC following the applicable Milestone period. Any Milestone Adjustment is permanent notwithstanding any future revenue or achievement of any other milestones. Any Milestone Adjustment may only adjust the conversion price downward. The Secured Debentures are subject to a conversion cap (as discussed on page 71) which limits the number of shares issuable upon conversion of the Secured Debentures. The number of shares currently issuable upon conversion of the Secured Debentures is at the maximum level permitted by the conversion cap. Consequently, if a Milestone Adjustment occurs, the Secured Debenture holders will not acquire additional shares upon conversion. The Company, however, will be obligated to redeem that portion of the Secured Debenture that can not be converted into common stock.

Restrictive Covenants. The Secured Debentures and the related Securities Purchase Agreement contain certain restrictive covenants. We may not pay any cash dividends on our common stock or repurchase any shares of common stock while the Secured Debentures are outstanding. Our ability to incur new indebtedness is largely restricted to trade payables. With limited exceptions, we may not issue any new debt which is senior to or pari passu with the Secured Debentures. We may not issue shares of common stock or common stock equivalents for one year following the closing of the sale of the Secured Debentures, with limited exceptions for issuances pursuant to compensation plans and equipment leases. During the subsequent year, we may not issue common stock or common stock equivalents for an issue price which is less than the initial conversion price of the Secured Debentures. We may not effect a merger, share exchange or similar transaction unless we have placed in escrow sufficient funds to redeem all outstanding Secured Debentures as well as the Warrants held by holders of the Secured Debentures. While the Secured Debentures are outstanding, the Secured Debenture holders shall also have a pro rata right of participation in any future financings by the Company and pro rate rights

In connection with the April 2007 Debenture Offering, we granted warrants to purchase 11,394,494 shares of common stock to certain investors and warrants to purchase 212,796 shares of common stock to the dealers in that offering. (The amounts for the April 2007 Debenture Offering are less than the amounts reported on the Company’s Form 8-K filed on April 20, 2007 due to the cancellation of one investor’s debentures and warrants. The investor defaulted on a promissory note used to purchase the debentures and warrants.) 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 exercise price of $1.05 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 and 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.

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We are registering 17,355,379 shares of our common stock issuable in connection with the conversion of the April Secured Debentures and the May Secured Debentures, excluding shares of common stock issuable to our management, our Board of Directors and Harvey Cohen, a consultant to the Company. None of the shares issuable in connection with the exercise of the warrants issued in connection with the April 2007 Debenture Offering and the May 2007 Debenture Offering are being registered in this Registration Statement.

In connection with their purchase of April Secured Debentures, May Secured Debentures and the warrants issued in connection with the April 2007 Debenture Offering and May 2007 Debenture Offering, the investors made representations that they were accredited investors within the meaning of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). These issuances of securities were issued in reliance upon the exemption provided in Rule 506 under Regulation D promulgated thereunder.

The Offering

Common Stock Offered:	Up to 17,355,379 shares of common stock by selling stockholders
Offering Price:	Market price
Use of Proceeds:	We will not receive any proceeds from the sale of the shares by the selling security holders. See “Use of Proceeds.”
Terms of the Offering:	The selling stockholders will determine when and how they will sell the common stock offered in this Prospectus.
Termination of the Offering:	The offering will conclude when all of the 17,355,379 shares of common stock have been sold or registration is no longer required to sell the shares.

We have 38,659,283 shares of our common stock currently issued and outstanding. We are registering up to 17,355,379 shares of our common stock for sale by the selling stockholders identified in the section of this Prospectus entitled "Selling Security Holders." Some of the shares included in the table identifying the selling stockholders are shares of our common stock that have not yet been, but that may be, issued to designated selling stockholders should they convert their Secured Debentures. These shares have been identified in the footnotes to the “Selling Security Holders” table. Information regarding our common stock and the Secured Debentures is included in the section of this Prospectus entitled "Description of Securities."

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Summary Financial Data

The following tables summarize the consolidated statements of operations and balance sheet data for our business and should be read together with the section of this Prospectus captioned “Management’s Discussion and Analysis” and our consolidated financial statements and related notes included elsewhere in this Prospectus. 

CONSOLIDATED STATEMENT OF OPERATIONS DATA

	Three months ended March 31 (Unaudited)						Years ended  December 31
	2007			2006			2006			2005
										(as restated)
REVENUE
Commercial customers	$	653,262		$	235,041		$	1,496,454		$	594,161
Government contracts		453,317			30,523			1,576,878			479,030
TOTAL REVENUE		1,106,579			265,564			3,073,332			1,073,191
COST OF SALES		855,781			279,726			2,291,851			1,009,477
GROSS PROFIT		250,798			(14,162	)		781,481			63,714
OPERATING EXPENSES
Research and Development		1,012,800			1,123,792			4,502,132			4,753,356
General and Administrative		1,216,524			1,078,844			6,282,043			2,441,405
License Termination		—			—			6,000,000			—
Total operating expenses		2,229,324			2,202,636			16,784,175			7,194,761
LOSS FROM OPERATIONS		(1,978,526	)		(2,216,798	)		(16,002,694	)		(7,131,047	)
Interest Income		1,754			—			41,632			15,036
Interest Expense		(468,399	)		(1,059,967	)		(2,420,633	)		(750,299	)
Merger expense		—			—			(326,199	)		—
Loss on Embedded Derivative		—			—			(68,703	)		—
Other income		31,966			16,171			83,990			88,452
NET LOSS		(2,413,205	)		(3,260,594	)		(18,692,607	)		(7,777,858	)
Preferred Stock Dividend		—			—			—			(10,823,028
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(2,413,205	)	$	(3,260,594	)		(18,692,607	)	$	(18,600,886	)
LOSS PER COMMON SHARE — Basic and Diluted	$	(0.06	)	$	(0.14	)	$	(0.60	)	$	(1.49	)
WEIGHTED AVERAGE SHARES OUTSTANDING, basic and diluted		38,559,283			22,972,960			31,306,637			12,466,339

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CONSOLIDATED BALANCE SHEET DATA

	March 31, 2007 (Unaudited)			December 31, 2006
Cash	$	313,194		$	1,429,077
Total Assets	$	8,678,613		$	7,435,300
Total stockholders’ deficiency		(3,529,174	)		(1,231,330	)
Total liabilities and stockholders’ deficiency	$	8,678,613		$	7,435,300

Our consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company had a net loss of $18,692,607 and utilized cash of $8,219,053 in operating activities during the year ended December 31, 2006, and had working capital of $1,078,244 at December 31, 2006. During the three months ended March 31, 2007, the Company had a net loss of $2,413,205 and utilized cash of $1,328,955 in operating activities. At March 31, 2007, the Company had a stockholders’ deficiency of $3,529,174. These factors raise substantial doubt about the Company's ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from this uncertainty. Our independent registered public accounting firm has included an explanatory paragraph expressing doubt about our ability to continue as a going concern in their audit report for the fiscal year ended December 31, 2006.

See Note 2 to the consolidated financial statements for a summary of our significant accounting policies.

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RISK FACTORS

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

RISKS OF THE BUSINESS

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

We have relied upon outside financing to fund our operations. As a result, our ability to sustain and build our business has depended upon our ability to raise capital from investors and we do not know if we will be able to continue to raise sufficient funds from investors. We have operated on a negative cash flow basis since our inception and we have never earned a profit. We anticipate that we will continue to incur losses for at least the next 12 to 15 months and that we will continue to operate on a negative cash flow basis for at least the next 9 to 12 months. We have financed our operations to date through the sale of stock, other securities and certain borrowings.

In April and May 2007 we received net proceeds of approximately $13,900,000 through the sale of Secured Debentures and common stock purchase warrants. We believe such funds will be sufficient to sustain our operations for the next 20 months based upon our current expectations. If such expectations prove incorrect, or if we continue to operate on a negative cash flow basis at the end of such period, then we will likely need to raise additional funds through the sale of securities.

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

We do not have sufficient revenues to service our debt. If we default on our debt, we could lose all of our assets, including our intellectual property. As of May 31, 2007, we had $24,785,022 of debt secured by all our fixed assets and intellectual property, interest and principal payments on such debt are approximately $2,176,000 for the balance of 2007, $3,152,000 in 2008 and $25,263,000 in 2009. The foregoing amounts include the Secured Debentures issued in April and May 2007. We do not have the ability to pay the amounts due on these Secured Debentures. Accordingly, if the Secured Debentures are not converted we will default unless we are able to raise additional funds through the sale of new securities. It is our expectation that most or all of the Secured Debentures will be converted into the shares which are the subject of this registration statement. However, we can not predict how many Secured Debentures will be converted and, even if all the Secured Debentures are converted, we will still owe more than $5,800,000 in 2009. We do not currently have the ability to service this debt without obtaining additional cash resources. If our revenues fail to increase sufficiently, our debt service requirements may affect our working capital and, therefore, adversely affect our ability to operate our business. If we are unable to service our debt, our assets, including our patents and other intellectual property, may be subject to foreclosure and our common stock may become worthless.

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

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

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

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

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

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

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

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

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.

9

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

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

The relative lack of public company experience of our management team may put us at a competitive disadvantage. Ourmanagement 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.

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

10

MARKET RISKS.

Our common stock is thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. Prior to the Share Exchange in May 2006, QPC’s shares were not publicly traded. Through this Share Exchange, QPC has essentially become public without the typical initial public offering procedures which usually include a large selling group of broker-dealers who may provide market support after going public. Thus, we have undertaken efforts to develop market recognition for our stock. As of March 31, 2007, we had approximately 525 stockholders and our market capitalization was approximately $ 52,826,190. As a result, there is limited market activity in our stock and we are too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. While we are trading on the OTC Bulletin Board, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in Bulletin Board stocks and certain major brokerage firms restrict their brokers from recommending Bulletin Board stocks because they are considered speculative, volatile and thinly traded.

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

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

·  quarterly variations in our revenues and operating expenses;

·  announcements of new products or services by us;

·  fluctuations in interest rates;

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

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

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

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

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

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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 21.2% of our outstanding common stock, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our Company. Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in you receiving a premium over the market price for your shares. We estimate that approximately 21.2% of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our directors and executive officers. Such concentrated control of the Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, certain provisions of Nevada law could have the effect of making it more difficult or more expensive for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. Accordingly, the existing principal stockholders together with our directors and executive officers will have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of the Company.

Future sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock price. There is a risk that this downward pressure may make it impossible for an investor to sell his securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock. This downward pressure could be magnified as a result of the large number of shares issuable upon the exercise of outstanding warrants, the conversion of our convertible debt and the exercise of outstanding options. Certain of our outstanding warrants, including the warrants issued in connection with the April 2007 Debenture Offering and the May 2007 Debenture Offering, have registration rights. As of the date of this Prospectus, 37,712,783 shares of our common stock are issuable upon exercise of warrants at an exercise price ranging between $1.05 to $1.50, 17,867,282 shares of our common stock are issuable upon the conversion of our convertible debt at a conversion price of $1.05 and 4,046,083 shares of our common stock are issuable upon exercise of options.

12

USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares by the selling stockholders.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is not listed on any national stock exchange. Our common stock is traded over-the-counter on the Over-the-Counter Electronic Bulletin Board under the symbol “QPCI”. Prior to May 2006, we were known as Planning Force, Inc. and our stock traded under the symbol “PLFI”. The following table sets forth the high and low bid information for the common stock for each quarter within the last two fiscal years, as reported by the Over-the-Counter Bulletin Board.

	High Bid		Low Bid
2007
First Quarter		1.69		0.90
Second Quarter		1.50		0.31

	High Bid		Low Bid
2006
First Quarter		*		*
Second Quarter	$	3.05	$	1.75
Third Quarter	$	2.84	$	1.60
Fourth Quarter	$	1.70	$	1.03

	High Bid		Low Bid
2005
First Quarter		*		*
Second Quarter		*		*
Third Quarter		*		*
Fourth Quarter		*		*

* There have been no trades of Company common stock during such quarter.

These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On June 14, 2007, the closing sales price of our common stock as reported on the Over-The-Counter Bulletin Board was $0.92 per share.

As of March 6, 2007, there were approximately 520 stockholders of record of our common stock.

Dividends

13

We have never paid any cash dividends on the common stock or the preferred stock. We currently anticipate that any future earnings will be retained for the development of our business and do not anticipate paying any cash dividends on the common stock or the preferred stock in the foreseeable future.

SELLING SECURITY HOLDERS

The following table presents information regarding the beneficial ownership of our common stock by the selling stockholders as of June 15, 2007 and as adjusted to reflect the sale of the common stock in this offering by the selling stockholders. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of our common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of June 15, 2007 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

Prior to the issuance of the April Secured Debentures, we had outstanding 31,843,675 shares of common stock held by persons other than selling stockholders, their affiliates and affiliates of the Company. An aggregate of 17,355,379 shares are being registered hereunder. These shares represent all of the shares which the Company may be obligated to issue upon conversion of the Secured Debentures, except for 292,856 shares that may be issued to members of our Board and management team. None of the shares issuable to members of our Board and management team are included in this registration statement. Each of the selling stockholders is registering all of the shares that they may acquire pursuant to conversion of the Secured Debentures. None of the selling stockholders or their affiliates has previously registered for sale, or sold in registered resale transactions, any of our shares of common stock.

The information presented in this table is based on 38,659,283 shares of our common stock outstanding on June 15, 2007.

Name	Number of Shares Beneficially Owned Before Offering (1)		Number of Shares Being Offered		Number of Shares Beneficially Owned After Offering
					Number of Shares		Percentage
Bristol Investment Fund, Ltd. (2)		5,290,740		2,116,296		3,174,444		8.23	%
IRA FBO J. Steven Emerson Rollover II Pershing LLC as Custodian (3)		7,142,858		1,904,762		4,285,715		11.11	%
Andrew Lessman (4)		2,645,238		1,058,095		1,587,143		4.12	%
IRA FBO J. Steven Emerson Roth Pershing LLC as Custodian (5)		7,142,858		714,286		4,285,715		11.11	%
Drew Rayman (6)		2,609,225		553,690		2,055,535		5.33	%
Bridgepointe Master Fund, Ltd (7)		1,322,751		529,101		793,651		2.06	%
Maller Estate Planning Trust Dtd 3/3/1998 Melvyn and Carol Maller, Jeffrey Maller, Trustees (8)		1,506,085		529,101		976,985		2.53	%
Whalehaven Capital Fund Limited (9)		1,322,619		529,048		793,571		2.06	%
Jonathan & Nancy Glaser Family Trust DTD 12-16-98 Jonathan M. Glaser & Nancy E. Glaser TTEES (10)		1,322,619		529,048		793,571		2.06	%
Colony Partners, a California general partnership (11)		1,322,619		529,048		793,571		2.06	%
Core Fund, L.P. (12)		1,058,095		423,238		634,857		1.65	%
Jonathan and Miriam Sternberg (13)		1,054,563		396,825		657,738		1.7	%
Paragon Capital LP (14)		952,381		380,952		571,429		1.48	%
Arthur Michelson (15)		1,060,926		370,370		690,556		1.79	%

14

Name	Number of Shares Beneficially Owned Before Offering (1)		Number of Shares Being Offered		Number of Shares Beneficially Owned After Offering
					Number of Shares		Percentage
Banque SCS Alliance S.A. (16)		793,571		317,429		476,143		1.23	%
Sol Kest (17)		661,376		264,550		396,825		1.03	%
Michael Kest (18)		661,376		264,550		396,825		1.03	%
Steven B. Dunn (19)		661,310		264,524		396,786		1.03	%
RP Capital LLC (20)		683,529		264,524		419,005		1.09	%
EMSE, LLC, a Delaware limited liability company (21)		661,310		264,524		396,786		1.03	%
Bear Stearns Securities Corp. FBO Marshall S. Ezralow Roth IRA (22)		661,310		264,524		396,786		1.03	%
Bradley E. Turell (23)		783,418		253,968		529,449		1.37	%
Emerson Partners (24)		7,142,858		238,095		4,285,715		11.11	%
Ungar Family Trust (25)		529,101		211,640		317,460		*
The Black Diamond Fund LLLP (26)		529,048		211,619		317,429		*
Horberg Enterprises Limited Partnership (27)		529,048		211,619		317,429		*
Cranshire Capital, L.P. (28)		529,048		211,619		317,429		*
Apex Investment Fund, Ltd. (29)		529,048		211,619		317,429		*
Michael Shiffman MD Inc Pension Trust (30)		437,855		158,730		279,125		*
California Neurosurgical Associates Profit Sharing Plan (31)		466,711		158,730		307,981		*
The Nutmeg Mercury Fund, LLP (32)		396,813		158,725		238,088		*
Lesin Family Trust (33)		464,027		119,662		344,365		*
The McGurk Family Trust (34)		448,066		116,894		331,172		*
JKRK Family Partners No. 2 LLC (35)		264,550		105,820		158,730		*
Iriquois Master Fund Ltd. (36)		264,550		105,820		158,730		*
Elisha Rothman (37)		289,550		105,820		183,730		*
David D. Miller, TTEE of the Miller Living Trust Dtd 3/3/87 (38)		264,550		105,820		158,730		*
Alfons Melohn (39)		264,550		105,820		158,730		*
The Muhl Family Trust, Phillip E. Muhl & Kristin A. Muhl TTEE DTD 10-11-95 (40)		264,524		105,810		158,714		*
G. Tyler Runnels or Jasmine Niklas Runnels TTEES The Runnels Family Trust DTD 1-11-2000 (41)		264,524		105,810		158,714		*
David Sidoo (42)		264,524		105,810		158,714		*

15

Name	Number of Shares Beneficially Owned Before Offering (1)		Number of Shares Being Offered		Number of Shares Beneficially Owned After Offering
					Number of Shares		Percentage
High Tide, LLC (43)		234,712		93,885		140,827		*
Flat Universe, LLC (44)		214,264		85,706		128,559		*
Joyce M. Westreich (45)		198,413		79,365		119,048		*
John B. Davies (46)		198,393		79,357		119,036		*
The Striks and Pearlman Group (47)		185,185		74,074		111,111		*
Adolph & Miriam Rabinovitz (48)		158,730		63,492		95,238		*
Tibor Neumann & Erika Neumann as Trustees of the Neumann Family Trust 3rd comp. rsttmt dtd 12/13/05 (49)		727,885		52,910		674,975		*
Striks Properties L.P. (50)		157,275		52,910		104,365		*
Rutgers Enhanced Insurance Company (51)		132,275		52,910		79,365		*
Rutgers Casualty Insurance Company (52)		152,275		52,910		99,365		*
Pensco Trust Company FBO Ivan H Norman (53)		217,251		52,910		164,341		*
PENSCO Trust Company Custodian, FBO Benjamin Lesin ACCT#LE1GE (54)		132,275		52,910		79,365		*
Pensco Trust Company FBO Aaron L. Heimowitz (55)		157,275		52,910		104,365		*
Norman R. Shapiro (56)		132,275		52,910		79,365		*
Nathan Korman (57)		172,275		52,910		119,365		*
Nagel Family Living Trust (58)		164,335		52,910		111,425		*
Mayer 2005 Revocable Trust (59)		132,275		52,910		79,365		*
Martin Weiss (60)		132,275		52,910		79,365		*
Leo L. Striks & Deborah S. Striks Community Property Trust (61)		132,275		52,910		79,365		*
James & Dr. Esther Enterline (62)		202,275		52,910		149,365		*
Ezra and Lauren Kest Community Property Trust (63)		132,275		52,910		79,365		*
Anthony & Christine Digiovanni Living Trust (64)		164,335		52,910		111,425		*
Matthew Weiss and Michele Weiss JT TEN (66)		132,262		52,905		79,357		*
Joseph H. Merback & Tema N. Merback Co-TTEE FBO Merback Family Trust UTD 8-30-89 (67)		132,262		52,905		79,357		*

16

Name	Number of Shares Beneficially Owned Before Offering (1)		Number of Shares Being Offered		Number of Shares Beneficially Owned After Offering
					Number of Shares		Percentage
Arden Merback (68)		132,262		52,905		79,357		*
Shri & Annamma Mishra Family Trust (69)		82,138		26,455		55,683		*
Robert Stuckelman, TTEE, RTS Charitable Unit Trust #2, DTD (70)		82,138		26,455		55,683		*
Paul Levinson (71)		66,138		26,455		39,683		*
Donald Shepherd IRA (72)		66,138		26,455		39,683		*
Charlene and Steve Ustin Revocable Trust (73)		82,168		26,455		55,713		*
Benzion J. Westreich, as TTEE for MW 1996 Trust (74)		66,138		26,455		39,683		*
Charles B. Runnels Family Trust DTD 10-14-93 Charles B. Runnels & Amy Jo Runnels TTEES (75)		66,131		26,452		39,679		*
Jonathan M. Westreich (76)		52,910		21,164		31,746		*
Karen Kang (77)		26,452		10,581		15,871		*
John W. Galuchie, Jr. (78)		26,452		10,581		15,871		*
Christopher G. Niklas (79)		26,452		10,581		15,871		*
Steve Klein (80)		37,228		5,291		31,937		*
Harvey Turell (81)		196,397		52,910		143,487		*
		46,682,470		17,355,379		29,327,093		76.06	%

* Less than one (1) percent.

(1)The number and percentage of share beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which each selling stockholder has sole or shared voting power or investment power and also any shares which the selling stockholder has the right to acquire within 60 days.

(2) Includes up to 2,116,296 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 3,174,444 warrants received for the April 2007 and May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Paul Kessler. Bristol Capital Advisors, LLC (“BCA”) is the investment advisor to Bristol Investment Fund, Ltd. (“Bristol”). Paul Kessler is the manager of BCA and as such has voting and investment control over the securities held by Bristol. Mr. Kessler disclaims beneficial ownership of such securities.

(3)Includes up to 1,904,762 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 2,857,143 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is J. Steven Emerson.

(4)Includes up to 1,058,095 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 1,587,143 warrants received for the May 2007 Debenture Offering.

(5)Includes up to 714,286 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 1,071,429 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is J. Steven Emerson.

17

(6)Includes up to 553,690 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 830,535 warrants received for the April 2007 Debenture Offering, and 1,225,000 warrants held prior to the April 2007 Debenture Offering.

(7)Includes up to 529,101 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 793,651 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Eric S. Swartz.

(8)Includes up to 529,101 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 793,651 warrants received for the April 2007 Debenture Offering, and 100,000 warrants held prior to the April 2007 Debenture Offering. The natural persons with voting and investment powers for this stockholder Melvyn Maller, Carol Maller, and Jeffrey Maller.

(9) Includes up to 529,048 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 793,571 warrants received for the May 2007 Debenture Offering. The natural persons with voting and investment powers for this stockholder is Michael Finkelstein, Arthur Jones, Brian Mazzella, Trevor Williams and Joseph Weisfeld.

(10) Includes up to 529,048 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 793,571 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Jonathan Glaser.

(11) Includes up to 529,048 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 793,571 warrants received for the May 2007 Debenture Offering. The natural persons with voting and investment powers for this stockholder are Bryan Ezralow, Marshall Ezralow, and Marc Ezralow.

(12) Includes up to 423,238 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 634,857 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Steven Shum.

(13)Includes up to 396,825 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 595,238 warrants received for the April 2007 Debenture Offering, and 62,500 warrants held prior to the April 2007 Debenture Offering.

(14)Includes up to 380,952 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 571,429 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Alan P Donenfeld, Managing Member of the General Partner of Paragon Capital LP.

(15)Includes up to 370,370 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 555,556 warrants received for the April 2007 Debenture Offering, and 15,000 warrants held prior to the April 2007 Debenture Offering.

(16)Includes up to 317,429 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 476,143 warrants received for the May 2007 Debenture Offering. The natural persons with voting and investment powers for this shareholder is Joseph Benhamov.

(17)Includes up to 264,550 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 396,825 warrants received for the April 2007 Debenture Offering.

(18)Includes up to 264,550 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 396,825 warrants received for the April 2007 Debenture Offering.

(19)Includes up to 264,524 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 396,786 warrants received for the May 2007 Debenture Offering.

18

(20) Includes up to 264,524 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 396,786 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Erick Richardson.

(21) Includes up to 264,524 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 396,786 warrants received for the May 2007 Debenture Offering. The natural persons with voting and investment powers for this stockholder are Marshall Ezralow, Marc Ezralow, and Bryan Ezralow.

(22) Includes up to 264,524 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 396,786 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Marshall Ezralow.

(23) Includes up to 253,968 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 380,952 warrants received for the April 2007 Debenture Offering.

(24) Includes up to 238,095 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 357,143 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is J. Steven Emerson.

(25) Includes up to 211,640 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 317,460 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Armand Ungar.

(26) Includes up to 211,619 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 317,429 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Brandon Goulding.

(27) Includes up to 211,619 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 317,429 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Howard Todd Horberg.

(28) Includes up to 211,619 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 317,429 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Mitchell P. Kopin, President of Downsview Capital, Inc., the General Partner of Cranshrie Capital, LP. Each of Mr. Kopin and Downsview Capital, Inc disclaims beneficial ownership of these securities.

(29) Includes up to 211,619 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 317,429 warrants received for the May 2007 Debenture Offering. The natural persons with voting and investment powers for this shareholder are Peter Schlesinger and Susan Fairhurst.

(30) Includes up to 158,730 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 238,095 warrants received for the April 2007 Debenture Offering, and 25,000 warrants held prior to the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Michael Shiffman.

(31) Includes up to 158,730 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 238,095 warrants received for the April 2007 Debenture Offering, and 25,000 warrants held prior to the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Morris Loffman.

(32) Includes up to 158,725 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 238,088 warrants received for the April 2007 and May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Randall Goulding.

(33) Includes up to 119,662 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 179,493 warrants received for the April 2007 Debenture Offering, and 90,625 warrants held prior to the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Benjamin Lesin.

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(34) Includes up to 116,894 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 175,341 warrants received for the April 2007 Debenture Offering, and 52,500 warrants held prior to the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Dan L. McGurk

(35) Includes up to 105,820 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 158,730 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Ronald Mayer

(36) Includes up to 105,820 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 158,730 warrants received for the April 2007 Debenture Offering. The natural persons with voting and investment powers for this stockholder is Joshua Silverman.

(37) Includes up to 105,820 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 158,730 warrants received for the April 2007 Debenture Offering, and 25,000 warrants held prior to the April 2007 Debenture Offering.

(38) Includes up to 105,820 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 158,730 warrants received for the April 2007 Debenture Offering.

(39) Includes up to 105,820 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 158,730 warrants received for the April 2007 Debenture Offering.

(40) Includes up to 105,810 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 158,714 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Phillip E. Muhl.

(41) Includes up to 105,810 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 158,714 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is G. Tyler Runnels

(42) Includes up to 105,810 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 158,714 warrants received for the May 2007 Debenture Offering.

(43) Includes up to 93,885 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 140,827 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is G. Tyler Runnels

(44) Includes up to 85,706 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 128,559 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers is David N. Baker.

(45) Includes up to 79,365 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 119,048 warrants received for the April 2007 Debenture Offering.

(46) Includes up to 79,357 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 119,036 warrants received for the May 2007 Debenture Offering.

(47) Includes up to 74,074 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 111,111 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Mathew Pearlman.

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(48) Includes up to 63,492 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 95,238 warrants received for the April 2007 Debenture Offering.

(49) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 79,365 warrants received for the April 2007 Debenture Offering, and 182,500 warrants held prior to the April 2007 Debenture Offering. The natural persons with voting and investment powers for this stockholder are Tibor Neumann and Erika Neumann.

(50) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 79,365 warrants received for the April 2007 Debenture Offering, and 5,000 warrants held prior to the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is David M. Striks.

(51) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Nachum Stein.

(52) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Nachum Stein.

(53) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 79,365 warrants received for the April 2007 Debenture Offering, and 4,976 warrants held prior to the April 2007 Debenture Offering.

(54) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering.

(55) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 79,365 warrants received for the April 2007 Debenture Offering, and 5,000 warrants held prior to the April 2007 Debenture Offering.

(56) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering.

(57) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering.

(58) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Jack Nagel

(59) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering. The natural persons with voting and investment powers for this stockholder are Ronald Mayer and Helene G. Mayer

(60) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering.

(61) Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering.

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(62)Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock, 79,365 warrants received for the April 2007 Debenture Offering, and 10,000 warrants held prior to the April 2007 Debenture Offering.

(63)Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Lauren Kest.

(64)Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering.

(65)Intentionally omitted.

(66)Includes up to 52,905 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,357 warrants received for the May 2007 Debenture Offering.

(67)Includes up to 52,905 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,357 warrants received for the May 2007 Debenture Offering. The natural persons with voting and investment powers for this stockholder are Joseph H. Merback and Tema Merback.

(68)Includes up to 52,905 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,357 warrants received for the May 2007 Debenture Offering.

(69)Includes up to 26,455 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 39,683 warrants received for the April 2007 Debenture Offering.

(70)Includes up to 26,455 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 39,683 warrants received for the April 2007 Debenture Offering.

(71)Includes up to 26,455 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 39,683 warrants received for the April 2007 Debenture Offering.

(72)Includes up to 26,455 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 39,683 warrants received for the April 2007 Debenture Offering.

(73)Includes up to 26,455 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 39,683 warrants received for the April 2007 Debenture Offering.

(74)Includes up to 26,455 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 39,683 warrants received for the April 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Benzion Westreich.

(75)Includes up to 26,452 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 39,679 warrants received for the May 2007 Debenture Offering. The natural person with voting and investment powers for this stockholder is Charles B. Runnels.

(76)Includes up to 21,164 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 31,746 warrants received for the April 2007 Debenture Offering.

(77)Includes up to 10,581 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 15,871 warrants received for the May 2007 Debenture Offering.

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(78)Includes up to 10,581 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 15,871 warrants received for the May 2007 Debenture Offering.

(79)Includes up to 10,581 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 15,871 warrants received for the May 2007 Debenture Offering.

(80)Includes up to 5,291 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 7,937 warrants received for the April 2007 Debenture Offering.

(81)Includes up to 52,910 shares of common stock to be issued upon the exercise of the convertible debenture at an exercise price of $1.05 per share of common stock and 79,365 warrants received for the April 2007 Debenture Offering.

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ADDITIONAL DISCLOSURE

Dollar Value of Underlying Securities Registered for Resale in this Prospectus

The total dollar value of the shares of common stock underlying the securities issued in connection with the April 2007 financing and the May 2007 financing that we have registered for resale (using the number of underlying securities that we have registered for resale and the market price per share for those securities on April 16, 2007, the closing date of the April 2007 financing documents, and May 29, 2007, the closing date of the May 2007 financing, respectively) are as follows:

April 2007 Financing

Shares of Common Stock Registered for Resale Underlying Debentures:		7,303,470
Market Price per Share of Common Stock on April 16, 2007:	$	1.35
Dollar Value of Underlying Securities:	$	9,859,685

May 2007 Financing

Shares of Common Stock Registered for Resale Underlying Debentures and Warrants:		10,051,909
Market Price per Share of Common Stock on May 29, 2007:	$	1.18
Dollar Value of Underlying Securities:	$	11,861,253

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Payments Made in Connection with April 2007 Financing and May 2007 Financing

The following tables disclose the dollar amount of each payment (including the value of any payments to be made in common stock) in connection with the April 2007 financing and the May 2007 financing that we have made or may be required to make to any selling security holder, any affiliate of a selling security holder, or any person with whom any selling security holder has a contractual relationship regarding the transaction (including any interest payments, liquidated damages, payments made to “finders” or “placement agents”, and any other payments or potential payments). The net proceeds to the Company from the sale of the April 2007 Debentures and the May 2007 Debentures and the total possible payments to all selling security holders and any of their affiliates in the first year following the sale of the April 2007 Debentures and the May 2007 Debentures, respectively, are also provided.

April 2007 Financing

Payee	Type of Payment			Amount/Value of Payment
Bristol Capital, LLC(1)	Cash		$	85,000
Warrant(2)			$	84,476
Jeffrey Maller	Warrant (3	)	$	21,119
Total interest payments to be made to all Selling Security Holders in First Year	Cash		$	766,864
Total potential failure payments to be paid to all Selling Security Holders in First Year (4)			$	1,380,355
Total Possible Payments to all Selling Security Holders and Any of Their Affiliates in First Year:			$	2,337,814
Net Proceeds from April 2007 Debentures (5):			$	6,850,416

(1)    Bristol Capital, LLC, served as advisors to Bristol Investment Fund for $1,111,111 of the debentures sold in the April 2007 financing and is an affiliate of Bristol Investment Fund, Ltd. Bristol Capital, LLC received this cash amount as an origination fee and reimbursement of expenses.

(2)    On April 16, 2007, we issued a warrant to purchase 95,238 shares of common stock at an exercise price of $1.05 per share (subject to certain milestone adjustments) to Bristol Capital, LLC in connection with the April 2007 financing. The market price per share on the date of issuance was $1.35. The initial fair value of the warrant was estimated at approximately $84,476 using a complex Binomial Lattice pricing model suitable to value path dependent American options. The assumptions used in the model are as follows: (1) dividend yield of 0%; (2) expected volatility of 63%, (3) risk-free interest rate of 4.64%, and (4) expected life of 5 years. Bristol Capital, LLC is an affiliate of Bristol Investment Fund, Ltd

(3)    Jeffrey Maller received warrants to purchase 23,810 shares of common stock as a finder’s fee. The initial fair value of the warrant was estimated at approximately $21,119 using a complex Binomial Lattice pricing model. The assumptions used in the complex Binomial Lattice model are as follows: (1) dividend yield of 0%; (2) expected volatility of 63%, (3) risk-free interest rate of 4.64%, and (4) expected life of 5 years. Jeffrey Maller is an affiliate of the Maller Estate Planning Trust.

(4)    Total potential failure payments are calculated as 18% per annum of outstanding principal.

(5)    Net proceeds from the May 2007 debentures is calculated as the gross proceeds to the company less cash fees paid in connection with the financing.

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May 2007 Financing

Payee	Type of Payment		Amount/Value of Payment
T.R Winston & Company, LLC(1)	Cash	$	760,000
	Warrant(2)	$	1,864,628
Total potential failure payments to be paid to all Selling Security Holders in First Year (3)		$	1,899,810
Total interest payments to be made to all Selling Security Holders in First Year	Cash	$	1,055,450
Total Possible Payments to all Selling Security Holders and Any of Their Affiliates in First Year:		$	5,579,888
Net Proceeds from May 2007 debentures: (4)		$	8,679,955

(1)    T.R. Winston & Company, LLC served as the placement agent for the securities sold in the May 2007 financing.

(2)    On May 29, 2007, we issued a warrant to purchase 2,512,976 shares of common stock at an exercise price of $1.05 per share to T.R. Winston & Company, LLC in connection with the May 2007 financing. The market price per share on the date of issuance was $1.18. The initial fair value of the warrant was estimated at approximately $1,864,628 using the complex customized Binomial Lattice model. The assumptions used in the model are as follows: (1) dividend yield of 0%, (2) expected volatility of 63%, (3) risk-free interest rate of 4.82%, and (4) expected life of 5 years.

(3)    Total potential failure payments are calculated as 18% per annum of outstanding principal.

(4)    Net proceeds from the May 2007 debentures is calculated as the gross proceeds to the company less cash fees paid in connection with the financing.

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Potential Profits on Conversion of April 2007 Debentures and May 2007 Debentures

The following tables show the total possible profit that the selling security holders could realize as a result of the conversion discount for the securities underlying the April 2007 Debentures and May 2007 Debentures. The total possible discount to market price has been calculated, assuming a conversion price of $1.05 as set forth in the Secured Debentures.

April 2007 Financing

Name	Market Price per Share of Common Stock on Closing Date		Conversion Price of April 2007 Debentures		Total Possible Shares Underlying April 2007 Debentures		Combined Market Price of Shares Underlying April 2007 Debentures		Combined Conversion Price of Shares Underlying April 2007 Debentures		Total Possible Discount to Market Price (1)
Bristol Investment Fund, Ltd.	$	1.35	$	1.05		1,058,201	$	1,428,571	$	1,111,111	$	317,460
Drew Rayman		1.35		1.05		553,690		747,482		581,375		166,107
Roswell		1.35		1.05		529,101		714,286		555,556		158,730
Maller Estate Planning Trust Dtd 3/3/1998 Melvyn and Carol Maller, Jeffrey Maller, Trustees		1.35		1.05		529,101		714,286		555,556		158,730
Jonathan and Miriam Sternberg		1.35		1.05		396,825		535,714		416,666		119,048
Paragon Capital LP		1.35		1.05		380,952		514,285		400,000		114,286
Arthur Michelson		1.35		1.05		370,370		500,000		388,889		111,111
Sol Kest		1.35		1.05		264,550		357,143		277,778		79,365
Michael Kest		1.35		1.05		264,550		357,143		277,778		79,365
Bradley E. Turell		1.35		1.05		253,968		342,857		266,666		76,190
Ungar Family Trust		1.35		1.05		211,640		285,714		222,222		63,492
Michael Shiffman MD Inc Pension Trust		1.35		1.05		158,730		214,286		166,667		47,619
California Neurosurgical Associates Profit Sharing Plan		1.35		1.05		158,730		214,286		166,667		47,619
Lesin Family Trust		1.35		1.05		119,662		161,544		125,645		35,899
The McGurk Family Trust		1.35		1.05		116,894		157,807		122,739		35,068
The Nutmeg Mercury Fund, LLP		1.35		1.05		105,820		142,857		111,111		31,746
JKRK Family Partners No. 2 LLC		1.35		1.05		105,820		142,857		111,111		31,746
Iriquois Master Fund Ltd.		1.35		1.05		105,820		142,857		111,111		31,746
Elisha Rothman		1.35		1.05		105,820		142,857		111,111		31,746
David D. Miller, TTEE of the Miller Living Trust Dtd 3/3/87		1.35		1.05		105,820		142,857		111,111		31,746
Alfons Melohn		1.35		1.05		105,820		142,857		111,111		31,746
Joyce M. Westreich		1.35		1.05		79,365		107,143		83,333		23,810
The Striks and Pearlman Group		1.35		1.05		74,074		100,000		77,778		22,222
Adolph & Miriam Rabinovitz		1.35		1.05		63,492		85,714		66,667		19,048
Tibor Neumann & Erika Neumann as Trustees of the Neumann Family Trust 3rd comp. rsttmt dtd 12/13/05		1.35		1.05		52,910		71,429		55,556		15,873
Striks Properties L.P.		1.35		1.05		52,910		71,429		55,556		15,873
Rutgers Enhanced Insurance Company		1.35		1.05		52,910		71,429		55,556		15,873
Rutgers Casualty Insurance Company		1.35		1.05		52,910		71,429		55,556		15,873
Pensco Trust Company FBO Ivan H Norman		1.35		1.05		52,910		71,429		55,556		15,873
PENSCO Trust Company Custodian, FBO Benjamin Lesin ACCT#LE1GE		1.35		1.05		52,910		71,429		55,556		15,873
Pensco Trust Company FBO Aaron L. Heimowitz		1.35		1.05		52,910		71,429		55,556		15,873
Norman R. Shapiro		1.35		1.05		52,910		71,429		55,556		15,873
Nathan Korman		1.35		1.05		52,910		71,429		55,556		15,873
Nagel Family Living Trust		1.35		1.05		52,910		71,429		55,556		15,873
Mayer 2005 Revocable Trust		1.35		1.05		52,910		71,429		55,556		15,873
Martin Weiss		1.35		1.05		52,910		71,429		55,556		15,873
Leo L. Striks & Deborah S. Striks Community Property Trust		1.35		1.05		52,910		71,429		55,556		15,873
James & Dr. Esther Enterline		1.35		1.05		52,910		71,429		55,556		15,873
Harvey A. Turell		1.35		1.05		52,910		71,429		55,556		15,873
Ezra and Lauren Kest Community Property Trust		1.35		1.05		52,910		71,429		55,556		15,873
Anthony & Christine Digiovanni Living Trust		1.35		1.05		52,910		71,429		55,556		15,873
Shri & Annamma Mishra Family Trust		1.35		1.05		26,455		35,714		27,778		7,937
Robert Stuckelman, TTEE, RTS Charitable Unit Trust #2, DTD		1.35		1.05		26,455		35,714		27,778		7,937
Paul Levinson		1.35		1.05		26,455		35,714		27,778		7,937
Donald Shepherd IRA		1.35		1.05		26,455		35,714		27,778		7,937
Charlene and Steve Ustin Revocable Trust		1.35		1.05		26,455		35,714		27,778		7,937
Benzion J. Westreich, as TTEE for MW 1996 Trust		1.35		1.05		26,455		35,714		27,778		7,937
Jonathan M. Westreich		1.35		1.05		21,164		28,571		22,222		6,349
Steve Klein		1.35		1.05		5,291		7,143		5,556		1,587
Total						7,303,470	$	9,859,685	$	7,668,644	$	2,191,041

(1) This amount does not include Original Issue Discount, and is calcualted using the current conversion price of $1.05 per share.

27

May 2007 Financing

Name	Market Price per Share of Common Stock on Closing Date		Conversion Price of May 2007 Debentures		Total Possible Shares Underlying May 2007 Debentures		Combined Market Price of Shares Underlying May 2007 Debentures		Combined Conversion Price of Shares Underlying May 2007 Debentures		Total Possible Discount to Market Price (1)
IRA FBO J. Steven Emerson Rollover II Pershing LLC as Custodian	$	1.18	$	1.05		1,904,762	$	2,247,619	$	2,000,000	$	247,619
Bristol Investment Fund, Ltd.		1.18		1.05		1,058,095		1,248,552		1,111,000		137,552
Andrew Lessman		1.18		1.05		1,058,095		1,248,552		1,111,000		137,552
IRA FBO J. Steven Emerson Roth Pershing LLC as Custodian		1.18		1.05		714,286		842,857		750,000		92,857
Whalehaven Capital Fund Limited		1.18		1.05		529,048		624,277		555,500		68,776
Jonathan & Nancy Glaser Family Trust DTD 12-16-98 Jonathan M. Glaser & Nancy E. Glaser TTEES		1.18		1.05		529,048		624,277		555,500		68,776
Colony Partners, a California general partnership		1.18		1.05		529,048		624,277		555,500		68,776
Core Fund, L.P.		1.18		1.05		423,238		499,421		444,400		55,021
Banque SCS Alliance S.A.		1.18		1.05		317,429		374,566		333,300		41,266
Steven B. Dunn		1.18		1.05		264,524		312,138		277,750		34,388
RP Capital LLC		1.18		1.05		264,524		312,138		277,750		34,388
EMSE, LLC, a Delaware limited liability company		1.18		1.05		264,524		312,138		277,750		34,388
Bear Stearns Securities Corp. FBO Marshall S. Ezralow Roth IRA		1.18		1.05		264,524		312,138		277,750		34,388
Emerson Partners		1.18		1.05		238,095		280,952		250,000		30,952
The Black Diamond Fund LLLP		1.18		1.05		211,619		249,710		222,200		27,510
Horberg Enterprises Limited Partnership		1.18		1.05		211,619		249,710		222,200		27,510
Cranshire Capital, L.P.		1.18		1.05		211,619		249,710		222,200		27,510
Apex Investment Fund, Ltd.		1.18		1.05		211,619		249,710		222,200		27,510
The Muhl Family Trust, Phillip E. Muhl & Kristin A. Muhl TTEE DTD 10-11-95		1.18		1.05		105,810		124,856		111,101		13,755
G. Tyler Runnels or Jasmine Niklas Runnels TTEES The Runnels Family Trust DTD 1-11-2000		1.18		1.05		105,810		124,856		111,101		13,755
David Sidoo		1.18		1.05		105,810		124,856		111,101		13,755
High Tide, LLC		1.18		1.05		93,885		110,784		98,579		12,205
Flat Universe, LLC		1.18		1.05		85,706		101,133		89,991		11,142
John B. Davies		1.18		1.05		79,357		93,641		83,325		10,316
The Nutmeg Mercury Fund, LLP		1.18		1.05		52,905		62,428		55,550		6,878
Matthew Weiss and Michele Weiss JT TEN		1.18		1.05		52,905		62,428		55,550		6,878
Joseph H. Merback & Tema N. Merback Co-TTEE FBO Merback Family Trust UTD 8-30-89		1.18		1.05		52,905		62,428		55,550		6,878
Arden Merback		1.18		1.05		52,905		62,428		55,550		6,878
Charles B. Runnels Family Trust DTD 10-14-93 Charles B. Runnels & Amy Jo Runnels TTEES		1.18		1.05		26,452		31,213		27,775		3,439
Karen Kang		1.18		1.05		10,581		12,486		11,110		1,376
John W. Galuchie, Jr.		1.18		1.05		10,581		12,486		11,110		1,376
Christopher G. Niklas		1.18		1.05		10,581		12,486		11,110		1,376
Total						10,051,909	$	11,861,253	$	10,554,504	$	1,306,748

(1) This amount does not include Original Issue Discount, and is calcualted using the current conversion price of $1.05 per share.

Effect of Milestone Adjustment

The Secured Debentures are subject to Milestone Adjustments pursuant to which the conversion price may be reduced. However, as a result of a Conversion Cap applicable to the Secured Debentures, the Debenture holders may not acquire more shares upon conversion than the number of shares that are reflected in the Selling Security Holders table. To the extent that a reduction in the conversion price combined with the Conversion Cap means that the entire amount of a Secured Debenture may not be converted into our common stock, then we will be obligated to redeem over time that portion of the Secured Debenture which is not convertible into common stock. See the table below for an illustration of what would occur in the event of a 10%, 25% and 50% reduction in the conversion price as a result of a Milestone Adjustment.

Reduction in Conversion Price	Combined Market Price of Shares Debentures redeemable Underlying April 2007 and May2007 Debentures		Combined Conversion Price		Total Possible Discount to Market Price		Principal Amount of Debentures Redeemable
10%	$	21,720,938	$	16,400,833	$	5,320,105	$	1,822,315
25%	$	21,720,938	$	13,667,361	$	8,053,577	$	4,555,787
50%	$	21,720,938	$	9,111,574	$	12,609,364	$	9,111,574

28

Total Potential Profit from Other Securities

The following tables show the total possible profit to be realized as a result of any conversion discounts for securities underlying any other warrants, options, notes or other securities of the Company in connection with the April 2007 financing and the May 2007 financing that are held by the selling security holders or any affiliates of the selling security holders. The total possible discount to market price has been calculated assuming (1) a current exercise price of $1.05, (2) a ten percent (10%) discount to the exercise price based on Milestone Adjustments, (3) a twenty-five percent (25%) discount to the exercise price based on Milestone Adjustments, and (4) a fifty percent (50%) discount to the exercise price based on Milestone Adjustments.

April 2007 Financing - Gain on April 2007 Warrants

Name	Market Price per Share of Common Stock on Closing Date		Exercise Price of April 2007 Warrants		Total Possible Shares Underlying April 2007 Warrants		Combined Market Price of Shares Underlying April 2007 Warrants		Combined Exercise Price of Shares Underlying April 2007 Warrants		Total Possible Discount to Market Price (1)		Total Possible Discount to Market Price (2)		Total Possible Discount to Market Price (3)		Total Possible Discount to Market Price (4)
Bristol Investment Fund, Ltd.		1.35		1.05		1,587,302		2,142,857		1,666,667		476,190		642,857		892,857		1,309,524
Drew Rayman		1.35		1.05		830,535		1,121,222		872,062		249,161		336,367		467,176		685,191
Roswell		1.35		1.05		793,652		1,071,430		833,334		238,095		321,429		446,429		654,762
Maller Estate Planning Trust Dtd 3/3/1998 Melvyn and Carol Maller, Jeffrey Maller, Trustees		1.35		1.05		793,652		1,071,430		833,334		238,095		321,429		446,429		654,762
Jonathan and Miriam Sternberg		1.35		1.05		595,238		803,571		624,999		178,571		241,071		334,821		491,071
Paragon Capital LP		1.35		1.05		571,428		771,428		599,999		171,428		231,428		321,428		471,428
Arthur Michelson		1.35		1.05		555,555		749,999		583,333		166,667		225,000		312,500		458,333
Sol Kest		1.35		1.05		396,825		535,714		416,666		119,048		160,714		223,214		327,381
Michael Kest		1.35		1.05		396,825		535,714		416,666		119,048		160,714		223,214		327,381
Bradley E. Turell		1.35		1.05		380,952		514,285		400,000		114,286		154,286		214,286		314,285
Ungar Family Trust		1.35		1.05		317,460		428,571		333,333		95,238		128,571		178,571		261,905
Michael Shiffman MD Inc Pension Trust		1.35		1.05		238,095		321,428		250,000		71,429		96,428		133,928		196,428
California Neurosurgical Associates Profit Sharing Plan		1.35		1.05		238,095		321,428		250,000		71,429		96,428		133,928		196,428
Lesin Family Trust		1.35		1.05		179,493		242,316		188,468		53,848		72,695		100,965		148,082
The McGurk Family Trust		1.35		1.05		175,341		236,710		184,108		52,602		71,013		98,629		144,656
The Nutmeg Mercury Fund, LLP		1.35		1.05		158,730		214,286		166,667		47,619		64,286		89,286		130,952
JKRK Family Partners No. 2 LLC		1.35		1.05		158,730		214,286		166,667		47,619		64,286		89,286		130,952
Iriquois Master Fund Ltd.		1.35		1.05		158,730		214,286		166,667		47,619		64,286		89,286		130,952
Elisha Rothman		1.35		1.05		158,730		214,286		166,667		47,619		64,286		89,286		130,952
David D. Miller, TTEE of the Miller Living Trust Dtd 3/3/87		1.35		1.05		158,730		214,286		166,667		47,619		64,286		89,286		130,952
Alfons Melohn		1.35		1.05		158,730		214,286		166,667		47,619		64,286		89,286		130,952
Joyce M. Westreich		1.35		1.05		119,048		160,714		125,000		35,714		48,214		66,964		98,214
The Striks and Pearlman Group		1.35		1.05		111,111		150,000		116,667		33,333		45,000		62,500		91,667
Adolph & Miriam Rabinovitz		1.35		1.05		95,238		128,571		100,000		28,571		38,571		53,571		78,571
Tibor Neumann & Erika Neumann as Trustees of the Neumann Family Trust 3rd comp. rsttmt dtd 12/13/05		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Striks Properties L.P.		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Rutgers Enhanced Insurance Company		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Rutgers Casualty Insurance Company		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Pensco Trust Company FBO Ivan H Norman		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
PENSCO Trust Company Custodian, FBO Benjamin Lesin ACCT#LE1GE		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Pensco Trust Company FBO Aaron L. Heimowitz		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Norman R. Shapiro		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Nathan Korman		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Nagel Family Living Trust		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Mayer 2005 Revocable Trust		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Martin Weiss		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Leo L. Striks & Deborah S. Striks Community Property Trust		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
James & Dr. Esther Enterline		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Harvey A. Turell		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Ezra and Lauren Kest Community Property Trust		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Anthony & Christine Digiovanni Living Trust		1.35		1.05		79,365		107,143		83,333		23,810		32,143		44,643		65,476
Shri & Annamma Mishra Family Trust		1.35		1.05		39,683		53,571		41,667		11,905		16,071		22,321		32,738
Robert Stuckelman, TTEE, RTS Charitable Unit Trust #2, DTD		1.35		1.05		39,683		53,571		41,667		11,905		16,071		22,321		32,738
Paul Levinson		1.35		1.05		39,683		53,571		41,667		11,905		16,071		22,321		32,738
Donald Shepherd IRA		1.35		1.05		39,683		53,571		41,667		11,905		16,071		22,321		32,738
Charlene and Steve Ustin Revocable Trust		1.35		1.05		39,683		53,571		41,667		11,905		16,071		22,321		32,738
Benzion J. Westreich, as TTEE for MW 1996 Trust		1.35		1.05		39,683		53,571		41,667		11,905		16,071		22,321		32,738
Jonathan M. Westreich		1.35		1.05		31,746		42,857		33,333		9,524		12,857		17,857		26,190
Steve Klein		1.35		1.05		7,937		10,714		8,333		2,381		3,214		4,464		6,548
Jeffrey Maller		1.35		1.05		23,810		32,144		25,001		7,143		9,643		13,393		19,643
Bristol Capital Advisors		1.35		1.05		95,238		128,571		100,000		28,571		38,571		53,571		78,571
Total						11,074,253	$	14,950,242	$	11,627,966	$	3,322,276	$	4,485,072	$	6,229,267	$	9,136,259

(1) This amount does not include Original Issue Discount, and is calcualted using the current conversion price of $1.05 per share.

(2) Assumes that the conversion price is reduced by 10% to $0.945 per share

(3) Assumes that the conversion price is reduced by 25% to $0.7875 per share

(4) Assumes that the conversion price is reduced by 50% to $0.525 per share

29

May 2007 Financing

Name	Market Price per Share of Common Stock on Closing Date		Exercise Price of May 2007 Warrants		Total Possible Shares Underlying May 2007 Warrants		Combined Market Price of Shares Underlying May 2007 Warrants		Combined Exercise Price of Shares Underlying May 2007 Warrants		Total Possible Discount to Market Price (1)		Total Possible Discount to Market Price (2)		Total Possible Discount to Market Price (3)		Total Possible Discount to Market Price (4)
IRA FBO J. Steven Emerson Rollover II Pershing LLC as Custodian	$	1.18	$	1.05		2,857,143	$	3,371,429	$	3,000,000	$	371,429	$	671,429	$	1,121,429	$	1,871,429
Bristol Investment Fund, Ltd.		1.18		1.05		1,587,143		1,872,828		1,666,500		206,329		372,978		622,953		1,039,578
Andrew Lessman		1.18		1.05		1,587,143		1,872,828		1,666,500		206,329		372,978		622,953		1,039,578
IRA FBO J. Steven Emerson Roth Pershing LLC as Custodian		1.18		1.05		1,071,429		1,264,286		1,125,000		139,286		251,786		420,536		701,786
Whalehaven Capital Fund Limited		1.18		1.05		793,572		936,415		833,251		103,164		186,489		311,477		519,790
Jonathan & Nancy Glaser Family Trust DTD 12-16-98 Jonathan M. Glaser & Nancy E. Glaser TTEES		1.18		1.05		793,572		936,415		833,251		103,164		186,489		311,477		519,790
Colony Partners, a California general partnership		1.18		1.05		793,572		936,415		833,251		103,164		186,489		311,477		519,790
Core Fund, L.P.		1.18		1.05		634,857		749,131		666,600		82,531		149,191		249,181		415,831
Banque SCS Alliance S.A.		1.18		1.05		476,144		561,849		499,951		61,899		111,894		186,886		311,874
Steven B. Dunn		1.18		1.05		396,786		468,207		416,625		51,582		93,245		155,739		259,895
RP Capital LLC		1.18		1.05		396,786		468,207		416,625		51,582		93,245		155,739		259,895
EMSE, LLC, a Delaware limited liability company		1.18		1.05		396,786		468,207		416,625		51,582		93,245		155,739		259,895
Bear Stearns Securities Corp. FBO Marshall S. Ezralow Roth IRA		1.18		1.05		396,786		468,207		416,625		51,582		93,245		155,739		259,895
Emerson Partners		1.18		1.05		357,143		421,428		375,000		46,429		83,928		140,178		233,928
The Black Diamond Fund LLLP		1.18		1.05		317,429		374,566		333,300		41,266		74,596		124,591		207,916
Horberg Enterprises Limited Partnership		1.18		1.05		317,429		374,566		333,300		41,266		74,596		124,591		207,916
Cranshire Capital, L.P.		1.18		1.05		317,429		374,566		333,300		41,266		74,596		124,591		207,916
Apex Investment Fund, Ltd.		1.18		1.05		317,429		374,566		333,300		41,266		74,596		124,591		207,916
The Muhl Family Trust, Phillip E. Muhl & Kristin A. Muhl TTEE DTD 10-11-95		1.18		1.05		158,715		187,284		166,651		20,633		37,298		62,296		103,958
G. Tyler Runnels or Jasmine Niklas Runnels TTEES The Runnels Family Trust DTD 1-11-2000		1.18		1.05		158,715		187,284		166,651		20,633		37,298		62,296		103,958
David Sidoo		1.18		1.05		158,715		187,284		166,651		20,633		37,298		62,296		103,958
High Tide, LLC		1.18		1.05		140,828		166,176		147,869		18,308		33,094		55,275		92,242
Flat Universe, LLC		1.18		1.05		128,559		151,700		134,987		16,713		30,211		50,459		84,206
John B. Davies		1.18		1.05		119,036		140,462		124,987		15,475		27,973		46,721		77,968
The Nutmeg Mercury Fund, LLP		1.18		1.05		79,358		93,642		83,325		10,316		18,649		31,148		51,979
Matthew Weiss and Michele Weiss JT TEN		1.18		1.05		79,358		93,642		83,325		10,316		18,649		31,148		51,979
Joseph H. Merback & Tema N. Merback Co-TTEE FBO Merback Family Trust UTD 8-30-89		1.18		1.05		79,358		93,642		83,325		10,316		18,649		31,148		51,979
Arden Merback		1.18		1.05		79,358		93,642		83,325		10,316		18,649		31,148		51,979
Charles B. Runnels Family Trust DTD 10-14-93 Charles B. Runnels & Amy Jo Runnels TTEES		1.18		1.05		39,678		46,820		41,662		5,158		9,324		15,574		25,989
Karen Kang		1.18		1.05		15,872		18,728		16,665		2,063		3,730		6,230		10,396
John W. Galuchie, Jr.		1.18		1.05		15,872		18,728		16,665		2,063		3,730		6,230		10,396
Christopher G. Niklas		1.18		1.05		15,872		18,728		16,665		2,063		3,730		6,230		10,396
T.R. Winston & Company, LLC		1.18		1.05		2,512,976		2,965,312		2,638,625		326,687		590,549		1,884,732		1,645,999
Total						17,590,840	$	20,757,191	$	18,470,381	$	2,286,809	$	4,133,847	$	7,802,793	$	11,522,000

(1) This amount does not include Original Issue Discount, and is calcualted using the current conversion price of $1.05 per share.

(2) Assumes that the conversion price is reduced by 10% to $0.945 per share

(3) Assumes that the conversion price is reduced by 25% to $0.7875 per share

(4) Assumes that the conversion price is reduced by 50% to $0.525 per share

30

Comparison of Company Proceeds from the April 2007 Financing and May 2007 Financing to Potential Investor Profit

April 2007 Financing

Gross Proceeds from April 2007 Financing:	$	7,178,531
Less Payments Made or that May Be Required to be Made to Selling Security Holders and Any of Their Affiliates:	$	2,337,814
Resulting Net Proceeds from April 2007 Financing:	$	4,840,717
Combined Total Possible Discount to Market Price:
Debentures	$	2,191,041
Warrants	$	3,322,276
Total	$	5,513,317
Payments Made or Required to be Made to Selling Security Holders + Combined Total Possible Discount to Market Price/ Net Proceeds from April 2007 Financing:		213	%
Percentage Averaged over Term of April 2007 Debentures (2 years):		107	%

May 2007 Financing

Gross Proceeds from May 2007 Financing:	$	9,500,000
Less Payments Made or Required to be Made to Selling Security Holders and Any of Their Affiliates:	$	5,579,888
Resulting Net Proceeds from May 2007 Financing:	$	3,920,112
Combined Total Possible Discount to Market Price:
Debentures	$	1,306,748
Warrants	$	2,286,809
Total	$	3,593,557
Payments Made or Required to be Made to Selling Security Holders + Combined Total Possible Discount to Market Price/ Net Proceeds from May 2007 Financing:		192	%
Percentage Averaged over Term of May 2007 Debentures (2 years):		96	%

31

Prior Securities Transactions Between the Company (and our predecessor) and the Selling Security Holders

The following tables show the prior security transactions between the Company and the Selling Security Holders, any affiliates of the selling security holders, or any person with whom any selling security holder has a contractual relationship regarding the transaction.

Series B Preferred Stock Offering

In 2003, the Company sold Series B Preferred Stock in a private placement.

Selling Security Holder or Affiliate of Selling Security Holder	Number of Shares of Series B Preferred Stock Issued to Selling Security Holder or Affiliate of Selling Security Holder		Date of Transaction		Number of Shares of Series B Preferred Stock Outstanding Prior to Transaction (1)		Number of Shares of Series B Preferred Stock Outstanding Prior to Transaction held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders (1)		Number of Shares of Series B Preffered Stock Issued or Issuable in Transaction		Percentage of Total Issued and Outstanding Securities Held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders Issued or Issuable in Transaction (1)		Market Price per Share of Series B Preferred Stock Prior to Transaction (2)		Current Market Price per Share (3)
Anthony F. and Christine E. Digiovanni Living Trust		16,030		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Lesin Family Trust		16,030		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Dan L. Mcgurk		10,000		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Shri & Ann Mishra		8,000		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Morris & Sonia Loffman FamilyTrust 6/14/99		22,443		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Jack Nagel		16,030		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Tibor Neuman and Erika Neumann TTEE, Neumann Fam Tr		32,061		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Michael Shiffman		8,015		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Michael Shiffman TTEE Michael Shiffman MD Pension TR		8,015		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
LSD LTD Retirement Trust Dtd 2/1/98 FBO Leo Striks		13,125		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
LSD LTD Retirement Trust Dtd 2/1/98 FBO David Striks		10,921		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Robert Stuckelman		8,000		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Bradley E. Turell		32,061		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Harvey A. Turell		32,061		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Charlene and Steve Ustin Rev Trust		8,015		7/1/2003		-		-		2,525,432		-	$	3.12		N/A
Total		240,807				-		-		2,525,432		-

(1) There were no shares of Class B Preferred shares outstanding prior to the transaction on July 31, 2003

(2) The price per share in the offering was $3.12 per share.

(3) This class of securities no longer exists; at the time of our share exchange with quintessence photonics, each share of Series B Preferred stock was exchanged for one share of common stock.

32

Series C Preferred Stock Offering 

In 2004, the Company sold Series C Preferred Stock in a private placement.

Selling Security Holder or Affiliate of Selling Security Holder	Number of Shares of Series C Preferred Stock Issued to Selling Security Holder or Affiliate of Selling Security Holder		Date of Transaction		Number of Shares of Series C Preferred Stock Outstanding Prior to Transaction (1)		Number of Shares of Series C Preferred Stock Outstanding Prior to Transaction held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders (1)		Number of Shares of Series C Preffered Stock Issued or Issuable in Transaction		Percentage of Total Issued and Outstanding Securities Held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders Issued or Issuable in Transaction (1)		Market Price per Share of Series C Preferred Stock Prior to Transaction (2)		Current Market Price per Share (3)
Lesin Family Trust		28,688		10/31/2004		-		-		3,096,316		-	$	3.75		NA
Maller Estate Planning		56,667		10/31/2004		-		-		3,096,316		-	$	3.75		NA
Jeffrey & Aviva Maller, Husbankd & Wife Community Prop		56,667		10/31/2004		-		-		3,096,316		-	$	3.75		NA
Dan L. Mcgurk		56,665		10/31/2004		-		-		3,096,316		-	$	3.75		NA
Tibor Neuman and Erika Neumann TTEE, Neumann Fam Tr		114,750		10/31/2004		-		-		3,096,316		-	$	3.75		NA
Bradley E. Turell		57,375		10/31/2004		-		-		3,096,316		-	$	3.75		NA
Total		370,812				-		-		3,096,316

(1) There were no shares of Class C Preferred shares outstanding prior to this transaction

(2) The price per share in the offering was $3.75 per share

(3) This class of securities no longer exists; at the time of our share exchange with quintessence photonics, each share of Series C Preferred stock was exchanged for one share of common stock

Stock Dividend

In 2005, the Company authorized a stock dividend to preferred Stockholders.

Selling Security Holder or Affiliate of Selling Security Holder	Number of Shares of Common Stock Issued to Selling Security Holder or Affiliate of Selling Security Holder		Date of Transaction (1)		Number of Shares of Common Stock Outstanding Prior to Transaction		Number of Shares of Common Stock Outstanding Prior to Transaction held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders		Number of Shares of Common Stock Issued or Issuable in Transaction		Percentage of Total Issued and Outstanding Securities Held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders Issued or Issuable in Transaction			Market Price per Share of Common Stock Prior to Transaction		Current Market Price per Share (2)
Anthony F. and Christine E. Digiovanni Living Trust		16,030		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Lesin Family Trust		29,530		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Maller Estate Planning		26,667		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Jeffrey & Aviva Maller, Husbankd & Wife Community Prop		26,667		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Dan L. Mcgurk		36,666		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Shri & Ann Mishra		8,000		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Morris & Sonia Loffman FamilyTrust 6/14/99		22,443		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Jack Nagel		16,030		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Tibor Neuman and Erika Neumann TTEE, Neumann Fam Tr		86,061		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Michael Shiffman		8,015		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Michael Shiffman TTEE Michael Shiffman MD Pension TR		8,015		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
LSD LTD Retirement Trust Dtd 2/1/98 FBO Leo Striks		13,125		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
LSD LTD Retirement Trust Dtd 2/1/98 FBO David Striks		10,921		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Robert Stuckelman		8,000		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Bradley E. Turell		59,061		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Harvey A. Turell		32,061		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Charlene and Steve Ustin Rev Trust		8,015		12/31/2005		12,787,802		7,136,154		8,658,422		121	%	$	1.25	$	1.24
Total		415,307				12,787,802		7,136,154		8,658,422

(1) The stock dividend occurred in 2005, but the shares were not issued until 2006

(2) Market price per share of common stock on July 26, 2007

33

Brookstreet Tranche I

In 2006, the Company sold shares of common stock through a private placement in which Brookstreet Securities Corporation acted as the placement agent.

Selling Security Holder or Affiliate of Selling Security Holder	Number of Shares of Common Stock Issued to Selling Security Holder or Affiliate of Selling Security Holder		Date of Transaction		Number of Shares of Common Stock Outstanding Prior to Transaction		Number of Shares of Common Stock Outstanding Prior to Transaction held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders		Number of Shares of Common Stock Issued or Issuable in Transaction		Percentage of Total Issued and Outstanding Securities Held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders Issued or Issuable in Transaction			Market Price per Share of Common Stock Prior to Transaction		Current Market Price per Share (5)
Arthur Michelson (1)		75,000		1/31/2006		21,446,224		15,261,739		2,290,104		15	%	$	1.25	$	1.24
PENSCO Trust Company FBO Ivan H Norman (2)		24,880		1/31/2006		21,446,224		15,261,739		2,290,104		15	%	$	1.25	$	1.24
James & Esther Enterline (3)		50,000		1/31/2006		21,446,224		15,261,739		2,290,104		15	%	$	1.25	$	1.24
Striks Properties (4)		25,000		1/31/2006		21,446,224		15,261,739		2,290,104		15	%	$	1.25	$	1.24
PENSCO Trust Company FBO Aaron L. Heimowitz (4)		25,000		1/31/2006		21,446,224		15,261,739		2,290,104		15	%	$	1.25	$	1.24
Adolph Rabinovitz (4)		25,000		1/31/2006		21,446,224		15,261,739		2,290,104		15	%	$	1.25	$	1.24
Total		224,880

(1) includes warrants to purchase 15,000 shares of common stock

(2) Includes warrants to purchase 4,976 shares of common stock

(3) Includes warrants to purchase 10,000 shares of common stock

(4) Includes warrants to purchase 5,000 shares of common stock

(5) Market price per share of common stock on July 26, 2007

Brookstreet Tranche II

In 2006, the Company sold shares of common stock through a private placement in which Brookstreet Securities Corporation acted as the placement agent.

Selling Security Holder or Affiliate of Selling Security Holder	Number of Shares of Common Stock Issued to Selling Security Holder or Affiliate of Selling Security Holder		Date of Transaction		Number of Shares of Common Stock Outstanding Prior to Transaction		Number of Shares of Common Stock Outstanding Prior to Transaction held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders		Number of Shares of Common Stock Issued or Issuable in Transaction		Percentage of Total Issued and Outstanding Securities Held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders Issued or Issuable in Transaction			Market Price per Share of Common Stock Prior to Transaction		Current Market Price per Share *
Tibor Neuman and Erika Neumann TTEE, Neumann Fam Tr		85,000		5/12/2006		23,778,822		17,414,432		9,436,577		54	%	$	1.25	$	1.24
Bradley E. Turell		60,000		5/12/2006		23,778,822		17,414,432		9,436,577		54	%	$	1.25
PENSCO Trust Company FBO Ivan H Norman		80,000		5/12/2006		23,778,822		17,414,432		9,436,577		54	%	$	1.25
James & Esther Enterline		20,000		5/12/2006		23,778,822		17,414,432		9,436,577		54	%	$	1.25
Nathan Korman		40,000		5/12/2006		23,778,822		17,414,432		9,436,577		54	%	$	1.25
Steve Klein		24,000		5/12/2006		23,778,822		17,414,432		9,436,577		54	%	$	1.25
Rutgers Casualty Insurance Company		20,000		5/12/2006		23,778,822		17,414,432		9,436,577		54	%	$	1.25
Total		329,000

* Market price per share of common stock on July 26, 2007

Issued Upon Reverse Merger

In 2006, the Company issued one share of the Company’s Common Stock to the Shareholders of Quintessence Photonics Corporation in exchange for each share of common stock of Quintessence Photonics Corporation.

Selling Security Holder or Affiliate of Selling Security Holder	Number of Shares of Common Stock Issued to Selling Security Holder or Affiliate of Selling Security Holder		Date of Transaction		Number of Shares of Common Stock Outstanding Prior to Transaction		Number of Shares of Common Stock Outstanding Prior to Transaction held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders		Number of Shares of Common Stock Issued or Issuable in Transaction		Percentage of Total Issued and Outstanding Securities Held by Persons Other than Selling Security Holders, Affiliates of the Company, or Affiliates of Selling Security Holders Issued or Issuable in Transaction			Market Price per Share of Common Stock Prior to Transaction		Current Market Price per Share *
RP Capital		22,219		5/12/2006		23,778,822		17,414,432		4,166,378		24	%	$	1.25	$	1.24
Corporate Capital Partners (1)		399,946		5/12/2006		23,778,822		17,414,432		4,166,378		24	%	$	1.25	$	1.24
Richardson Patel (1)		22,220		5/12/2006		23,778,822		17,414,432		4,166,378		24	%	$	1.25	$	1.24
Total		444,385

* Market price per share of common stock on July 26, 2007

(1) Corporate capital partners and Richardson Patel are affiliates of RP Capital

34

SHARES ELIGIBLE FOR FUTURE SALE

Rule 144

We had 38,659,283 outstanding shares of common stock as of the date of this prospectus. All of the shares registered pursuant to this prospectus will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”). If shares are purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act, their sales of shares would be governed by the limitations and restrictions that are described below. In general, under Rule 144 as currently in effect, a person who has beneficially owned shares of a company’s common stock for at least one year is entitled to sell within any three month period a number of shares that does not exceed 1% of the number of shares of our common stock then outstanding, which equals approximately 386,593 shares in our company as of the date of this prospectus.

Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about the Company.

Rule 144(k)

Under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

PLAN OF DISTRIBUTION

The selling stockholders have advised us that the sale or distribution of our common stock owned by the selling stockholders may be effected directly to purchasers by the selling stockholders, and as principal or through one or more underwriters, brokers, dealers or agents from time-to-time in one or more transactions (which may involve crosses or block transactions) (i) on the OTC Bulletin Board or any other market on which the price of our shares of common stock are quoted, or (ii) in transactions otherwise than on the OTC Bulletin Board or in any other market on which the price of our shares of common stock are quoted. Any of such transactions may be effected at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at varying prices determined at the time of sale or at negotiated or fixed prices, in each case as determined by the selling stockholders or by agreement between the selling stockholders and underwriters, brokers, dealers or agents, or purchasers. If the selling stockholders effect such transactions by selling their shares of common stock to or through underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or agents may receive compensation in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of common stock for whom they may act as agent (which discounts, concessions or commissions as to particular underwriters, brokers, dealers or agents may be in excess of those customary in the types of transactions involved). The selling stockholders and any brokers, dealers or agents that participate in the distribution of the common stock may be deemed to be underwriters, and any profit on the sale of common stock by them and any discounts, concessions or commissions received by any such underwriters, brokers, dealers or agents may be deemed to be underwriting discounts and commissions under the Securities Act.

Under the securities laws of certain states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. The selling stockholders are advised to ensure that any underwriters, brokers, dealers or agents effecting transactions on behalf of the selling stockholders are registered to sell securities in all 50 states. In addition, in certain states the shares of common stock in this offering may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

John W. Galuchie, Jr., Pensco Trust FBO Aaron L. Heimowitz, Christopher Niklas, G. Tyler Runnels or Jasmine Niklas Runnels TTEES The Runnels Family Trust DTD 1-11-2000, Joseph H. Merback & Tema N. Merback Co-TTEE FBO Merback Family Trust UTD 8-30-89, Karen Kang, and Pensco Trust FBO Ivan H. Norman are selling security holders that are affiliated with broker-dealers. 

All of the selling security holders have represented to us that, from the time they first received a term sheet with regard to the proposed sale of Secured Debentures, they did not enter into any short sales of our common stock and did not enter into any hedging transactions which would establish a net short position in our common stock. All selling security holders have also covenanted that they will not enter into any such short sales or hedging transitions that result in net short positions while the Secured Debentures or Warrants are outstanding.

We will pay all of the expenses incident to the registration, offering, and sale of the shares of common stock to the public hereunder other than commissions, fees, and discounts of underwriters, brokers, dealers and agents. We have agreed to indemnify the selling stockholders against certain liabilities, including liabilities under the Securities Act. We estimate that the expenses of the offering to be borne by us will be approximately $159,000. These offering expenses consist of an SEC registration fee of $458, printing and engraving fees and expenses of $10,000, audit fees of $50,000, legal fees and expenses of $75,000, and miscellaneous expenses of $10,000 and blue sky expenses of $14,000. We will not receive any proceeds from the sale of any of the shares of common stock by the selling stockholders.

The selling stockholders have been advised that the anti-manipulation provisions of Regulation M under the Exchange Act will apply to purchases and sales of shares of common stock by the selling stockholders, and that there are restrictions on market-making activities by persons engaged in the distribution of the shares. Under Registration M, the selling stockholders or their agents may not bid for, purchase, or attempt to induce any person to bid for or purchase, shares of our common stock while such selling stockholders are distributing shares covered by this Prospectus. The selling stockholders are advised that if a particular offer of common stock is to be made on terms constituting a material change from the information set forth above with respect to the Plan of Distribution, then, to the extent required, a post-effective amendment to the accompanying Registration Statement must be filed with the Securities and Exchange Commission (“SEC” or “Commission”).

35

DESCRIPTION OF BUSINESS

Overview

We design and manufacture high brightness semiconductor lasers for a variety of defense, medical and industrial applications. We have developed multiple technology platforms, with five issued patents and eleven patents pending. We believe our proprietary technology positions us to gain market share with products that address important issues of laser performance including brightness, power, and the ability to produce laser light at specified wavelengths. We are vertically integrated, from semiconductor fabrication through packaging, and perform all critical production processes at our facility in Sylmar, California.

Our current products include high brightness diode lasers used for “pumping” or energizing large solid-state or fiber lasers, as well as diode lasers that may be used directly for various defense, medical and industrial applications. In 2006, approximately 65% of our revenues were derived from contracts with various agencies of the U.S. Department of Defense and from sales to certain defense contractors. Approximately 20% of our 2006 revenues were derived from the sale of products for certain medical applications and approximately 15% of our revenues were derived from the sale of products for various industrial applications.

We were founded in 2000 by Dr. Jeffrey Ungar, a Caltech graduate and former head of Advanced Optoelectronic Device R & D at Ortel, and George Lintz, MBA, an entrepreneur with fifteen years of investment banking and finance industry experience. Under their administration, we have built a staff of more than 40 employees, including prominent scientists and engineers. Ten of our fourteen scientists have Ph.D.s. By 2002, we had created a state-of-the-art production facility that covers 18,000 square feet and allows us to conduct nearly all of our operations on site, including R&D, semiconductor wafer fabrication, processing and packaging. In its present configuration, our plant has the wafer capacity to produce three million devices per year and it is scalable to an estimated 20 million devices.

 In 2002, we also produced the “first light” from our laser devices and procured our initial government contracts. In 2003, we phased in these government contracts and focused on product development for industrial, medical and defense purposes. In 2004, we initiated our first commercial shipments of our “Generation I” devices and in 2005, we introduced and began to market “Generation II” products, hired worldwide sales representatives and attracted several original equipment manufacturer (“OEM”) orders. These contracts have all since terminated.

Since our inception, we have received over $7 million of development contracts from the United States Navy, United States Army, and United States Missile Defense Agency as well as from prime defense contractors in the United States and Israel. As of May 31, 2007, contracts with the U.S. Navy, the U.S. Army, two prime defense subcontract agreements with Fibertek, Inc. and Telaris, Inc. and an agreement with an Israeli prime defense contractor remain active. Please see “Management’s Discussion and Analysis of Results of Financial Condition” for additional information on our material agreements.

Total sales for the years ending December 31, 2006 and 2005 were $3,073,332 and $1,073,191, respectively. Our net loss for the years ending December 31, 2006 and 2005 were $18,692,607 and $18,600,886, respectively. Total sales for the three month periods ended March 31, 2007 and 2006 were $1,106,579 and $265,564, respectively. Our net loss for the three month periods ended March 31, 2007 and 2006 was $2,413,205 and $3,260,594, respectively.

On May 12, 2006, we entered into a Share Exchange Agreement with Quintessence Photonics Corporation, a Delaware corporation, and the stockholders of all of the equity stock of Quintessence, and closed the transaction on the same date. Prior to the Share Exchange, we had 24 stockholders of record. Pursuant to the Share Exchange Agreement, QPC issued one share of its common stock to the Quintessence Stockholders in exchange for each share of their Quintessence common stock. The Quintessence Stockholders transferred substantially all of the shares of equity stock of Quintessence, thereby making Quintessence a subsidiary of QPC, and QPC issued an aggregate of 26,986,119 shares of its common stock to the Quintessence Stockholders. Furthermore, all Derivative Securities and preferred stock that may be exercised or converted into Quintessence common stock were exchanged for Derivative Securities that may be exercised or converted into shares of common stock of QPC. The number of shares of common stock of QPC underlying the new QPC Derivative Security was equal to the number of shares of common stock of QPC that would have been issued to the Quintessence Stockholders, had they exercised or converted the Quintessence Derivative Security into Quintessence common stock immediately prior to the closing of the Share Exchange. Pursuant to the Share Exchange Agreement, QPC issued options, warrants or convertible notes that may be exercised or converted, as the case may be, into 10,776,879 shares of common stock of QPC. After closing the Share Exchange, the Quintessence stockholders held at least 87% of the outstanding shares of common stock of QPC. We had 521 stockholders of record after the closing of the Share Exchange. This May 2006 transaction (1) involved no general solicitation or general advertising, and (2) involved no non-accredited purchasers. Thus, we believe that the offering was exempt from registration under Regulation D, Rule 506 of the Securities Act.

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Industry Overview

“LASER” is an acronym for light amplification by stimulated emission of radiation. A laser converts electricity into light and delivers a large amount of energy to a small designated area. In general, there are three main types of commercial lasers: gas, solid-state and semiconductor (or “diode”). The major difference between a laser and any other sort of light source, such as a light bulb, is that a laser is focused and directed. In the case of a light bulb, there is a hot cylinder at the core and it distributes light in many different directions and in a range of colors, or wavelengths. Thus, light bulbs are very useful in illuminating large areas but they are essentially useless in directing energy to a small area. On the other hand, lasers are well suited to concentrating energy in a small area because the beam quality is significantly higher. Furthermore, lasers produce light at essentially the exact desired color (wavelength) or a very closely banded range of colors.

 Lasers are widely used in a variety of applications including medical procedures, telecommunications, welding and other industrial applications, printing and various defense applications. Many daily conveniences, such as CD players and grocery store check out scanners, employ lasers. The trend over the last several decades has been for lasers to be employed in an increasing number of applications.

With recent advances in technology, the diode laser is becoming dominant in several markets that rely on low power lasers. In fact, in the telecommunications and optical fiber industries, diode lasers have become the standard and have virtually replaced all other types. However, with respect to most industrial applications, such as plastics welding, metal welding, soldering, surface hardening and coarse marking, gas and solid-state lasers remain dominant because incumbent technology high-powered diode lasers lack the required “brightness.” In other words, they cannot be sufficiently focused down into a tight spot.

Gas Lasers

The principal attribute of gas-powered lasers, such as carbon-dioxide lasers, is that they produce a beam of good quality, or brightness. However, they are expensive, occupy large amounts of floor space, have low efficiency rates—consuming approximately 100 times as much energy as they emit—and require vast cooling systems to handle the excess heat that is wasted in the process. They also have a major disadvantage because their output beams are incompatible with transport through optical fibers.

Solid-State and Fiber Lasers

Solid-state and fiber lasers utilize a suitably doped solid (crystalline or glass) as the active medium. This medium must be illuminated or “pumped” by an intense optical source, such as a flashlamp or another laser in order to produce laser light. The ruby and Nd:YAG lasers are solid-state lasers. Solid-state and fiber lasers, as is the case with gas lasers, offer good beam quality, but high power solid-state units are expensive, and at kilowatt powers, very large (in some cases the size of a car). Flashlamp pumped solid-state and fiber lasers have very poor efficiency, which means that only a very small fraction of the power used in the process is actually transmitted to the laser while the balance is wasted as heat. As a result, solid-state and fiber lasers require significant cooling infrastructure. This can be somewhat improved by pumping solid-state and fiber lasers with laser diodes rather than flashlamps; however, this increases the cost of the system.

Semiconductor (or Diode) Lasers

Semiconductor, or diode lasers, convert electricity directly into light in a semiconductor chip without any other medium (such as gas or a crystal). Semiconductor lasers are compact, highly efficient, rugged and may be inexpensively manufactured in large quantities using techniques similar to those used for mass-producing consumer electronics. Typically, diode lasers successfully convert over 50% of the electric power source into the laser beam. Diode lasers are widely used for certain mass production applications such as CD players, barcode readers, and laser printers. The major disadvantage of standard diode lasers is that they generate low optical quality beams; technically speaking, they lack “brightness.” This limits their usefulness for certain industrial, material and defense applications which require high quality beams.

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QPC’s Strategy

We believe there is a significant opportunity for semiconductor lasers that can produce high power, high brightness beams with precise wavelength control. Such high performance characteristics, combined with the efficient use of energy and low cost of manufacture associated with semiconductor lasers, may offer potential advantages to a wide range of end-users. Based on our proprietary technologies, we have developed the products discussed below and we are continuing to pursue the development of higher performance semiconductor lasers for the defense, industrial and medical markets.

Product Offerings

We are launching our products in three distinct phases. Our Generation I offerings, released in 2004, are currently available to the industrial, defense and medical markets. They were designed to establish market presence and generate immediate revenues by offering advantages in terms of cost, reliability, efficiency and power brightness. Generation I products include single emitters, mounted and unmounted bars covering wavelengths from 800 nanometers (“nm”) to 1,500 nm and power levels ranging from 2.5 watts to 50 watts. These products have been sold to more than 25 customers including defense contractors, industrial laser system manufacturers, and medical laser manufacturers.  Repeat and/or production quantity orders have been received from several customers.

 We released our first Generation II products in January 2006. Additional Generation II products have been released over the course of 2006 and the first half of 2007. These products deploy our proprietary chip technology and offer enhanced brightness over the first generation products. We have received purchase orders for Generation II products from multiple customers including defense contractors, medical device companies, research institutions and industrial companies. Our Generation II products incorporate (1) our non-absorbing mirror technology which can generate significantly higher power without causing catastrophic optical damage (“Brightlase®”) and (2) our internal gratings which enable our customers to specify exact, desired wavelength within +/- 0.5 nanometers. Internal gratings reduce the requirement for customers to cool or heat their diodes to achieve a specified wavelength. Generation II products are available in wavelengths from 780 nm to 1750 nm.

We are developing Generation III products which are intended to provide certain performance improvements over our Generation II products. Development contracts have been received from various agencies within the United States Department of Defense for technologies that are relevant to our Generation III products. We currently plan to release Generation III prototypes in 2007, with commercialization expected in 2008-2009 . We will attempt to penetrate the solid-state and gas laser markets—particularly industrial welding—with our Generation III diode solutions. In addition, we believe that this class of products may expand our opportunities for homeland security and defense applications that require low cost, small, light, rugged and efficient lasers. See “Technology Platforms” below.

Potential Product Applications

The following are examples of applications of our laser products. All of these markets may be addressed by our Generation I and/or II products, except “Direct-Diode Materials Processing,” and certain homeland security applications which we believe may be addressed by our Generation III products.

Defense and Homeland Security

Because of their compact size, lightweight and ruggedness, semiconductor lasers are ideal for military and aerospace applications. Used directly or as pumps for other lasers, semiconductor lasers are introduced in a wide variety of applications including the transmission of optical energy to a target and the receipt of a portion of such optical energy back in order to remotely measure various physical properties of the target. Our technology should enable diode lasers to be used directly in applications where traditional diode lasers have provided insufficient performance in areas such as direct target illumination.

Defense applications for lasers exist at both low and high power levels. On the low power end (less than 500 milliwatts), direct diode lasers are used for free-space communications for line of sight transmission. Laser communication is preferable to radio frequency (“RF”) communication because RF signals identify the location of the transmitter and can be easily intercepted, while laser communications cannot be detected unless the eavesdropper is in the exact line of the laser beam. A drawback of free-space laser communications is that fog and battlefield smoke can interfere with the signal; lasers emitting light in the mid-infrared wavelengths would be many orders-of-magnitude more penetrating than conventional wavelengths. We are currently in the process of developing products that are intended to operate in the mid-infrared range.

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At slightly higher power, direct diode lasers are used to initiate ordinance. At even higher powers and long wavelengths, diode lasers can be used directly (or through pumped solid-state lasers) to disrupt the homing systems of heat-seeking missiles. At the highest power levels of 50 to 100 kilowatts, and eventually megawatts, high energy lasers for tactical weapons are being developed for air, sea and land-based platforms.

During our 2005 and 2006 fiscal years, 66% and 65% of our revenues, respectively, were derived from defense and homeland security related applications.

 Medical

At present, a variety of medical applications utilize diode lasers as either pump lasers or as direct diode treatment because of their compact size, efficiency, low cost and ability to produce large optical energies. Hair removal, dental, ophthalmic and other dermatological applications utilize diode laser light directly. The wavelength of the light is critical to the treatment efficacy and the laser source is selected to match the absorption lines of various skin, blood or organ constituents, or that of an injected dye. In many cases, the light is delivered through a fiber by way of a catheter or scope that needs to be extremely small, resulting in the need for high brightness fiber coupled with diode lasers. Medical imaging is also an emerging application for diode lasers.

During our 2005 and 2006 fiscal years, 24% and 20% of our revenue, respectively, were derived from medical applications.

Industrial

Presently, the most widespread application for high-power semiconductor lasers is “pumping” (or energizing) other lasers. In diode pumped laser architectures, the semiconductor laser light “pumps” or energizes the gain medium that is configured inside its own laser cavity. The pump light is absorbed by the crystal or fiber, and a solid state or fiber laser is created. Diode pumping has significant advantages over traditional approaches that utilize lamps as pumps. In fact, nearly every important parameter of a laser system is improved with diode pumped architectures: system size, weight, performance, beam quality, waste heat (efficiency), complexity and operating cost.

High power semiconductor lasers are used in the printing, graphics arts and display markets as well. The printing process uses lasers for a wide variety of print media including magazines, posters and newspapers. The most common application is thermal computer-to-plate imaging in which diode lasers are used to write printing plates. Thermal computer-to-plate imaging has significant advantages over traditional analog film and plate technology, both of which use UV lamps. The elimination of film from the workflow dramatically reduces the start-up time for printers and allows them more flexibility in getting jobs on and off the press. Additionally, the thermal computer-to-plate process allows the user to work in white light, versus a dark environment. High brightness and power as provided by our lasers permit the process of printing to be performed more rapidly, which is of crucial importance to the end-user. There is also an emerging and large market for laser-driven displays such as rear-projection television and digital theater. These will require high power and low cost laser sources in the visible region of the spectrum. We do not currently produce visible lasers, but coupled with frequency-doubling crystals we believe that our high brightness lasers could be attractive to television manufacturers and consumers.

Laser materials processing is one of the world’s largest laser markets, with applications ranging from metal cutting and welding at the high power levels, to marking and plastics welding at low powers. Diode lasers are ideal for materials processing because of their high efficiency and compact size compared to conventional gas and solid-state laser solutions. We believe that our high brightness diode lasers may be used for a large number of materials processing applications including marking, cutting of non-metals and metals, and metal welding.

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During our 2005 and 2006 fiscal years, 10% and 15% of our revenue, respectively, were derived from printing, graphic arts and display applications.

Technology Platforms

Our proprietary Brightlase® technology enables us to manufacture single emitters that produce high brightness beams without causing catastrophic optical damage to the semiconductor facet through the use of non-absorbing mirrors. Brightlase® products are available from 780 nm to 1600 nm and may be used for medical applications such as the treatment of varicose veins, industrial applications such as printing and laser pumping and defense applications such as target illumination.

We have manufactured arrays of laser diodes in which each diode has more brightness than conventional arrays. The high brightness of these arrays allows them to be used in applications such as direct diode materials processing, fiber-core laser pumping or red-green-blue displays that cannot use conventional laser diodes or arrays.

We have developed technology that uses internal gratings to enhance the ability of the laser to produce light at specified wavelengths. Diode lasers that emit light in a narrow spectrum are more efficient for pumping fiber and solid-state lasers. They are also less sensitive to temperature changes that could affect laser performance. Potential applications include detection of bio-chemical agents, spectroscopy and pumping of industrial lasers.

We have demonstrated high power monolithic surface emitting arrays, wherein we aggregate many high power (> 1 watt) surface-emitting lasers onto a single semiconductor chip. This development may significantly reduce the size of a high power laser and may permit the fabrication of large-scale, high power spectrally narrowed laser arrays at much lower cost and much longer lifetimes than conventional technology permits. We believe that our surface emitting array technology is a significant achievement in low cost laser manufacturing because it should enable a complete two-dimensional high power array to be produced on a single wafer and be packaged on a single cooler. By contrast, conventional laser array technologies generally require individual manufacture, assembly and testing of each row of an array. Our surface emitting technology, which was developed with funding from the U.S. Navy, represents a decrease in the number of coolers required. This technology also facilitates an improvement in reliability, because it eliminates the need for “micro-channel” coolers that are a leading cause of laser burnout.

We have developed high power lasers with on-chip, monolithic wavelength control. These lasers are used for pumping solid-state lasers as well as other applications, and have what we believe are advantages over conventional lasers including efficient absorption by the solid-state crystal, and lower temperature sensitivity of wavelength.

We have also developed high power long-wavelength arrays for pumping eye-safe lasers. These are lasers that emit beams in the 1300 nm to 1750 nm range. Eye safe lasers are very important for industrial and military lasers in order to reduce the risk of collateral casualties. We have developed eye-safe laser arrays, and are pursuing a new class of advanced high performance wavelength stabilized arrays for eye-safe lasers. Eye-safe laser pumping technology may be used in the creation of directed energy weapons for the U. S. military, as well as for the creation of eye-safe laser products for surgery, hair, tattoo and acne removal, and other commercial applications.

Laser sources in the mid-infrared range may be important for homeland defense against terrorism. They might be used to confuse heat-seeking missiles launched against airliners and also for early warning of biological and chemical attacks. We have performed an early-stage demonstration of a novel technology for shifting the output of a laser diode into the mid-infrared wavelength range which may enable us to provide compact, high performance mid-infrared laser diodes at very low manufacturing costs. Lasers generating light in the mid-infrared wavelengths may also be used for detecting pollution, hazardous materials and chemical explosives.

Sales and Marketing

We estimate that the global laser market is greater than $5 billion in annual revenues. Lower margin, commodity diodes (optical storage and telecommunications) represent over 50% of the market, and we do not consider this sector economically attractive for us. The higher margin marketplace, which we consider our target market, currently encompasses non-diode lasers, which we estimate to be approximately a $2 billion market, and the market for high power diodes, which we estimate to be a $250 million market.

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 We believe that emerging applications, including defense and display, will increase the overall size of the laser market. The industrial high power laser market is currently dominated by gas and solid state lasers.

In the United States, we have a sales team that sells directly to our customers. In foreign markets, we use distributors to sell our products, and we have existing relationships in a number of countries including Germany, the United Kingdom, Israel, Italy, France, China, Japan and Korea. The distributor agreements generally provide that the distributor will promote, advertise, market and sell our products on an exclusive basis throughout the relevant territory. We will fill orders from distributors in accordance with agreed-upon delivery times. Distributors are generally required to make payments within 45 days of invoice. Generally, either party may terminate the agreement on 90 days’ written notice.

On a global basis, we employ various outside consultants to gain access to new accounts. Our in-house sales team currently consists of a Senior Vice President of Sales and Marketing, a Director of Worldwide Marketing, a Director of Worldwide Sales, a Director of Government Program Development, a Senior Market Development Manager, a Manager of Sales, and a Sales Administrator.

Our marketing activities include advertising in several international trade journals and we have published articles in many magazines. Our scientists have presented several technical papers at military and general laser conferences. We also exhibit at more than five trade shows on an annual basis. In addition, we use an outside agency for graphic arts and marketing communications.

 Our advertisements and website are currently producing an average of one new inquiry per day. We manage the inquiries by parceling them into (1) standard products; (2) custom inquiries from desirable OEM target customers for products on our roadmap; and (3) other. Our general policy is to decline to quote on inquiries that do not fall within the first two categories.

Competition

We compete with approximately 40 companies that produce laser diodes. Some of these companies, such as JDS Uniphase and Coherent, Inc., are large, well-established companies that have substantially greater resources than we do to pursue product development, manufacturing and marketing. There are also many smaller companies engaged in the production of laser diodes, such as nLight Photonics and Alfalight. Historically, most laser diodes produced by our competitors have generated high power, but with low brightness. We believe that our products may enjoy a competitive advantage to the extent that we can combine high power and high brightness in our products.

Some of our competitors are pursuing alternative technological approaches to enhance the brightness of their products. While we cannot predict the success of such alternative approaches, we believe that our surface emitting array technology and our ability to enhance the functionality of a chip, offer significant advantages by enabling us to produce a single chip containing multiple lasers. Nonetheless, we believe that a number of our competitors have been improving the performance features and reliability of their products, which may diminish any competitive advantage we might enjoy based upon our technological capabilities. Our efforts to grow our business will remain vulnerable to new technological developments by our competitors.

As we expand our marketing efforts, we also expect to increasingly compete with companies that produce diode-pumped solid state and fiber lasers. While such lasers are capable of producing both high power and high brightness, they typically are multi-stage lasers that are substantially larger, heavier and more expensive than our products. We believe that there is an opportunity for our products to gain market share to the extent that end users require or desire lasers that are smaller, lighter and less expensive than those produced by our competitors. Nonetheless, notwithstanding our perceived technological advantages, we are aware that we will be seeking to replace incumbent technologies. Moreover, we will be competing with some companies that have substantially greater marketing budgets as well as long established relationships with existing customers. Finally, as we seek to enter new markets, our products will not have the benefit of many years of commercial usage to demonstrate their reliability.

Customers

For each of the years ended December 31, 2006 and 2005, we had three major customers who accounted for approximately 54% and 61%, respectively, of our total revenue. Total government contract revenue during the years ended December 31, 2006 and 2005 was approximately 51% and 45%, respectively. In particular, revenue from the Navy during 2006 and 2005 comprised 0% and 32% respectively, and revenue from the Missile Defense Agency comprised 13% and 6%, respectively. Revenue from the Defense Advance Research Project Agency contract was 29% of our overall revenue for the year ending December 31, 2006. In addition to the government contract revenue indicated above, we had sales of approximately $360,000 or 12% of our total revenue to a single commercial customer. As of December 31, 2006 and March 31, 2007, the amounts due from government contracts was $383,935 and $60,366 respectively, and is included in accounts receivable in the accompanying financial statements.

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Patents, Trademarks and Intellectual Property

We have been granted five patents and have 11 patents pending. These patents cover a suite of different laser-related technologies and are related to process (manufacturing), performance characteristics and design. We have applied for patents in our key markets of North America, Asia and Europe, and have been granted trade secret protection, where appropriate. We also believe that due to the complex nature of our products, our products would be very difficult to reverse engineer and replicate with precision.

 The following is a table of our five issued patents:

Title	Patent No.		Issue Date
A Laser Diode with an Internal Mirror		6,711,199		March 23, 2004
A Laser Diode with a Low Absorption Diode Junction		7,103,080		September 5, 2006
A Laser Diode With an In-Phase Output		6,668,003		December 23, 2003
Mid-Infrared Laser Diode		6,865,209		March 8, 2005
De-Tuned Distributed Feedback Laser Diode		7,139,299		November 21, 2006

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The following is a table of our 11 pending patent applications:

Title	Serial No.		Filing Date
A Laser Diode With an Amplification Section That has a Varying Index of Refraction		10/379,027		March 3, 2003
Compact, High Power Pulsed Laser Source		11/248,769		October 11, 2005
High Performance Vertically Emitting Lasers		10/264,534		October 3, 2002
High Performance Vertically Emitting Lasers		11/130,535		May 16, 2005
Mid-Infrared Laser Diode		10/783,269		February 20, 2004
Very Low Cost Surface Emitting Laser Diode Arrays		11/042,759		January 24, 2005
Laser Diode With Monolithic Intra-Cavity Difference Frequency Generator		11/039,342		January 18, 2005
Semiconductor laser array beam transformer/equalizer		11/175,699		July 6, 2005
Apparatus For Dynamic Control Of Laser Beam Profile		11/269,974		November 8, 2005
Direct Impingement Cooling of a Laser Diode Array		11/345,107		January 13, 2006
Vertically Emitting Laser And Method Of Making The Same		11/677,417		February 21, 2007

From time to time, we may encounter disputes over rights and obligations concerning our intellectual property. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business, our reputation, or our ability to compete. Also, protecting our intellectual property rights could be costly and time consuming.

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Research and Development

Our research and development efforts are crucial to our potential for success. As a small company without long-established customer relationships, our ability to generate sales is dependent upon the technological features of our products. We must continually exert substantial efforts to develop innovative products and improvements to existing products. We currently conduct research and development activities in-house under the supervision of Jeffrey Ungar, our Chief Executive Officer. We spent approximately $4.5 million for research and development in 2006 and $4.8 million in 2005. We expect to continue to expend significant amounts on research and development for the foreseeable future.

Manufacturing

One of our core strategies is to tightly control our manufacturing process. We believe this is essential in order to maintain high quality products and enable rapid development and deployment of new products and technologies. We design and produce many of our own components and sub-assemblies in order to retain quality control. All of our manufacturing is conducted at our Sylmar, California headquarters. We use contract manufacturing firms for certain specialized packaging functions.

 Raw materials or sub-components required in the manufacturing process are generally available from several sources. However, any interruption or delay in the supply of any of these components or materials, or the inability to obtain these components and materials from alternate sources at acceptable prices and within a reasonable amount of time, would impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

 We rely exclusively on our own production capability to manufacture certain strategic components, optics and optical systems, semiconductor lasers, lasers and laser-based systems. Because we manufacture, package and test these components, products and systems at our own facilities, and such items may not be readily available from other sources, any interruption in our manufacturing would adversely affect our business.

Governmental Regulations, including Environmental Regulations

Our operations are subject to various federal, state and local environmental protection regulations governing the use, storage, handling and disposal of hazardous materials, chemicals, various radioactive materials and certain waste products. In the United States, we are subject to the federal regulation and control of the Environmental Protection Agency. We are further subject to regulation by the Los Angeles Fire Department and the South Coast Air Quality Management Department. Comparable authorities are involved in other countries and jurisdictions. We believe that compliance with federal, state and local environmental protection regulations will not have a material adverse effect on our capital expenditures, earnings and competitive and financial position.

Although we believe that our safety procedures for using, handling, storing and disposing of such materials comply with the standards required by federal and state laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident involving such materials, we could be liable for damages and such liability could exceed the amount of our liability insurance coverage and the resources of our business.

Depending upon their features and specifications, our products could be subject to export controls which may limit our ability to sell products to certain countries. Such controls include the Export Administration Regulations administered by the Department of Commerce and the International Traffic in Arms Regulations, administered by the Department of State.Working with a legal firm that specializes in export license law, we have successfully applied for and have received export licenses when appropriate.  If we fail to comply with applicable export regulations, we could be subject to civil and criminal penalties. In addition, we could be debarred from receiving contracts from federal government agencies and government prime contractors, which contracts currently account for more than half of our revenues.

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Employees

We have 44 full-time and 1 part-time employees. We have 17 employees in research and development/engineering, 7 in sales and marketing, 6 in general and administration and 15 in manufacturing. No employee is represented by a labor union, and we have never suffered an interruption of business caused by labor disputes.

DESCRIPTION OF PROPERTIES

Our principal executive offices and manufacturing facilities consist of a total of 40,320 square feet and are currently located at 15632 Roxford Street, Sylmar, California 91342 with a lease term of ten years and an option to extend at market rates for an additional five years. The expiration of the lease is May 31, 2016 for the initial term and May 31, 2021 for the option. We use 18,000 square feet of our leased 40,320 square foot building and sub-let the remainder of our facility for warehousing space. We pay approximately $25,500 per month for lease payments and approximately $1,800 per month for common area maintenance and recover $6,100 from our subleases.

LEGAL PROCEEDINGS

We are not a party to any pending legal proceedings that, 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. To our knowledge, we are not a party to any pending civil or criminal action or investigation.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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 REGISTRATION STATEMENT ON FORM SB-2. THIS DISCUSSION SUMMARIZES THE SIGNIFICANT FACTORS AFFECTING OUR OPERATING RESULTS, FINANCIAL CONDITIONS AND LIQUIDITY AND CASH-FLOW FOR THE FISCAL YEARS ENDED DECEMBER 31, 2005 AND 2006 AS WELL AS THE THREE MONTH PERIODS ENDED MARCH 31, 2006 AND 2007. THIS DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES AND ARE BASED ON JUDGMENTS CONCERNING VARIOUS FACTORS THAT ARE BEYOND OUR CONTROL. YOU CAN IDENTIFY THESE FORWARD LOOKING STATEMENTS BY WORDS SUCH AS “MAY,” “SHOULD,” “EXPECT,” “ANTICIPATE,” “BELIEVE,” “ESTIMATE,” “INTEND,” “PLAN” AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS REGISTRATION STATEMENT. IN PARTICULAR, WE CALL YOUR ATTENTION TO THE DISCUSSION ABOVE UNDER “RISK FACTORS.”

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 expect to release some Generation III prototypes during 2007 with commercialization expected in 2008-2009. Generation I and II products have been sold to customers in the medical, printing, and defense industries.

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

 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.

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

 In the second quarter of 2006, QPC was also awarded a subcontract with Fibertek, Inc. as part of a team working on a project for the United States Missile Defense Agency to develop lasers that emit mid-infrared wavelengths. Management believes these lasers may be used in systems designed to defend military and commercial aircraft against heat seeking missiles. We also believe that this effort will bring us closer to creating a compact and affordable system for detection of biochemical agents in public places. The contract is a Phase III follow-on contract from an earlier contract that QPC completed which demonstrated the early phases of feasibility of our technology. Our portion of this Phase III contract is $800,000 and is to be performed over twelve months through June 2007. As of March 31, 2007, we have recognized $700,000 of revenue from this contract.

 The United States Army Research Laboratory awarded us a Phase II development contract in the first quarter of 2006 and we began performing under this contract in the second quarter of 2006. The contract is a follow-on contract from an earlier contract with the same customer in which QPC demonstrated its ability to develop diode lasers that emit wavelengths that are safer to the human eye than conventional high power diode wavelengths. Management believes that upon successful completion of the diode laser project, these lasers may be used in both military and commercial systems to limit accidental damage to human eyes of system operators, friendly forces, and bystanders. The Army contract amount is $673,028 and is to be performed by March 2008. As of March 31, 2007 we have recognized $390,479 of revenue from this contract.

During the second quarter of 2007 the United States Navy awarded us two contracts totaling $1 million to deliver high-energy laser engine prototypes for naval aviation directed energy weapons applications. The concurrent nine-month contracts build upon the Company's previous high-brightness chip-based laser development for the U.S. Navy, as well as for the DARPA, the U.S. Army, the Missile Defense Agency, and the Israeli Ministry of Defense.

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

 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.

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 Revenue Recognition

 A portion of the Company’s revenues result from fixed-price contracts with U.S. government agencies. Revenues from fixed-price contracts are recognized under the percentage-of-completion method of accounting, generally based on costs incurred as a percentage of total estimated costs of individual contracts (“cost-to-cost method”). Revisions in contract revenue and cost estimates are reflected in the accounting period as they are identified. Provisions for the entire amount of estimated losses on uncompleted contracts are made in the period such losses are identified. No contracts were determined to be in an overall loss position at December 31, 2006 or March 31, 2007. In addition, the Company has certain cost plus fixed fee contracts with U.S. Government agencies that are being recorded as revenue is earned based on time and costs incurred. At December 31, 2006, there was no deferred revenue and approximately $42,692 of unbilled receivables related to these government contracts. At March 31, 2007, there was no deferred revenue and approximately $321,067 of unbilled receivables related to these government contracts.

 The Company recognizes revenues on product sales, other than fixed-price contracts, based on the terms of the customer agreement. If the customer agreement does not have specific delivery or customer acceptance terms, revenue is recognized at the time of shipment of the product to the customer. Our ability to collect outstanding accounts receivable is reviewed on a quarterly basis. When management determines that there is a potential collection problem, a reserve is established, based on management’s estimate of the potential bad debt. When management abandons all collection efforts it will write off the account and adjust the reserve accordingly.

 Management Estimates

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

Stock Based Compensation

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

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Results of Operations for the Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

REVENUE. During the quarter ended March 31, 2007, QPC had revenue of $1,106,579 as compared to revenue of $265,564 during the quarter ended March 31, 2006, an increase of approximately 317%. This increase is attributable to an increase in both commercial sales and government contracts. We have increased our product offerings and expanded our sales and marketing resources. We continued to perform and bill on government contracts awarded to us in prior periods and to ship to customers for orders placed in 2006. Specifically, during the quarter ended March 31, 2007 we recognized $453,317 of revenue related to government contracts that were awarded to us in prior periods.

COST OF SALES. Cost of sales, which consists of direct labor, material costs and overhead, was $855,781 or 77% of revenue for the quarter ended March 31, 2007 as compared to $279,726 or 105% of revenue for the quarter ended March 31, 2006. As a percentage of revenue, cost of sales decreased as we recognized improved efficiencies as a result of allocating our fixed costs over a higher number of units, and achieved higher yields on direct materials and labor.

GROSS PROFIT. Gross profit was $250,798 for the quarter ended March 31, 2007 as compared to $(14,162) for the quarter ended March 31, 2006, representing gross margins of approximately 23% and (5)%, respectively. As mentioned above, the increase in our gross profits is attributable to increased efficiencies in our operations.

RESEARCH AND DEVELOPMENT COSTS. Research and development costs which consist of salaries, professional and technical support fees, material used by our research and development team and overhead, totaled $1,012,800 for the quarter ended March 31, 2007, as compared to $1,123,792 for the quarter ended March 31, 2006, a decrease of approximately 10%. The decrease in research and development costs is attributable to the shift of some of our resources from development to manufacturing as a result of increased orders for our products. We anticipate to continue to spend substantial amounts on research and development in the future.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses which consist of sales and marketing, accounting, legal, investor relations and other administrative expenses totaled $1,216,524 the quarter ended March 31, 2007, as compared to $1,078,844 for the quarter ended March 31, 2006, an increase of approximately 13%. Of this increase, $76,000 was due to increased investor relations, insurance, legal and accounting costs attributable to becoming a publicly traded company with increased compliance obligations and investor relations needs, and $78,000 was attributable to stock option compensation expense recognized during the quarter ended March 31, 2007. These increases were partially offset by a decrease in other general and administrative expenses. We expect these categories of expenses to increase in future quarters, based on anticipated growth of the Company.

NET LOSS. QPC had a net loss of $2,413,205 for the quarter ended March 31, 2007 as compared to a net loss of $3,260,594 for the quarter ended March 31, 2006. Interest expense was $468,399 for the three months ended March 31, 2007 compared to $1,059,967 for the three months ended March 31, 2006. During the quarter ended March 31, 2006, interest expense included non-cash interest of $690,000 for the issuance of warrants to extend a note payable. The reduction in net loss is a result of increased revenue in the three months ended March 31, 2007 and a decrease of approximately $592,000 in interest expense. We expect interest expense to increase in the future as a result of additional debt financings.

Results of Operations for the Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

REVENUE. During the year ended December 31, 2006, the Company had revenue of $3,073,332 as compared to revenue of $1,073,191 during the year ended December 31, 2005, which represents an increase of approximately 186%. This increase is attributable to an increase in both commercial sales and government contract work which are a result of our sales and marketing efforts and our increase in government contracts and product offerings. We were awarded three government contracts during the period for which we began to perform and bill.

COST OF REVENUE. Cost of revenue, which consists of direct labor, overhead and material costs, was $2,291,851 for the year ended December 31, 2006 as compared to $1,009,477 for the year ended December 31, 2005. This increase is attributable to increased revenue from both commercial sales and government contracts.

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GROSS PROFIT. Gross profit was $781,481 for the year ended December 31, 2006 as compared to $63,714 for the year ended December 31, 2005, representing gross margins of approximately 25% and 6%, respectively. The increase in our gross profits is attributable to our increase in commercial sales and government contracts. Since we have released new products, there are still inefficiencies in the manufacturing operations. These inefficiencies largely affect our commercial products rather than the government contracts. As our manufacturing operations mature, we expect to have increased efficiencies and as a result better margins.

RESEARCH AND DEVELOPMENT COSTS. Research and development costs which consist of salaries, professional and technical support fees, material and overhead, totaled $4,502,132 for the year ended December 31, 2006, as compared to $4,753,356 for the year ended December 31, 2005, which is a decrease of approximately 5%. The decrease in research and development costs is attributable to the shift of some of our resources from development to manufacturing as a result of increased orders for our products. We expect to continue to spend substantial sums on research and development as we seek to maintain our technological edge and develop new products for various applications.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses which consist of sales and marketing, accounting, legal, investor relations and other administrative expenses totaled $6,282,043 the year ended December 31, 2006, as compared to $2,441,405 for the year ended December 31, 2005, which represents an increase of approximately 157%. Approximately $1,500,000 of this increase was a non-cash expense attributable to equity compensation paid to investor relations consultants. This increase also includes stock option compensation expense of approximately $300,000 for the year ended December 31, 2006, as compared to $0 for the year ended December 31, 2005. Additionally, increased investor relations, legal and accounting costs are attributable to our becoming a publicly traded company with more compliance and investor relations issues. We expect these categories of expenses to increase in future periods, based on anticipated growth of the Company. However, we do not believe that the percentage increase will be as great in future periods. We have also expanded our sales team, and increased our sales and marketing efforts, and as a result we have increased expenses in the sales and marketing areas.

NET LOSS. QPC had a net loss of $18,692,607 for the year ended December 31, 2006 as compared to a net loss of $18,600,886 for the year ended December 31, 2005. The loss in 2006 was in significant part attributable to certain non-cash expenses, including a license termination fee of $6,000,000 to Finisar Corporation (“Finisar”) and the non-cash compensation expenses discussed above. In addition, approximately $690,000 was included as expense associated with warrant issuance in connection with a related party note, which was extended in January 2006 and repaid in April 2006, and $525,175 of non-cash interest expense that was recognized in connection with the modification of warrants. Loss on change in the fair value of derivatives was $68,703 for the year ended December 31, 2006 compared to $0 for the year ended December 31, 2005. Approximately $330,000 of the expenses in 2006 were one-time expenses attributed to the cost of the Share Exchange.

While we anticipate that revenues should continue to grow from the amounts recorded in 2006, we do not expect to achieve profitability during the next 12 months. Moreover, our ability to continue to grow our revenues is subject to significant risks including, without limitation, our limited marketing budget, the limited track record for our products and the 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.

Liquidity and Capital Resources

Overview

We continue to operate with a negative cash flow from operations, and depend upon external financing to maintain our operations. QPC lost $2,413,205 during the three months ended March 31, 2007 and has a cumulative deficit of $53,919,598 as of March 31, 2007. Our negative cash flow from operations during the three months ended March 31, 2007 was in excess of $400,000 per month, and our total negative cash flow including debt service and capital expenditures is approximately $700,000 per month. We currently anticipate that we will continue to have a negative cash flow from operations for at least the next 9 to 12 months.

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In April 2007, we issued to certain investors secured convertible debentures in the aggregate principal amount of $7,976,146 at an original issue discount of 10%. The secured debentures are convertible into shares of the Company’s common stock at an initial conversion price of $1.05 per share, subject to certain adjustments. In addition, the Company issued to debenture-holders five year warrants to purchase up to 11,394,495 shares of our common stock at an exercise price of $1.05 per share, subject to certain adjustments. The aggregate purchase price for the debentures and the warrants was $ 7,178,531.

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

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

The net cash proceeds to us from the April 2007 Debenture Offering and May 2007 Debenture Offering was approximately $13,900,000. Our negative cash flow in recent months has been approximately $700,000 a month. Accordingly, we currently expect such funds will be sufficient to meet our cash requirements until late 2008. However, our expectations may prove incorrect and we may need to raise additional funds. Moreover, if we do not generate positive cash flow from operations and we expend our current cash resources to meet our ongoing requirements, then we will not have sufficient cash to meet our debt obligations that mature in 2009. Those obligations are in excess of $25 million, and even if all of the Secured Debentures are converted our payment obligation on our outstanding debt in 2009 will be nearly $6 million.

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.

If we need to raise additional funds in the future, it is likely we will seek to issue additional equity securities. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise any needed funds, we might be forced to make substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.

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

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Current Debt Obligations

Our current obligations, including those undertaken as a result of the sale of convertible debentures in April and May 2007, require us to make the following payments over the next several years including principal and interest:

	Payments by Period
	Remainder of 2007		2008		2009		2010 and Beyond		Total
Senior Secured Notes Payable	$	24,038	$	--	$	--	$	--	$	24,038
Subordinated Secured Notes Payable		108,770		141,545		--		--		250,315
Finisar Secured Note Payable		653,411		871,214		5,653,408		--		7,178,033
Secured Equipment Financing		197,910		263,880		178,180		221,250		861,220
April Secured Debentures		576,202		819,837		8,437,488		--		9,833,527
May Secured Debentures		615,678		1,055,448		10,994,270		--		12,665,396
Total	$	2,176,009	$	3,151,924	$	25,263,346	$	221,250	$	30,812,529

 The table above reflects the payments due after the conversion of $554,631 of our Senior Secured notes payable and $1,050,000 of our Subordinated Secured notes payable into the April Secured Debentures on April 16, 2007 as described above.

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

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Financing History

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

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

 In the third quarter of 2003, we raised a second round of equity financing. Finisar converted the $5 million remaining principal balance on their term loan into our Series B Preferred Stock and we raised an additional $2.8 million in new cash. The price per share of Series B Preferred Stock was $3.118998. Three of the five members of the Board of Directors at that time, founders Dr. Ungar and Mr. Lintz and independent director, Dr. Israel Ury, each purchased preferred stock in the Series B round of financing. As a condition to Finisar’s investment in Series B Preferred Stock, we granted Finisar a non-exclusive royalty free perpetual license to our existing and future intellectual property pursuant to a certain License Agreement, dated September 16, 2003, by and between Quintessence and Finisar (“License Agreement”). The License Agreement allowed for termination by us by paying a fee on or before September 18, 2008. We subsequently terminated the license by issuing a promissory note in the amount of $6 million to Finisar as of September 18, 2006. As of March 31, 2007, the outstanding principal balance of the Finisar secured note was $5,852,818.

 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. As of March 31, 2007, the outstanding principal balance of the senior secured note was $578,274.

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

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

 In the third quarter of 2005 we entered into a subordinated secured note with various investors for $1,280,000. As of March 31, 2007, the outstanding principal balance was $1,280,000. 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 $1.25 per share in conjunction with the first $1 million of the Brookstreet offering in December 2005. 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.

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

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

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

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

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

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

In April 2007, we issued to certain investors secured convertible debentures in the aggregate principal amount of $7,976,146 at an original issue discount of 10%. The April Secured Debentures are convertible into shares of the Company’s common stock at an initial conversion price of $1.05 per share, subject to certain adjustments. In addition, the Company issued to the investors five year warrants to purchase up to 11,394,495 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.

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Capital Expenditures

 From January 1, 2006 to December 31, 2006, we spent approximately $791,000 on manufacturing equipment, computer equipment and software, furniture and cubicles. We expect our capital expenditures to increase based on the growth of our operations, and increased orders and personnel. We are considering expanding our manufacturing area by up to 10,000 square feet. Our facility has warehouse space that is contiguous to our present manufacturing area which we are considering using for the manufacturing area expansion. We expect the expansion, should we choose to proceed, to cost in the range of $1 million to $2 million.

 Recent Accounting Pronouncements

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

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

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

 Off-Balance Sheet Arrangements

   We do not have any off-balance sheet arrangements.

Restatement of Prior Periods - June 30, 2006

The Company has restated its financial statements as of and for the three and six months ended June 30, 2006. In addition, certain disclosures in note 7 of the notes to the consolidated financial statements have been revised to reflect the restatement adjustments. The Company’s determination to restate these financial statements was made after a reexamination of the transactions to account for shares of common stock issued for services and the modification of warrants to purchase shares of common stock that occurred in January 2006. The Company determined the original accounting treatment was inappropriate under GAAP.

Consultant Shares

On April 3, 2006 the Company entered into an agreement with a consultant to provide services to the Company over a one year period. As compensation for the services to be provided, the Company issued 1.2 million shares of common stock to the consultant. In accordance with EITF 96-18, “Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiring, or in Conjunction with Selling, Goods and Services,” the Company valued the shares at grant date and determined the value of the shares issued based upon the current price of the sales of common stock, which was approximately $1.25 per share. These shares were accounted for as deferred compensation at the time of issuance to be expensed over the term of the contract. In September 2006, the Company re-evaluated the accounting treatment of the shares granted to the consultant and determined that in accordance with EITF 00-18, “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees,” the full value of the shares should have been expensed at June 30, 2006 since the shares were fully vested and non-forfeitable on the date of issuance. In order to reflect this change, our restated financial statements for the period ending June 30, 2006 remove the deferred compensation value of these shares on our balance sheet and record the expense for the full value of these shares in our consolidated statement of operations. This non-cash expense is included within our General and Administrative expenses for the three and six months ended June 30, 2006.

55

Modification of Warrants

In the second quarter of 2004, we issued 2,437,500 warrants to purchase common stock to various lenders in connection with a senior secured two-year note transaction. The exercise price of each warrant was initially $3.75. In the second quarter of 2005, approximately $2.1 million of the $2.4 million outstanding balance of the note was extended for an additional year. In January 2006, we adjusted the exercise price of 2,325,000 of these warrants to $1.25 upon the closing of the Brookstreet Tranche I offering. We did not initially record the expense associated with this modification, and our financial statements did not reflect the expense associated with this modification at June 30, 2006. In order to reflect this change, the Company has recorded the change in fair value of the warrants immediately prior to the modification and the value of the warrants following the modification as an additional loan discount of $744,000 to be amortized over the remaining life of the loan. Interest expense includes $132,395 and $262,589 related to the amortization of this discount for the three and six months ending June 30, 2006, respectively.

The accompanying financial statements for the three and six months ended June 30, 2006 have been restated to reflect the changes described above. The impact of these adjustments are summarized below:

Changes to Statement of Operations:

	For the three months ended June 30, 2006			For the six months ended June 30, 2006
Net Loss
Net Loss as previously reported	$	(3,127,904	)	$	(6,258,306	)
Additional investor relations expense for the issuance of stock for services		(1,125,000	)		(1,125,000	)
Additional interest expense as a result of warrant modification		(132,395	)		(262,589	)
Net Loss as restated	$	(4,385,299	)	$	(7,645,895	)
Loss per share
Loss per share as previously reported	$	(0.10	)	$	(0.20	)
Recognition of adjustments		(0.04	)		(0.05	)
Loss per share as restated	$	(0.14	)	$	(0.25	)

Changes to Balance Sheet:

		June 30, 2006 Previously Reported			Adjustments			June 30, 2006 As Restated
Current Liabilities	$	2,382,330		$	(481,411	)(A)	$	1,900,919
Long term debt less current portion		1,104,800			—			1,104,800
Total Liabilities		3,487,130			(481,411	)		3,005,719
Stockholders’ Equity
Common stock		37,311			—			37,311
Additional paid in capital		47,613,729			744,000	(B)		48,357,729
Unearned compensation		(1,125,000	)		1,125,000	(C)		—
Accumulated deficit		(39,072,092	)		(1,387,589	(D)		(40,459,681	)
Total Stockholders’ Equity		7,453,948			481,411			7,935,359
Total liabilities & stockholders’ equity	$	10,941,078		$	—		$	10,941,078

(A)	Represents additional loan discount of $744,000 for modification of 2,325,000 warrants measured as the change in fair value of the warrants immediately preceding the modification and the fair value of the warrants following the modification less $262,589 accumulated amortization of the additional loan discount
(B)	Represents $744,000 for modification of 2,325,000 warrants measured as the change in fair value of the warrants immediately preceding the modification and the fair value of the warrants following the modification
(C)	Represents a $1,125,000 decrease in unearned compensation as a result of recognizing the expense associated with the issuance of common stock for services
(D)	Represents $1,125,000 additional General and Administrative expense for the issuance of common stock for services and $262,589 of additional interest expense as a result of amortization of the additional loan discount for the modification of warrants

56

The net loss, issuance of common stock for services, and warrant modification line items in the consolidated statements of cash flows for the six months ended June 30, 2006 have been adjusted to reflect the restatements; however, cash flows from operating, investing and financing activities were not affected by the restatement.

Restatement of Prior Periods - September 30, 2006

The Company restated its financial statements as of and for the three and nine months ended September 30, 2006. In addition, certain disclosures in the notes to the consolidated financial statements have been revised to reflect the restatement adjustments. We concluded that it was necessary to restate our financial results for the interim period ended September 30, 2006 to reflect additional non-operating losses related to the classification of and accounting for: (1) the conversion feature of our subordinated convertible notes payable issued in August 2005, the warrants to purchase common stock associated with these notes, and the amortization of the discount recorded with respect to the subordinated convertible note (see Note 7 for further discussion), (2) the note payable issued to Finisar Corporation for $6,000,000 for the license termination, (3) the modification of warrants held by investors in our Senior Secured Notes Payable, and (4) common stock issued to a consultant for services rendered in the three months ended June 30, 2006.

Embedded Derivatives

We initially classified the value of the conversion features and warrants to purchase common stock related to the issuance of our subordinated secured convertible notes payable in the equity section of the balance sheet. In September 2006, we analyzed these instruments and determined they should be treated as derivative liabilities subject to FAS 133, “Accounting for Derivative Instruments and Hedging Activities.” In filing our Amendment No. 2 to a registration statement on Form SB-2 which was subsequently withdrawn, we restated our previous December 31, 2005 financial statements and accounted for these instruments as derivatives and recorded changes in the fair value of these instruments in the consolidated statement of operations as “gain (loss) on change in fair value of embedded derivatives.”

In December 2006, the Company reevaluated the features of these instruments, and determined that the initial accounting treatment was appropriate as the instruments are to be settled in shares and fulfill the conditions set forth in EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” According to paragraphs 12 through 32 of EITF 00-19 these instruments are not derivative liabilities, based on the analysis, principally because they are convertible into unregistered common shares, we have sufficient authorized shares available for conversion, there is a fixed maximum shares that required to be issued and there are no provisions that could require cash settlement. Therefore, these derivative instruments are accounted for in the equity section of the balance sheet. We have restated our balance sheet and statement of operations for the nine months ended September 30, 2006 to adjust for this. The December 31, 2005 financial statements reflect the original accounting treatment as previously audited and reported.

License Termination Fee

We executed an agreement effective as of September 18, 2006 with Finisar Corporation to terminate a previously existing license agreement dated September 18, 2003 (“IP License Agreement”). As consideration for termination of the IP License Agreement, we issued to Finisar a $6,000,000 secured note payable (see Note 7).

Based on our historical relationship with Finisar since 2001, and their substantial equity ownership in our Company, we originally accounted for this transaction as a deemed distribution of equity to Finisar at September 30, 2006. Upon further review of this transaction, we have determined that this transaction should have been expensed in the period in which it was incurred. Accordingly, we have restated our results for the nine months ended September 30, 2006 to recognize this expense.

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Modification of Warrants

In the second quarter of 2004, we issued 2,437,500 warrants to purchase common stock to various lenders as part of a senior secured two-year note transaction. The exercise price of each warrant was initially $3.75. In the second quarter of 2005, approximately $2.1 million of the $2.4 million outstanding balance of the note was extended for an additional year. In January 2006, we adjusted the exercise price of 2,325,000 of these warrants upon the closing of the Brookstreet Tranche I offering. We have recorded a loan discount of $744,000 in the nine months ended September 30, 2006 to record the difference in the value of the warrants immediately prior to the modification and the value of the warrants following modification. Interest expense includes $393,882 related to amortization of this discount.

The accompanying financial statements for the nine months ended September 30, 2006 have been restated to effect the changes described above. The impact of these adjustments are summarized below:

Changes to Statement of Operations:

	For the nine months ended September 30, 2006			For the nine months ended September 30, 2005
Net Loss
As previously reported	$	(9,038,663	)	$	(5,809,509	)
Remove gain on embedded derivative		(788,000	)		(12,000	)
Additional interest expense as a result of warrant modification		(393,882	)		—
Remove additional offering expense associated with embedded derivative		—			188,000
Lower amortization of loan discount		261,600			38,033
License Termination Fee		(6,000,000	)		—
As restated	$	(15,958,945	)	$	(5,595,476	)
Loss per share
As previously reported	$	(0.31	)	$	(0.47	)
Recognition of adjustments		(0.24	)		0.02
As restated	$	(0.55	)	$	(0.45	)

Changes to Balance Sheet:

	September 30, 2006 Previously Reported			Adjustments			September 30, 2006 As Restated
Current Liabilities	$	2,751,611		$	(1,041,429	(A)	$	1,710,182
Long term debt less current portion		6,160,564			553,356	(B)		6,713,920
Total Liabilities		8,912,175			(488,073			8,424,102
Stockholders’ Equity
Common stock		38,559			—			38,559
Additional paid in capital		43,146,254			6,977,600	(C)		50,123,854
Accumulated deficit		(42,283,204	)		(6,489,527	(D)		(48,772,731	)
Total Stockholders’ Equity		901,609			488,073			1,389,682
Total liabilities & stockholders’ equity	$	9,813,784		$	—		$	9,813,784

(A)	Represents the sum of $800,000 decrease for fair value of embedded derivative, additional senior secured loan discount of $431,118, less $189,689 net decrease in subordinated secured convertible loan discount
(B)	Represents an $814,956 decrease in loan discount less $261,600 less amortization of loan discount
(C)	Represents the sum of $233,600 value of the loan discount, $6,000,000 license termination fee originally charged to paid in capital, and $744,000 value of warrant modification
(D)	Represents the sum of $120,000 eliminate recognition of loss on embedded derivative 2005, $122,755 lower amortization of loan discount in 2005, $188,000 value of embedded derivative over loan amount charged to offering expense in 2005, $261,600 lower amortization of subordinated secured loan discount, less $788,000 elimination of recognition of gain on embedded derivative, less $393,882 additional amortization of senior secured loan discount, and less $6,000,000 license termination fee

58

The net loss, loan discount, license termination fee, warrant modification, and loss on change in fair value of embedded derivative line items in the consolidated statements of cash flows for the nine months ended September 30, 2006 has been adjusted to reflect the restatements; however, cash flows from operating, investing and financing activities were not affected by the restatement.

Consultant Shares

In addition to the adjustments presented above, the year-to-date totals reflect the adjustment discussed above with respect to consultant shares. This non-cash expense is included within our General and Administrative expenses for the nine months ended September 30, 2006.

Restatement of Prior Periods - Year Ended December 31, 2005

The Company restated its financial statements for the year ended December 31, 2005. In addition, certain disclosures in the notes to the consolidated financial statements have been revised to reflect the restatement adjustments. We concluded that it was necessary to restate our financial results for the year ended December 31, 2005 to include the loss attributable to common stockholders as a result of the preferred stock dividend that occurred in 2005. In October 2005, our Board authorized the issuance of one share of common stock for each outstanding share of preferred stock held by a preferred stockholder who granted a proxy to management in connection with a proposed reorganization of the Company. As originally filed in a registration statement which was subsequently withdrawn, our financial statements for the year ended December 31, 2005 did not reflect any charge for this stock issuance. Upon further review of the guidance provided in EITF topics D-42 and D-82, we determined that the fair value of the stock issued to preferred shareholders should be accounted for as a stock dividend. The fair value of $10,823,028 was determined based on the offering price of $1.25 per share in certain private placements which occurred in early 2006. The effect of this change to our Statement of Operations is reflected below.

Changes to Statement of Operations:

	For the year ended December 31, 2005
Net Loss
Net Loss as previously reported	$	(7,777,858	)
Preferred stock dividend		(10,823,028	)
Net Loss as restated	$	(18,600,886	)
Loss per share
Loss per share as previously reported	$	(0.63	)
Recognition of adjustments		(0.86	)
Loss per share as restated	$	(1.49	)

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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

 The following table sets forth the names, ages, and positions of our directors and executive officers.

Name	Age	Position
Jeffrey Ungar	48	Chief Executive Officer, Chairman of the Board, Co-Founder and Director
George Lintz	46	Chief Financial Officer, Chief Operating Officer, Co-Founder and Director
Israel Ury	50	Director
Robert Adams	74	Director
Merrill A. McPeak	70	Director
Paul Rudy	35	Senior Vice President of Marketing and Sales
Blima Tuller	28	Vice President of Finance and Chief Accounting Officer

The directors named above will serve until the next annual meeting of our stockholders or until their successors are duly elected and have qualified. Directors will be elected for one-year terms at the annual stockholders meeting. Officers will hold their positions at the pleasure of the Board of Directors, absent any employment agreement, of which none currently exists. There is no arrangement or understanding between any of our directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current Board of Directors. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.

Jeffrey Ungar, Ph.D., President, Chief Executive Officer, Co-Founder and Director

 Dr. Ungar formed Quintessence Photonics Corporation in 2000 and has served as its President and Chief Executive Officer since its inception. On May 12, 2006, we entered into a Share Exchange Agreement with Quintessence, and Quintessence became our wholly-owned subsidiary. Dr. Ungar has been our CEO and Chairman of our Board of Directors since the Share Exchange. Prior to forming Quintessence, Dr. Ungar had a 17 year career at Ortel Corporation, a pioneer in the development of analog fiber optic technology for CATV. He joined Ortel in 1983 as one of the first five employees, and stayed at Ortel until after its sale to Lucent Technologies in 2000 for approximately $2.95 billion. At Ortel, he occupied senior positions including Director of Advanced R&D for Optoelectronic Devices and Director of Material and Structure Technologies. He holds a Ph.D. in Nuclear Physics from the California Institute of Technology.

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George Lintz, M.B.A., Chief Financial Officer, Chief Operating Officer, Co-Founder and Director

 Mr. Lintz started QPC together with Dr. Ungar in 2000 after a fifteen year career in investment banking. Mr. Lintz founded Lintz Glover White & Company in 1987, an SEC registered, NASD member broker/dealer, and ran the broker-dealer until it was acquired in December 1999. During his tenure at Lintz Glover White, Mr. Lintz financed a number of early stage companies from the technology and finance industries. He founded and served as Chairman of G&H Financial, a commercial finance lender from 1989 to 1994, in which capacity he provided asset-based financing for manufacturing companies. In 1994, Mr. Lintz was appointed by the California State Senate to serve as an advisor to their Local Government Investment Committee. As an advisor, he assisted in drafting the legislation that governs investment practices of state and local government entities in California. Mr. Lintz has been associated with various financial services firms on a part-time basis until July 2005. Mr. Lintz received his M.B.A. in Finance from New York University in 1984.

Israel Ury, Director

 Dr. Ury joined the Board of Directors of Quintessence in November 2001 and has served on our Board of Directors since the Share Exchange. From July 2001 to September 2002, he also served as a director for Memlink, Inc. From February 2000 to July 2001 he served as a Senior Technology Consultant for Lucent Technologies and Agere Systems. Dr. Ury founded and served as an executive officer of diode laser manufacturer, Ortel from 1980 to 2000. Dr. Ury received his B.S. and M.S. from the University of California at Los Angeles, and his Ph. D. from the California Institute of Technology.

 Robert Adams, Director

 Mr. Adams joined our Board of Directors in May 2006. Mr. Adams began his career as an engineer at Bendix Aviation designing control systems for aircraft jet engines. He then designed ordnance systems as a non-commissioned army officer. After military service, he worked as a design engineer at Inland Steel Co. where he became involved in the use of computers to control steel making processes. He continued this interest as a control system designer at TRW/Bunker Ramo where he received several patents for multivariable control systems in the production of steel products.

 In 1969, Mr. Adams joined Xerox Corporation (“Xerox”). At the time Mr. Adams was Vice President of Marketing at the Scientific Data Systems unit of Xerox, responsible for planning and marketing of new technologies. In 1975 he advanced within Xerox and managed a new business using computers to convert high-speed copiers into laser printers. This business alone has grown to over $6 billion in annual revenue. Mr. Adams was promoted from the President of Printing Systems to Group Vice President of the Xerox Systems Group where he led the introduction of a number of new office products. At this time he sponsored a project to develop the first high-speed digital copier which under his guidance resulted in the development of high-quality, and high-speed digital scanners. Engineering of these products required the design of 13 application specific IC’s (ASIC’s) and other advance electronic design concepts. Mr. Adams was promoted to Executive Vice President in 1986 and moved to Xerox headquarters in Connecticut. In 1989 Mr. Adams began a venture capital operation on behalf of Xerox (Xerox Technology Ventures). For the past five years, Mr. Adams has managed Adams Capital Management, a private investment company. Mr. Adams serves on the Board of Directors of Tekelec Corp. (NASDAQ-NMS: TKLC), a manufacturer of network switching products, and The Los Angeles Opera Company, a private corporation. Mr. Adams received a B.S. in Mechanical Engineering from Purdue University and an M.B.A. from the University of Chicago. He was awarded the Distinguished Engineering Alumnus in 1983 as well as the Outstanding Mechanical Engineer from Purdue. He was elected a Life Member of the President’s Council of the University of Chicago Graduate School of Business.

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Merrill (“Tony”) McPeak, Director

 Gen. Merrill A. McPeak has served as the Vice-Chairman of our Board of Directors since January 2006. Gen. McPeak is President of McPeak and Associates, a management-consulting firm he founded in 1995. Gen. McPeak was Chief of Staff of the United States Air Force (“USAF”) during the early 1990s. He entered the USAF in November 1957 and was a fighter pilot during his early years. He flew 269 combat missions in Vietnam. In 1967-68, he performed in nearly 200 official air shows as Solo Pilot for the USAF Aerial Demonstration Team, the “Thunderbirds.” He commanded NATO’s 20 Fighter Wing in 1980-81, Twelfth Air Force in 1987-88, Pacific Air Forces from 1988 to 1990, and was Chief of Staff of the USAF from November 1990 to October 1994, when he retired from active military service. General McPeak is Chairman of the Board of Ethicspoint, Inc. and a director of several other private companies. He is a director of the following public companies: Del Global Technologies (OTC: DGTC), a manufacturer and marketer of medical imaging systems; Gigabeam Corporation (OTC BB: GGBM), a supplier of high performance, high availability fiber-speed wireless communications; Health Sciences Group, Inc., (OTC BB: HESG), a provider of preventive healthcare alternatives; MathStar (NASDAQ-NMS: MATH), a designer and marketer of specialized semiconductor integrated circuits; and Tektronix, Inc. (NYSE: TEK), a manufacturer and marketer of test and measurement solutions.

Paul Rudy, Ph.D., Senior Vice President of Marketing and Sales

 Dr. Rudy has served with QPC since March 2005. He comes to QPC from an extensive career with Coherent, Inc. He served as Director of Marketing at Coherent’s Semiconductor Business Unit, leading the tactical and strategic marketing activities of the high power diode laser business, overseeing product management and developing strategies for the business unit’s technology, products, and markets from June 2004 until March 2005. From October 2000 through June 2004, Dr. Rudy acted as Coherent’s Market Development Manager, responsible for developing and executing sales and tactical marketing strategies in the defense and graphics arts markets in North America. Prior to this, he acted as the Product Marketing Manager for Coherent Semiconductor Business Unit, focusing on unmounted bars and stacks. From 1997 to 1999, he was the Scientific Sales Engineer in the Mid-Atlantic region for Coherent Semiconductor Group and Coherent Laser Group. There, he developed several markets for Coherent including the scientific market, enhanced imaging MRI, and defense applications. Prior to his position with Coherent in the Mid-Atlantic, Dr. Rudy worked in the Advanced Technical Sales Group at Coherent headquarters. He received his masters and doctoral degrees in physics studying laser manipulation of atoms at the University of Rochester and his B.S. and B.A. from Duke University in physics and philosophy.

 Blima Tuller, Vice President of Finance and Chief Accounting Officer

 Ms. Tuller joined QPC in October 2006 from Ameripath where she served as Vice President of Finance of Ameripath’s Esoteric Division. From February 2005 to January 2006 she served as Director of Finance of Specialty Laboratories, a NYSE listed clinical reference laboratory that was acquired by Ameripath in January 2006. From February 2003 to February 2005, Ms. Tuller led Specialty Laboratories Internal Audit department, developing an Internal Audit function and bringing the company into compliance with the requirements of the Sarbanes-Oxley Act of 2002. From 1998 to 2003 Ms. Tuller held a variety of positions at the public accounting firms of Arthur Andersen LLP and KPMG LLP, most recently as a Manager in the Management Assurance Services practice at KPMG. She received her B.B.A. in Accounting from Cleveland State University.

Relationships Among Directors or Executive Officers

 There are no family relationships among any of our directors or executive officers.

Director Independence

 We use the definition of independence set forth in Rule 4200 of the listing standards of the Nasdaq Stock Market (“Nasdaq”) and the interpretations thereunder to determine if our members of our Board of Directors are independent. In making this determination, our Board of Directors considered, among other things, transactions and relationships between each director or his or her immediate family and the Company, including those reported in the section below captioned, “Certain Relationships and Related Transactions.” Directors Adams, McPeak and Ury are independent of the Company and, therefore, a majority of the members of our board is independent, under the standards set forth in the Nasdaq rules.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information known to us with respect to beneficial ownership of our common stock as of May 31, 2007, by (i) each stockholder known to us to own beneficially more than 5% of our common stock; (ii) each of our directors; (iii) the Named Executive Officers; and (iv) all of our directors and executive officers as a group. Percentage of beneficial ownership is based on 38,659,283 shares of common stock outstanding as of May 31, 2007. Unless otherwise indicated, the address of each named beneficial owner is the same as that of our principal executive office located at 15638 Roxford Street Sylmar, California 91342.

Name and Address of Beneficial Owner	Total Outstanding Common Stock Beneficially Owned(l)		Approximate Percent of Shares of Common Stock Beneficially Owned
Jeffrey Ungar, Chief Executive Officer, and Director (2)		4,554,948		11.8	%
George Lintz, Chief Financial Officer and Director (3)		2,690,155		7	%
Israel Ury, Director (4)		208,198		*
Merrill McPeak, Director (5)		138,485		*
Robert Adams, Director (6)		363,265		*
Paul Rudy, Vice President, Marketing and Sales (7)		226,819		*
Finisar Corporation 1389 Moffett Park Drive, Sunnyvale, California 94089		6,692,226		17.3	%
Wendell Lew (8) P.O. Box 22729, Honolulu, Hawaii 96823		2,982,558		7.7	%
Bristol Investment Fund, Ltd. (9) 10990 Wilshire Blvd. Suite 1410 Los Angeles, CA 90024		5,290,740		12.97	%
IRA FBO J. Steven Emerson Rollover II Pershing LLC as custodian (10) c/o T.R. Winston & Company, 1999 Ave of the Stars, Suite 2550, Los Angeles, CA 90067		7,142,858		15.59	%
Drew Rayman (11) 7 Vista Court Pleasantville, NY 10570		2,609,225		6.65	%
All Directors and officers as a group (6 persons) (12)		8,181,870		21.2	%

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_________________

* Less than one percent.

(1) Included in this calculation are shares deemed beneficially owned by virtue of the individual’s right to acquire them within 60 days of the date of this report.

(2) Includes warrants to purchase 488,000 and 39,683 shares at $1.25 and $1.05 per share respectively and options to purchase 100,000 and 68,750 shares at $0.38 and $1.25 per share, respectively, and 26,455 shares upon conversion of secured convertible debentures, that are exercisable within 60 days of May 31, 2007.

(3) Includes warrants to purchase 1,432,000 and 39,683 shares at $1.25 and $1.05 per share respectively and options to purchase 100,000 and 45,833 shares at $0.38 and $1.25 per share, respectively, and 26,455 shares upon conversion of secured convertible debentures, that are exercisable within 60 days of May 31, 2007.

(4) Includes warrants to purchase 39,683 shares at $1.05 per share, options to purchase 40,000 and 25,000 shares at $0.38 and $1.25 per share, respectively, and 26,455 shares upon conversion of secured convertible debentures that are exercisable within 60 days of May 31, 2007.

(5) Includes warrants to purchase 19,841 shares at $1.05 per share, options to purchase 85,416 shares at $1.25 per share, and 13,228 shares upon conversion of secured convertible debentures that are exercisable within 60 days of May 31, 2007.

(6) Includes warrants to purchase 158,730 shares at $1.05 per share, options to purchase 25,000 shares at $1.25 per share, and 105,820 shares upon conversion of secured convertible debentures that are exercisable within 60 days of May 31, 2007.

(7) Includes warrants to purchase 19,841 shares at $1.05 per share, options to purchase 111,111 and 82,639 shares at $0.38 and $1.25 per share, respectively, and 13,228 shares upon conversion of secured convertible debentures that are exercisable within 60 days of May 31, 2007.

(8) Includes promissory notes that are convertible into 111,111 shares. Also includes warrants to purchase 151,666 shares that are exercisable within 60 days of May 31, 2007. All QPC securities are held by Wendell Y.M. Lew Revocable Living Trust, U/A 12-07-99, Wendell Lew, TTEE.

(9) Includes warrants to purchase 2,237,461 shares, options to purchase 683,749 shares, and 211,641 shares upon conversion of secured convertible debentures, all of which are exercisable within 60 days May 31, 2007. Includes 2,116,296 shares upon conversion of secured convertible debentures that are exercisable within 60 days of May 31, 2007.

(10) Includes 2,857,143 shares upon conversion of secured convertible debentures and warrants to purchase 4,285,715 shares that are exercisable within 60 days of May 31, 2007.

(11) Includes 2,055,535 shares upon conversion of secured convertible debentures that are exercisable within 60 days of May 31, 2007.

(12) Includes warrants to purchase 2,237,461 shares, options to purchase 683,749 shares, and 211,641 shares upon conversion of secured convertible debentures, all of which are exercisable within 60 days May 31, 2007.

We are not aware of any arrangements which may result in a change in control of the Company.

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EXECUTIVE COMPENSATION

2006 Summary Compensation Table

The following table sets forth the total compensation awarded to, earned by or paid to our principal executive officer and the two other highest paid executive officers whose total compensation in fiscal year 2006 exceeded $100,000. We refer to these executive officers as our “Named Executive Officers.”

Name and Principal Position	Year	Salary ($)	Bonus ($)		Stock Awards ($)	Option Awards ($)(1)	Non-Equity Incentive Plan Compensation ($)	Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)		Total ($)
Jeffrey Ungar Chief Executive Officer, Chairman of the Board, Co-Founder and Director	2006	277,308	150,000	(2)	--	36,907	--	--	8,880	(3)	473,095
George Lintz Chief Financial Officer, Chief Operating Officer, Co-Founder and Director	2006	251,731	150,000	(4)	--	24,842	--	--	8,880	(5)	435,453
Paul Rudy Senior Vice President Marketing and Sales	2006	200,000	150,500		--	25,128	--	--	5,192	(6)	380,820

___________

(1)	The amounts in this column represent the dollar amounts recognized for financial statement reporting purposes in fiscal 2006 with respect to performance share grants made in 2006 as well as in prior fiscal years, in accordance with SFAS 123R.
(2)	Includes a $50,000 bonus for 2005 and $100,000 bonus for 2006 that were approved in 2006. Mr. Ungar has agreed to defer payment of the $150,000 bonus until the earlier of (i) such date as the Compensation Committee may determine that the Company has sufficient cash resources to pay the cash bonuses, or (ii) March 15, 2008.

(3)	Includes of $7,500 in 401(k) matching contributions and $1,380 of term life insurance premiums paid by us.
(4)	Includes a $50,000 bonus for 2005 and $100,000 bonus for 2006 that were approved in 2006. Mr. Lintz has agreed to defer payment of the $150,000 bonus until the earlier of (i) such date as the Compensation Committee may determine that the Company has sufficient cash resources to pay the cash bonuses, or (ii) March 15, 2008.

(5)	Includes of $7,500 in 401(k) matching contributions and $1,380 of term life insurance premiums paid by us.
(6)	Consists of $5,192 in 401(k) matching contributions paid by us.

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Outstanding Equity Awards at Fiscal Year-End 2006

The following table sets forth information concerning unexercised options, granted as equity incentive awards,  held by each of our Named Executive Officers as of December 31, 2006.

	Option Awards										Stock Awards
	Number of Securities Underlying Unexercised Options (#)				Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
Name	Exercisable		Unexercisable
Jeffrey Ungar		100,000		--		--		0.38		6/29/2014		--		--		--		--
--				225,000		--		1.25		5/11/2016		--		--		--		--
--				100,000		--		1.18		12/20/2016		--		--		--		--
George Lintz		100,000		--		--		0.38		6/29/2014		--		--		--		--
--				150,000		--		1.25		5/11/2016		--		--		--		--
--				100,000		--		1.18		12/20/2016		--		--		--		--
Paul Rudy		200,000		--		--		0.38		5/18/2015		--		--		--		--
		75,000						1.25		11/17/2015		--		--		--		--
--				50,000				1.25		4/12/2016		--		--		--		--
--				100,000				1.25		5/11/2016		--		--		--		--

Employee Benefit Plan

The Company established a defined contribution plan allowing eligible employee income deferrals as permitted by Section 401(k) of the Internal Revenue Code effective January 1, 2002. This plan covers substantially all full-time employees after minimum service requirements are met. The Company contributes a percentage of participants’ cash contribution subject to certain limits.

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Employment Agreements, Termination of Employment and Change-in-Control Arrangements

We currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control.

Compensation of Directors

The following table sets forth information concerning the compensation of our non-employee directors during fiscal year 2006.

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)	Option Awards ($)(1)	Non-Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($)	Total ($)
Israel Ury	21,750	--	16,088	--	--	--	37,838
Robert Adams	16,500	--	16,088	--	--	--	32,588
Merrill A. McPeak	21,750	--	73,254	--	--	--	95,004

___________

(1)   The amounts in this column represent the dollar amounts recognized for financial statement reporting purposes in fiscal 2006 with respect to performance share grants made in 2006 as well as in prior fiscal years, in accordance with SFAS 123R.

Two of our directors are also employees and do not receive separate board compensation. Our non-employee directors are each entitled to a quarterly fee of $2,500, a $1,000 for attendance at a Board meeting, a, $1,250 for serving as a Committee Chair, a $500 fee for attending Committee meetings and a $250 for attending Board or Committee meetings via teleconference. In addition to these cash fees, each non-employee director receives 25,000 options to purchase common stock upon initial election to the Board of Directors, an annual grant of 20,000 options to purchase common stock, and an annual grant of 5,000 options for Committee Chair fee.

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Equity Compensation Plan Information

The 2006 Stock Incentive Plan became effective on May 3, 2006. All options to purchase stock of Quintessence which were outstanding at the time of the Share Exchange were assumed by us and converted into options to purchase shares of our common stock. Prior to the Share Exchange, Quintessence had 2,395,250 options outstanding which had been issued pursuant to a stockholder approved plan, and 859,598 options outstanding which had been issued pursuant to Board approval but not under a stockholder approved plan. The number of shares subject to each assumed and converted option was equal to the number of shares of common stock which were subject to that option immediately prior to the conversion, and the exercise price per share remained the same as the per share exercise price in effect under the option at the time of conversion.

The 2006 Stock Incentive Plan permits issuance of restricted stock or stock options. As of April 20, 2007, only stock options are outstanding. Under the 2006 Stock Incentive Plan restricted stock or options may be granted to employees, non-employee members of our Board of Directors, and consultants and other independent advisors in our employ or service. The number of shares of common stock issuable under the 2006 Stock Incentive Plan is 5,400,000 shares. As of April 20, 2007, 3,461,300 options had been issued under the Plan and 132,500 options issued under the 2006 Stock Incentive Plan had been exercised.

Unvested options will vest on an accelerated basis in the event our Company is acquired and those options are not assumed or replaced by the acquiring entity. Each option will have a maximum term (not to exceed 10 years) set by the plan administrator (our Compensation Committee) at the time of grant, subject to earlier termination following the optionee’s cessation of employment. All options are non-statutory options under the Federal tax law, unless they are incentive stock options granted to employees.

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options warrants and rights		Number of securities remaining available for future issuance under the equity compensation plan
Equity compensation plans approved by security holders		2,957,750	$	0.80		2,309,750
Equity compensation plans not approved by security holders		859,598	$	1.25		N/A

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 2005 Quintessence borrowed money from our executive officers pursuant to a Loan Agreement. Quintessence issued a 10% secured promissory note in the principal amount of $200,000 to Jeffrey Ungar, our Chief Executive Officer, and another 10% secured promissory note in the principal amount of $300,000 to George Lintz, our Chief Financial Officer (collectively, as amended, the “Bridge Notes” and Mr. Lintz and Mr. Ungar may be referred to as the “Bridge Noteholders”). The notes were due and payable on January 31, 2006. The lenders had a security interest in our cash, deposit accounts, fixed assets, intellectual properties, and certain insurance proceeds. This security interest was subordinated to the Senior Secured Promissory Notes originally issued by Quintessence on May 21, 2004 and the Senior Subordinated Secured Promissory Notes dated as of September 30, 2005. Quintessence also paid a loan origination fee of 5% or, $10,000 and $15,000, to each of Mr. Ungar and Mr. Lintz, respectively. Quintessence also granted to each of Mr. Ungar and Mr. Lintz, a warrant to purchase 128,000 and 192,000 shares of common stock, respectively, at $1.25 a share. Pursuant to the Share Exchange, such warrants may now be exercised to acquire our common stock.

Effective as of January 25, 2006, Quintessence amended the Loan Agreement to mature on March 27, 2006 instead of January 31, 2006 and the Bridge Noteholders agreed to further potential extensions of the maturity date of the Bridge Notes. In consideration of this amendment, Quintessence paid the Bridge Noteholders a loan origination fee of 3% of the original principal amount of the Bridge Notes (“3% Origination Fee”) or $15,000. Quintessence also issued 60,000 Bridge Warrants. For every 30 day period beyond February 24, 2006 that the Bridge Notes remained outstanding, Quintessence was obligated to issue another 60,000 Bridge Warrants for every $100,000 in principal outstanding. These Bridge Notes were repaid in April 2006. In aggregate, Quintessence granted Mr. Ungar and Mr. Lintz an additional 360,000 and 540,000 warrants, respectively, in consideration of the Bridge Notes extension. Pursuant to the Share Exchange, such warrants may now be exercised to acquire our common stock.

During 2004, Quintessence issued $3,250,000 of notes payable to seven note holders, some of whom are our stockholders. One note holder who purchased $2,500,000 in principal is a partnership of which Mr. Lintz is a 50% partner. The partnership assigned its rights and payments under the notes to a third party unaffiliated lender. The original term of the notes was 24 months, bearing interest at 10% per annum, with no principal and interest payments required for the initial three months. The notes were secured by all of the assets of the Company, including its intellectual property. One warrant for every $1.33 of principal was granted to each note holder, with each warrant being convertible into one share of common stock at $3.75 per share. The warrants were immediately vested and have a six year term. During 2005, five of the seven note holders agreed to modify the terms of their notes. The modifications included deferring principal payments from April 2005 to March 2006, thereafter principal payments would commence until the notes were fully paid in May 2007. In addition, 840,000 warrants were issued to the five note holders who elected to defer principal payments on their loans. One of the five note holders was the partnership of which Mr. Lintz is a 50% partner. The partnership was issued 400,000 of the 840,000 warrants. Upon the closing of a financing in the first half of 2006, the exercise price of the warrants for the five individuals who extended their notes was adjusted to $1.25 per share.

In April 2007, the Company raised funds through the sale of secured convertible debentures in the aggregate principal amount of $7,976,146 at an original issue discount of 10%and five year warrants to purchase up to 11,394,495 shares of our common stock to certain purchasers. All of the Company’s directors and executive officers participated as investors. One director, Robert Adams, invested an amount equal to $100,000 in the April 2007 Debenture Offering. The investment amounts of the other directors and officers in the April 2007 Debenture Offering were less than 1% of the total assets of the Company as of December 31, 2006.

In August 2001, Finisar Corporation acquired 1,756,480 shares of the Series A Preferred stock of Quintessence for $5 million. In addition to Finisar’s equity investment, they made a five-year term loan to Quintessence for $7 million, closing in two tranches between August 2001 and January 2002. In January 2002, $45,500 of accrued interest was added to the balance of the loan. Through September 18, 2003, Quintessence paid $1,996,225 of principal on the loan to Finisar. On September 18, 2003, Finisar converted the $5,049,275 remaining principal balance on their term loan into 1,618,883 shares of the Series B Preferred Stock of Quintessence pursuant to an exchange agreement (the “2003 Exchange Agreement”). During 2006, Finisar received 3,375,363 shares of Quintessence common stock as a result of a stock dividend. The 1,756,480 shares of Series A Preferred stock and 1,618,883 shares of Series B Preferred were ultimately exchanged for 3,375,363 shares of our common stock in the Share Exchange. As a result of the share dividend and the Share Exchange, Finisar ultimately held 6,750,726 shares of our common stock at December 31, 2006.

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Pursuant to the terms of the 2003 Exchange Agreement with Finisar, Quintessence granted Finisar a royalty free, fully paid, nonexclusive license to all of its existing and future intellectual property (the "IP License"). In addition, Quintessence granted Finisar favorable pricing assurances with respect to all of its products. The IP license was terminated effective as of September 18, 2006. As consideration for terminating the IP License, Quintessence issued to Finisar a $6,000,000 secured note payable. The note is secured by substantially all of the assets of Quintessence. The value of the note was recognized as a license termination fee in the accompanying consolidated statements of operations for the year ending December 31, 2006

In April 2007, the Company entered into an agreement with T.R. Winston & Company, LLC, a broker-dealer (“Winston”), pursuant to which Winston agreed to introduce prospective investors to the Company. In consideration of such services, the Company agreed to pay Winston a cash fee equal to eight percent (8%) of all cash raised from the sale of Secured Debentures to investors introduced by Winston, as well as all cash received from such investors pursuant to the exercise of warrants. In addition, the Company agreed to issue a warrant to Winston equal to ten percent (10%) of the aggregate shares issued to investors introduced by Winston. The shares underlying such warrants have registration rights. Several of the selling stockholders (Christopher Niklas, G. Tyler Runnels or Jasmine Niklas Runnels TTEES The Runnels Family Trust DTD 1-11-2000, Joseph H. Merback & Tema N. Merback Co-TTEE FBO Merback Family Trust UTD 8-30-89, Karen Kang, and John W. Galuchie, Jr.) are affiliated with Winston.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Pursuant to the Share Exchange, Quintessence became our wholly-owned subsidiary and the former stockholders of Quintessence became the holders of approximately 87% of our common stock. QPC, the acquirer for accounting purposes, retained its independent registered public accounting firm, Weinberg & Company, P.A., resulting in a change of our outside accountant. We dismissed Bagell Josephs, Levine & Company, L.L.C. ("Bagell") as our independent accountant effective as of October 23, 2006. The decision to change accountants was recommended by our audit committee by unanimous written consent dated October 23, 2006.

Bagell’s report on the financial statements for the past two years neither contained an adverse opinion or a disclaimer of opinion, nor was modified as to uncertainty, audit scope, or accounting principles, except that in the Pre-Effective Amendment to Form SB-2 filed on May 31, 2005, the Registration Statement on Form SB-2 filed on December 23, 2004, Amendment No. 1 to Form SB-2 filed on June 7, 2005, Amendment No. 2 to Form SB-2 filed on June 7, 2005 and Report of Independent Registered Public Accounting Firm section of the our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2005, Bagell modified their opinions on the financial statements by indicating that their opinion on the financial statements were prepared assuming we continue as a going concern. Bagell indicated that since we had just begun operations, were currently developing our business, had sustained operating losses and were looking to raise capital over the next year to assist in funding our operations, substantial doubt was raised about our ability to continue as a going concern. During the two most recent fiscal years and through the date of this Annual Report on Form 10-KSB, (1) we had no disagreements with Bagell on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, and (2) there has been no disagreement or event as described in Item 304(a)(1)(iv) of Regulation S-B. As there has not been any disagreement or event as described in Item 304(a)(1)(iv) of Regulation S-B, during the fiscal year in which the change in accountants took place and during the later fiscal year, there have not been any transactions or events similar to those involved in such disagreement or event; and there were no transactions or events that were material and needed to be accounted for or disclosed in a manner different from that which the former accountants apparently would have concluded was required.

On October 23, 2006, our audit committee confirmed the engagement of Weinberg & Company, P.A. (“Weinberg”) as our new independent registered public accounting firm. Prior to such confirmation, Weinberg reviewed our consolidated financial statements for the period ended June 30, 2006. Weinberg audited our consolidated balance sheet as of December 31, 2006 and December 31, 2005 and the related consolidated statements of operations, changes in stockholders’ equity (deficiency) and cash flows for the years ended December 31, 2006, 2005 and 2004. Weinberg expressed that in their opinion, the consolidated financial statements present fairly, in all material respects, our consolidated financial position as of December 31, 2006 and December 31, 2005 and the consolidated results of our operations and our cash flows for the years ended December 31, 2006, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. However, Weinberg modified their opinions on the financial statement by indicating that their opinion on the consolidated financial statements was prepared assuming we continue as a going concern. Weinberg indicated that we incurred a net loss of $18,692,607 and used $8,219,053 of cash in operations for the year ended December 31, 2006 and had a stockholders’ deficiency of $1,231,330 as of December 31, 2006 and incurred a net loss of $7,777,858 and used $6,574,614 of cash in operations for the year ended December 31, 2005 and had a working capital deficiency of $1,635,421 as of December 31, 2005, which raises substantial doubt about our ability to continue as a going concern.

Other than this change, there were no other changes in or disagreements with our accountants on accounting and financial disclosure during the last two fiscal years.

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DESCRIPTION OF SECURITIES

General

Our Company’s Articles of Incorporation provide for authority to issue 180,000,000 shares of common stock with a par value of $0.001 per Share. At March 31, 2007, the capitalization of our Company consisted of 38,559,283 shares of common stock.

Common Stock

The holders of the common stock are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available therefore. The Company has not paid cash dividends in the past and does not expect to pay any within the foreseeable future since any earnings are expected to be reinvested in the Company. In the event of liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, each outstanding share of the common stock is entitled to share equally in the Company's assets. Each outstanding share of the common stock is entitled to equal voting rights, consisting of one vote per share.

Warrants Exercisable Into Common Stock

Warrants Issued in April and May 2007 Financing

In connection with the April 2007 Debenture Offering and May 2007 Debenture Offering, we granted warrants to purchase 26,472,352 shares of common stock to certain investors and warrants to purchase 2,783,967 shares of common stock to the dealers in that offering. All of the above warrants have an exercise price of $1.05, registration rights, and expire five years from the date of issuance. None of these warrants are being registered in this registration statement.

Conversion Price Adjustment. The exercise price is subject to standard adjustments in event of recapitalization or occurrence of dilutive events. If the Company issues any shares of stock or securities convertible into common stock at a price per share that is less than the exercise price, then the exercise price is adjusted down to such issue price.

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

o   $5,000,000 in revenues for the nine (9) month period ending September 30, 2007,

o   $7,750,000 in revenues for the twelve (12) month period ending December 31, 2007

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

If a Milestone Adjustment occurs the exercise 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 exercise price downward.

Warrants Issued in Previous Transactions

In connection with prior financings and services rendered, we have issued the following warrants, including:

· Warrants to purchase 2,437,500 shares at $3.75 per share to certain debt holders, all but 112,500 of these warrants have been reset to $1.25 exercise price;

· Warrants to purchase 840,000 shares at $1.25 per share to certain debt holders;

· Warrants to purchase 346,666 shares at $1.25 per share to certain debt holders; The exercise price of these warrants has been reset to $1.05 as a result of the April 2007 Debenture Offering and May 2007 Debenture Offering;

· Warrants to purchase 222,749 shares at $1.25 per share to certain investors;

· Warrants to purchase 1,220,000 shares at $1.25 per share to former interim debt holders;

· Warrants to purchase 474,182 shares at $1.25 per share to certain consultants;

· Warrants to purchase 572,526 shares at $1.50 to the Brookstreet Tranche I investors; and

· Warrants to purchase 2,345,341 shares at $1.25 to Brookstreet Securities.

 During the year ended December 31, 2006, 2,500 warrants were exercised.

Debentures Convertible Into Common Stock

In April and May 2007, we issued Secured Debentures in the aggregate principal amount of $18,530,646 at an original issue discount of 10%. The Secured Debentures are convertible into shares of the Company’s common stock at an initial conversion price of $1.05 per share, subject to customary adjustments as set forth therein and any applicable Milestone Adjustments as described below. The Secured Debentures have a term of 2 years and pay interest at the rate of 10% per annum.

Conversion Price Adjustment. The conversion price is subject to standard adjustments in event of recapitalization or occurrence of dilutive events. If the Company issues any shares of stock or securities convertible into Common Stock at a price per share that is less than the conversion price, then the conversion price is adjusted down to such issue price.

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

o   $5,000,000 in revenues for the nine (9) month period ending September 30, 2007,

o   $7,750,000 in revenues for the twelve (12) month period ending December 31, 2007

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

If a Milestone Adjustment occurs the conversion price will be the lower of $1.05 or the market price as determined on the date that is five trading days after the Company files its next Form 10-Q with the SEC following the applicable Milestone period. Any Milestone Adjustment is permanent notwithstanding any future revenue or achievement of any other milestones. Any Milestone adjustment may only adjust the conversion price downward. Because of the operation of the conversion cap (as discussed below), a trigger of the conversion cap will result, unless waived, in a redemption of Secured Debentures.

Conversion Cap Redemption. The Secured Debentures contain a provision which caps the number of shares which may be acquired upon conversion of the Secured Debentures. If as a result of an adjustment in the conversion price, the number of shares issuable would exceed this cap, then the Company is required to redeem that portion of the Secured Debenture which if converted would result in shares in excess of the cap.

In the event that at any time the Fully Diluted Conversion Amount (as defined below) exceeds a Secured Debenture investor’s pro rata share of 30% of the Company’s Common stock that is outstanding on the business day immediately preceding the date of the Close of the purchase of the holder’s Secured Debenture, the Company shall be required to redeem a sufficient amount of the Secured Debentures such that the Fully Diluted Conversion Amount after such redemption equals the number of shares equal to 30% of the Company’s Common stock that is outstanding on the business day immediately preceding the date of the Close of the purchase of the holder’s Secured Debenture. Full Diluted Conversion Amount is the sum of the aggregate number of shares of Common Stock that have been issued to a holder of an Secured Debenture plus the aggregate number of shares of Common Stock that would be issuable to the holder upon full conversion of the holder’s outstanding Secured Debentures, without regard to any limitations on conversion contained in the Secured Debenture.

The conversion cap redemption amount shall be due and payable in four equal payments. The first payment is due on the later of the first business day of the next calendar month or the fifteenth calendar day following the date the conversion cap limit is violated. The last payment is due on the maturity date of the Secured Debenture. The second and third payments are due one-third and two-thirds, respectively, of the way between the initial and final payments.

The holders of the April 2007 Debentures waived the application of the conversation cap redemption provisions in order to permit the May 2007 Debentures to be issued.

Limitations to Conversion. In no event shall a holder of the Secured Dentures be entitled to convert any portion of the Secured Debenture if the sum of the beneficially owned shares of Common Stock and the shares issuable upon conversion of the portion of the Secured Debenture would result in the holder and its affiliates holding more than 4.99% of the outstanding shares of Common Stock. In the event, the Company receives a tender offer or any offer to enter into a merger with another entity whereby the Company shall not be the surviving entity, a Forced Conversion (as defined below) by the Company, or in the event of Default Shares (as defined in the Debenture) are being issued, then the 4.99% limitation shall be revised to 9.99%.

Mandatory Conversion. If certain “Equity Payment Conditions” (as defined in the Secured Debentures) have been met on each of the 10 trading days immediately preceding the date of payment of Interest Payment Shares (as defined below) and provided that interest is paid timely, the Company may pay the interest payable on a portion of the Secured Debentures with registered, free-trading shares of common stock (“Interest Payment Shares”) with an attributed value per share equal to 85% of the market price as calculated on the date that such interest is due to be paid thereunder, or as calculated on the date that such Interest Payment Shares are delivered to the investor, whichever is less. The Interest Payment Shares will be issued pro rata among those investors who had not previously instructed the Company that they will not accept shares in lieu of cash for interest. The Company will have the right to redeem all or a portion of the Secured Debentures if certain Equity Payment Conditions have been met for each of the prior 20 trading days, and the market price of the common stock for each of the prior 20 trading days exceeds 250% of the initial conversion price of $1.05 per share. In addition, if for each of any 20 consecutive trading days the Equity Payment Conditions have been met and the market price of the common stock for each of the prior 20 trading days exceeds 300% of the initial conversion price of $1.05 per share, then the Company may force the conversion (“Forced Conversion”) of the Secured Debentures by providing the investors a 20 trading day advance notice notifying the investors that the Company has elected to force each Investor to convert all or a specified portion of the Secured Debenture held by such investor. For so long as the investors hold any of the Secured Debentures of the Company, if the Company enters into a subsequent financing with another individual or entity (the “Third Party”) on terms that are more favorable to the Third Party, then the agreements between the Company and the investors shall be amended to include such better terms.

Company’s Redemption Rights.. If the Equity Payment Conditions have all been met for each for the prior twenty trading days and the market price of the common stock for each of the prior trading dates exceeds 250% of the conversion price of $1.05, then the Company may provide to the holders of the Secured Debentures notice of the Company’s election to redeem all or any portion of the outstanding Secured Debentures twenty trading days from the date of such notice. Upon receipt of the notice, the holder may elect to convert the Secured Debenture. If at any time between delivery of the notice and redemption of the Secured Debentures, any of the Equity Payment conditions is not met then the Company will not be entitled to redeem the Secured Debentures.

Restrictive Covenants. The Secured Debentures and the related Securities Purchase Agreement contain certain restrictive covenants. We may not pay any cash dividends on our common stock or repurchase any shares of common stock while the Secured Debentures are outstanding. Our ability to incur new indebtedness is largely restricted to trade payables. With limited exceptions, we may not issue any new debt which is senior to or pari passu with the Secured Debentures. We may not issue shares of common stock or common stock equivalents for one year following the closing of the sale of the Secured Debentures, with limited exceptions for issuances pursuant to compensation plans and equipment leases. During the subsequent year, we may not issue common stock or common stock equivalents for an issue price which is less than the initial conversion price of the Secured Debentures. We may not effect a merger, share exchange or similar transaction unless we have placed in escrow sufficient funds to redeem all outstanding Secured Debentures as well as the Warrants held by holders of the Secured Debentures. While the Secured Debentures are outstanding, the investors shall also have a pro rata right of participation in any future financings by the Company. and pro rate rights

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Failure Payments.Upon the occurrence of certain “Events of Failure” as defined in the Secured Debentures, the Company shall be obligated to pay liquidated damages to the investors in an amount equal to 18% per annum (“Debenture Failure Payments”) of the aggregate outstanding principal amount of the investors’ Secured Debentures on each day (or the maximum rate allowed under applicable law, whichever is less) after the Event of Failure until the Event of Failure is cured, accruing daily and compounded monthly. Upon the occurrence of certain “Events of Default” as defined in the Secured Debentures, the Secured Debentures shall become immediately due and payable and the Company shall be obligated to pay the investors an amount (the “Default Amount”) equal to the greater of (i) 115% times the sum of (x) the aggregate outstanding principal amount of the Secured Debentures plus (y) all accrued and unpaid interest thereon for the period beginning on the issue date and ending on the date of payment of the Default Amount, plus (z) any accrued and unpaid Debenture Failure Payments and other required cash payments, if any (the outstanding principal amount of the Secured Debentures on the date of payment plus the amounts referred to in (y) and (z) is collectively known as the `^”“Default Sum”), or (ii) (a) the number of shares of common stock that would be issuable upon the conversion of such Default Sum, without giving any effect to any ownership limitations on the conversion of the Secured Debentures contained therein, multiplied by (b) the greater of the Closing Price (as defined therein) for the common stock on the default notice date or (ii) the Closing Price on the date the Company pays the Default Amount.

 

INTEREST OF NAMED EXPERTS AND COUNSEL

No expert or counsel named in this Prospectus as having prepared or certified any part of this Prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, any interest, direct or indirect, in our company or any of our subsidiaries. Nor was any such person connected with us, or any of our subsidiaries, as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.

The consolidated financial statements of QPC Lasers, Inc. (formerly Planning Force Inc.) as of December 31, 2006 and for the years ended December 31, 2006 and 2005, included in the Prospectus and elsewhere in the Registration Statement have been included in reliance on the report of Weinberg & Company, P.A., independent registered public accountants, given such firm’s authority as experts in accounting and auditing.

DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Our Articles of Incorporation limit the liability of our directors to the fullest extent permitted under Section 78.037 of the Nevada General Corporation Law. As permitted by Section 78.037 of the Nevada General Corporation Law, our Bylaws and Articles of Incorporation also include provisions that eliminate the personal liability of each of its officers and directors for any obligations arising out of any acts or conduct of such officer or director performed for or on behalf of us. To the fullest extent allowed by Section 78.751 of the Nevada General Corporation Law, we will defend, indemnify and hold harmless its directors or officers from and against any and all claims, judgments and liabilities to which each director or officer becomes subject to in connection with the performance of his or her duties and will reimburse each such director or officer for all legal and other expenses reasonably incurred in connection with any such claim of liability. However, we will not indemnify any officer or director against, or reimburse for, any expense incurred in connection with any claim or liability arising out of the officer’s or director’s own gross negligence or willful misconduct.

72

The provisions of our Bylaws and Articles of Incorporation regarding indemnification are not exclusive of any other right of us to indemnify or reimburse our officers or directors in any proper case, even if not specifically provided for in our charter or Bylaws.

REPORTS TO SECURITY HOLDERS

We file annual and quarterly reports with the SEC. In addition, we file additional reports for matters such as material developments or changes within us, changes in beneficial ownership of officers and director, or significant stockholders. These filings are a matter of public record and any person may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. We are not required to deliver an annual report with this Prospectus, nor will we do so. However, you may obtain a copy of our annual report, or any of our other public filings, by contacting the Company or from the SEC as mentioned above.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Exchange Act and must file reports, proxy statements and other information with the Securities and Exchange Commission. The reports, information statements and other information we file with the Commission can be inspected and copied at the Commission at the Public Reference Room, 450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy, and information statements and other information regarding registrants, like us, which file electronically with the Commission.

This Prospectus constitutes a part of a registration statement on Form SB-2 filed by us with the Commission under the Securities Act. As permitted by the rules and regulations of the Commission, this Prospectus omits certain information that is contained in the registration statement. We refer you to the registration statement and related exhibits for further information with respect to us and the securities offered. Statements contained in the Prospectus concerning the content of any documents filed as an exhibit to the registration statement (or otherwise filed with the Commission) are not necessarily complete. In each instance you may refer to the copy of the filed document. Each statement is qualified in its entirety by such reference.

No person is authorized to give you any information or make any representation other than those contained or incorporated by reference in this Prospectus. Any such information or representation must not be relied upon as having been authorized. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs since the date of the Prospectus.

73

FINANCIAL INFORMATION

CONTENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCCOUNTING FIRM	F-2
CONSOLIDATED FINANCIAL STATEMENTS:	F-3
Balance Sheets	F-3
Statements of Operations	F-4
Statements of Stockholders’ Equity	F-5
Statements of Cash Flows	F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-8

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors

QPC Lasers, Inc. (Formerly Planning Force, Inc.) and Subsidiary

Sylmar, California

We have audited the consolidated balance sheet of QPC Lasers, Inc. (Formerly Planning Force, Inc.) (the “Company”) and Subsidiary as of December 31, 2006 and the related consolidated statements of operations, stockholders’ equity (deficiency) and cash flows for the years ended December 31, 2006 and 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of QPC Lasers, Inc. and Subsidiary as of December 31, 2006 and the consolidated results of their operations and their cash flows for the years ended December 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006 the Company adopted Statement of Financial Accounting Standard ("SFAS"), "Share-Based Payment" ("SFAS 123(R)") which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company incurred a net loss of $18,692,607 and used $8,219,053 of cash in operations for the year ended December 31, 2006 and had a stockholders’ deficiency of $1,231,330 as of December 31, 2006, which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 14 to the consolidated financial statements, the Company has restated its financial statements for the year ended December 31, 2005.

/s/ Weinberg and Company, P.A

Weinberg and Company, P.A

March 6, 2007, except for Note 14 which is July 23, 2007

Los Angeles, California

F-2

QPC LASERS, INC.

CONSOLIDATED BALANCE SHEETS

	March 31, 2007 (Unaudited)			December 31, 2006
ASSETS
CURRENT ASSETS
Cash	$	313,194		$	1,429,077
Restricted Cash		2,443,900			-
Accounts receivable, Commercial customers, net of allowance for doubtful accounts and returns and discounts of $3,735 as of March 31, 2007 and $19,810 as of December 31, 2006		746,561			667,908
Accounts receivable, Government contracts		60,366			383,935
Unbilled revenue		321,067			42,692
Inventory		560,686			550,655
Prepaid expenses and other current assets		210,809			272,418
Total current assets		4,656,583			3,346,685
Property and equipment, net of accumulated depreciation of $5,524,087 as of March 31, 2007 and $5,276,320 as of December 31, 2006		3,762,816			3,961,796
Capitalized loan fees, net of accumulated amortization of $110,756 at March 31, 2007 and $96,161 at December 31, 2006		23,444			38,039
Other assets		235,770			88,780
TOTAL ASSETS	$	8,678,613		$	7,435,300
LIABILITIES AND STOCKHOLDER’S DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	1,829,183		$	1,234,004
Current portion of long-term debt		1,548,248			1,034,437
Total current liabilities		3,377,431			2,268,441
Subscriptions to pending offering		2,443,900			-
Long-term debt, less current portion		6,386,456			6,398,189
Total liabilities		12,207,787			8,666,630
STOCKHOLDERS’ DEFICIENCY
Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued		-			-
Common stock, $0.001 par value, 180,000,000 shares authorized, 38,559,283 shares issued and outstanding		38,559			38,559
Additional paid-in capital		50,351,865			50,236,504
Accumulated deficit		(53,919,598	)		(51,506,393	)
Total stockholders’ deficiency		(3,529,174	)		(1,231,330	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY	$	8,678,613		$	7,435,300

F-3

QPC LASERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2006 and 2005 

and the Three Months Ended March 31, 2007 and 2006

	Three months ended March 31 (Unaudited)						Years ended December 31
	2007			2006			2006			2005
										(as restated)
REVENUE
Commercial customers	$	653,262		$	235,041		$	1,496,454		$	594,161
Government contracts		453,317			30,523			1,576,878			479,030
TOTAL REVENUE		1,106,579			265,564			3,073,332			1,073,191
COST OF SALES		855,781			279,726			2,291,851			1,009,477
GROSS PROFIT		250,798			(14,162	)		781,481			63,714
OPERATING EXPENSES
Research and Development		1,012,800			1,123,792			4,502,132			4,753,356
General and Administrative		1,216,524			1,078,844			6,282,043			2,441,405
License Termination		—			—			6,000,000			—
Total operating expenses		2,229,324			2,202,636			16,784,175			7,194,761
LOSS FROM OPERATIONS		(1,978,526	)		(2,216,798	)		(16,002,694	)		(7,131,047	)
Interest Income		1,754			—			41,632			15,036
Interest Expense		(468,399	)		(1,059,967	)		(2,420,633	)		(750,299	)
Merger expense		—			—			(326,199	)		—
Loss on Embedded Derivative		—			—			(68,703	)		—
Other income		31,966			16,171			83,990			88,452
NET LOSS		(2,413,205	)		(3,260,594	)		(18,692,607	)		(7,777,858	)
Preferred Stock Dividend		—			—			—			(10,823,028	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(2,413,205	)	$	(3,260,594	)		(18,692,607	)	$	(18,600,886	)
LOSS PER COMMON SHARE — Basic and Diluted	$	(0.06	)	$	(0.14	)	$	(0.60	)	$	(1.49	)
WEIGHTED AVERAGE SHARES OUTSTANDING, basic and diluted		38,559,283			22,972,960			31,306,637			12,466,339

F-4

QPC LASERS, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the years ended December 31, 2006 and 2005

and the three months ended March 31, 2007 (Unaudited)

											Common						Stock
	Preferred Stock C - QPC						Common Stock				Stock To Be			Additional Paid-in			subscribed but not			Accumulated
	Shares			Amount			Shares		Amount		Issued			Capital			issued			Deficit			Total
Balance, January 1, 2005		1,245,124		$	4,405,942			10,878,827	$	10,879	$	-		$	16,702,856		$	102,000		$	(14,212,900	)	$	7,008,777
Issuance of common stock from exercise of stock options		-			-			90,000		90		-			32,310			-			-			32,400
Issuance of common stock		-			-			221,000		221		-			220,779						-			221,000
Issuance of Series C preferred stock, net of issuance costs of $170,795		352,851			1,152,396			-		-		-			-			(102,000	)		-			1,050,396
Fair value of loan discount of warrants issued to holders of Senior Secured Notes Payable		-			-			-		-		-			596,400			-			-			596,400
Fair value of loan discount of warrants issued to holders of Subordinated Secured Convertible Notes		-			-			-		-		-			233,600			-			-			233,600
Fair value of loan discount of warrants issued to holders of related party note payable		-			-			-		-		-			313,600			-			-			313,600
Fair value of options issued to consultants		-			-			-		-		-			58,240			-			-			58,240
Conversion of series C preferred shares into common stock		(1,597,975	)		(5,558,338	)		1,597,975		1,598		-			5,556,740			-			-			-
Stock dividend		-			-			-		-		866			10,822,162						(10,823,028	)		-
Net loss for the year ended December 31, 2005		-			-			-		-		-			-			-			(7,777,858	)		(7,777,858	)
Balance, December 31, 2005		-			-			12,787,802		12,788		866			34,536,687			-			(32,813,786	)		1,736,555
Issuance of stock associated with Stock Dividend		-			-			8,658,422		8,659		(866	)		(7,793	)		-			-			-
Shares issued upon reverse merger, May 12, 2006		-			-			4,166,378		4,166		-			(4,166	)		-			-			-
Issuance of stock for cash, net of offering costs		-			-			11,726,681		11,726		-			12,312,202			-			-			12,323,928
Value of warrants issued with common stock		-			-			-		-		-			68,703			-			-			68,703
Issuance of stock upon option exercise		-			-			17,500		17		-			10,983			-			-			11,000
Issuance of stock upon warrant exercise		-			-			2,500		3		-			3,747			-			-			3,750
Issuance of stock for services		-			-			1,200,000		1,200		-			1,498,800			-			-			1,500,000
Fair value of modification of warrants		-			-			-		-		-			744,000			-			-			744,000
Fair value of warrants issued for services and loan fees		-			-			-		-		-			777,598			-			-			777,598
Fair value of vested options		-			-			-		-		-			295,743			-			-			295,743
Net loss for the year ended December 31, 2006		-			-			-		-		-			-			-			(18,692,607	)		(18,692,607	)
Balance, December 31, 2006		-			-			38,559,283		38,559		-			50,236,504			-			(51,506,393	)		(1,231,330
Fair value of vested stock options		-			-			-		-		-			115,361			-			-			115,361
Net loss for the three months ended March 31, 2007		-			-			-		-		-			-			-			(2,413,205	)		(2,413,205	)
Balance, March 31, 2007		-		$	-			38,559,283	$	38,559	$	-		$	50,351,865		$	-		$	(53,919,598	)	$	(3,529,174	)

F-5

QPC LASERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2006 and 2005 and

The three months ended March 31, 2007 and 2006 (Unaudited)

	Three Months Ended(Unaudited)						Year Ended
	March 31, 2007			March 31, 2006			December 31, 2006			December 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(2,413,205	)	$	(3,260,594	)	$	(18,692,607	)	$	(7,777,858	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		247,767			301,190			1,220,231			1,167,578
Fair Value of options issued for services		-			-			-			58,240
Amortization of loan discount		240,221			397,021			1,117,683			265,727
Amortization of Capitalized Loan Fees		14,595			40,779			102,010			142,501
Shares of common stock issued for services		-			-			1,500,000			-
Loss on change in fair value of embedded derivatives		-			-			68,703			-
Fair value of warrants issued for services and loan fees		-			721,000			777,598			-
Compensation cost of vested options		115,361			37,698			295,743			-
License Termination		-			-			6,000,000			-
Changes in operating assets and liabilities:
Accounts receivable		244,916			48,216			(704,842	)		(214,385	)
Inventory		(10,031	)		(12,089	)		(131,556	)		(343,682	)
Unbilled revenue		(278,375	)		2,485			(31,918	)		(10,774	)
Other assets		(146,990	)		(78,281	)		40.634			(28,471	)
Prepaid Expenses		61,607			(40,052	)		(73,969	)		(103,709	)
Accounts payable and other current liabilities		595,179			(45,863	)		293,237			522,808
Deferred revenue		-			-			-			(118,389	)
Net cash used in operating activities		(1,328,955	)		(1,888,490	)		(8,219,053	)		(6,440,414	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(48,785	)		(44,336	)		(791,007	)		(206,471	)
Net cash used in investing activities		(48,785	)		(44,336	)		(791,007	)		(206,471	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in capitalized loan fees		-			(15,000	)		-			(134,200	)
Proceeds from borrowing		500,000			-			-			1,780,000
Principal payments on debt		(238,143	)		(140,922	)		(1,968,981	)		(362,389	)
Exercise of options		-			-			11,000			32,400
Exercise of warrants		-			-			3,750			-
Proceeds from sale of common stock		-			3,473,101			12,323,928			215,500
Preferred stock issued, net of issuance costs		-			-			-			1,055,896
Net cash provided by financing activities		261,857			3,317,179			10,369,697			2,587,207
NET INCREASE (DECREASE)  IN CASH		(1,115,883	)		1,384,353			1,359,637			(4,059,678
CASH — Beginning of period		1,429,077			69,440			69,440			4,129,118
CASH — End of period	$	313,194		$	1,453,793		$	1,429,077		$	69,440
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	199,364		$	97,698		$	433,170		$	294,831
Taxes	$	—		$	—		$	—		$	—

F-6

QPC LASERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2006 and 2005 and

The three months ended March 31, 2007 and 2007 (Unaudited)

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

As of March 31, 2007, the Company had received $2,443,900 of subscriptions in connection with a pending private placement of the Company's securities, which amount was less than the minimum amount required in order to close the private placement.  Accordingly, at March 31, 2007 the Company had a contingent obligation to return the subscriptions had the minimum amount not been raised and the funds were treated as restricted cash.  On April 16, 2007, the minimum commitments required to close were received and the deposited funds were accepted by the Company.

During 2006, the Company modified warrants with a fair value of $744,000 to holders of Senior Secured Notes Payable.

During 2006, the Company issued warrants with a fair value of $690,000 to holders of Related Party Notes Payable.

During 2005 the Company committed to issuing 8,658,422 of common stock to preferred stockholders accounted for as a stock dividend (see Note 9).

During 2005, the Company issued warrants with a fair value of $596,400 to holders of Senior Secured Notes Payable.

During 2005, the Company issued warrants with a fair value of $313,600 to holders of Related Party Notes Payable.

During 2005, the Company issued warrants with a fair value of $313,600 to holders of Subordinated Secured Convertible Notes Payable

During 2005, the Company issued warrants with a fair value of $366,698 in connection with Preferred Stock Offering.

See accompanying Notes to Consolidated Financial Statements

F-7

QPC LASERS, INC.

NOTES TO CONSOLIDTED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2006 AND 2005 AND

THE THREE MONTHS ENDED MARCH 31, 2007 and 2006 (UNAUDITED)

NOTE 1

The accompanying interim consolidated financial statements of QPC Lasers, Inc. have been prepared, without audit, in accordance with U.S. generally accepted accounting principles for interim financial reporting.  Accordingly, the 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.

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.” as a development stage company that planned 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. executed a Share Exchange Agreement by and among Julie Morin, its majority stockholder, and Quintessence Photonics Corporation and substantially all of its stockholders. Under the agreement QPC issued one share of its common stock to the Quintessence Stockholders in exchange for each share of Quintessence common stock. Upon closing, former Quintessence Stockholders held at least 87% of QPC’s common stock. Therefore, a change in control occurred and Quintessence also became a wholly owned subsidiary of QPC. Accordingly, the transaction is accounted for as a reverse merger (recapitalization) in the accompanying condensed consolidated financial statements with Quintessence deemed to be the accounting acquirer and QPC is deemed to be the legal acquirer. As such the condensed consolidated financial statements herein reflect the historical activity of Quintessence since its inception, and the historical stockholders’ equity of Quintessence has been retroactively restated for the equivalent number of shares received in the exchange after giving effect to any differences in the par value offset to paid in capital. The activity of QPC is being reflected from May 12, 2006 forward (see Note 8).

GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. However, the Company had a net loss of $18,692,607 and utilized cash of $8,219,053 in operating activities during the year ended December 31, 2006, and had working capital of $1,078,244 at December 31, 2006. During the three months ended March 31, 2007, the Company had a net loss of $2,413,205 and utilized cash of $1,328,955 in operating activities. At March 31, 2007 the Company had a stockholders’ deficiency of $3,529,174. 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.

F-8

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash equivalents include unrestricted deposits and short-term investments with an original maturity of three months or less.

Inventory

Inventory is valued at lower of cost or market using the first-in, first-out method.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets, which range from 3 to 6 years. Leasehold improvements are amortized over the lesser of the remaining lease term, including renewal periods, or the useful life of the asset.

Impairment of Long-Lived Assets

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.

Deferred Stock Offering Costs

The Company capitalizes costs incurred related to its offering of common stock until such time as the stock is issued, or the stock offering is abandoned by the Company. These costs include specific incremental costs directly related to its stock offering. At December 31, 2005, deferred offering costs were approximately $41,000 and were included in Other Assets. The offering associated with these costs concluded in 2006. Accordingly, these costs were charged to Additional Paid in Capital as of December 31, 2006.

Income Taxes

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies, in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

F-9

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition

A portion of the Company’s revenues result from fixed-price contracts with U.S. government agencies. Revenues from fixed-price contracts are recognized under the percentage-of-completion method of accounting, generally based on costs incurred as a percentage of total estimated costs of individual contracts (“cost-to-cost method”). Revisions in contract revenue and cost estimates are reflected in the accounting period as they are identified. Provisions for the entire amount of estimated losses on uncompleted contracts are made in the period such losses are identified. No contracts were determined to be in an overall loss position at December 31, 2006 or March 31, 2007. In addition, the Company has certain cost plus fixed fee contracts with U.S. Government agencies that are being recorded as revenue is earned based on time and costs incurred. At December 31, 2006, there was no deferred revenue and approximately $42,692 of unbilled receivables related to these government contracts. At March 31, 2007 there was no deferred revenue and $321,067 of unbilled receivables related to these government contracts.

The Company recognizes revenues on product sales, other than fixed-price contracts, based on the terms of the customer agreement. The customer agreement takes the form of either a contract or a customer purchase order and each provide information with respect to the product or service being sold and the sales price. If the customer agreement does not have specific delivery or customer acceptance terms, revenue is recognized at the time of shipment of the product to the customer.

Management periodically reviews all product returns and evaluates the need for establishing either a reserve for product returns or a product warranty liability. As of March 31, 2007, management has concluded that neither a reserve for product returns nor a warranty liability is required.

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

Research and Development Costs

Research and development costs are charged to expense when incurred.

Management Estimates

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

Stock-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounted for stock option and warrant grants issued and vesting to employees up through December 31, 2005 utilizing the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 12"), with pro forma disclosures of net income (loss) as if the fair value method had been applied using the guidance SFAS No 123, "Accounting for Stock-Based Compensation". 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

F-10

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

As the exercise price of stock options and warrants issued to employees was not less than the fair market value of the Company's common stock on the date of grant, and in accordance with accounting for such options utilizing the intrinsic value method, there was no related compensation expense recorded in the Company's 2005 consolidated financial statements for the issuance or vesting of these instruments. The fair value of stock options and warrants issued to officers, directors and employees at not less than fair market value of the Company's common stock on the date of grant was estimated using the Black-Scholes option pricing model, and the effect on the Company's results of operations was shown in a pro forma disclosure as if such stock options and warrants had been accounted for pursuant to SFAS No. 123.

 In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based Payment" ("SFAS No. 123R"), a revision to SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123R superseded APB No. 25 and amended SFAS No. 95, "Statement of Cash Flows". Effective January 1, 2006, SFAS No. 123R requires that the Company measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards, with the cost to be recognized as compensation expense in the Company's financial statements over the vesting period of the awards. Accordingly, the Company recognizes compensation cost for equity-based compensation for all new or modified grants issued after December 31, 2005. In addition, commencing January 1, 2006, the Company recognized the unvested portion of the grant date fair value of awards issued prior to adoption of SFAS No. 123R based on the fair values previously calculated for disclosure purposes over the remaining vesting period of the outstanding stock options and warrants.

For the year ended December 31, 2006, the value of options vesting during the period was $295,743 and has been reflected as compensation cost in the accompanying consolidated financial statements.

For the three months ended March 31, 2007 and 2006, the value of options vesting during the period was $115,361 and $37,698 respectively, and has been reflected as compensation cost. As of March 31, 2007, the Company has unvested options of $2,255,107 which will be reflected as compensation cost in future periods as the options vest.

For the year ending December 31, 2005 the pro forma disclosure related to the issuance and vesting of options is as follows: 

	Year ended December 31, 2005
Net loss as reported	$	(18,600,886	)
Stock based compensation		(786,870	)
Pro forma net loss	$	(19,387,756	)
Pro forma net loss per share, basic and diluted	$	(1.55	)

F-11

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The assumptions used in calculating the fair value of the options granted during 2005, using the Black-Scholes option pricing model were: risk free interest rate, 4.47%, expected life, 10 years, expected volatility 70%, no expected dividends.

Fair Value of Financial Instruments

The recorded values of cash, accounts receivable, accounts payable and other current liabilities approximate their fair values based on their short-term nature. The carrying amount of the notes payable and long term debt at December 31, 2005 and December 31, 2006 approximates fair value because the related effective interest rates on the instruments approximate rates currently available to the Company.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents placed with high credit quality institutions and account receivable due from government agencies. 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.

Capitalized Loan Fees

Capitalized loan fees consist of legal fees and other direct costs incurred in obtaining the loans as described in Notes 6 and 7, and are amortized over the life of the loans using the effective interest method.

Loss per Common Share

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

Diluted loss per share is calculated assuming the issuance of common stock, if dilutive, resulting from the exercise of stock options and warrants. At March 31, 2007 and 2006, potentially dilutive securities consisted of outstanding common stock purchase warrants and stock options to acquire an aggregate of 11,997,547 and 8,117,206 shares, respectively. At December 31, 2006 and 2005, potentially dilutive securities consisted of outstanding common stock purchase warrants and stock options to acquire an aggregate of 5,576,686 and 10,472,964 shares respectively. Since we reported a net loss for the quarters ended March 31, 2007 and 2006 and the years ended December 31, 2006 and December 31, 2005, these potentially dilutive common shares were excluded from the diluted loss per share calculation because they were anti-dilutive.

Adoption of New Accounting Policy

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

F-12

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

 The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of March 31, 2007, The Company has no accrued interest or penalties related to uncertain tax positions.

 Recent Accounting Pronouncements

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

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

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

NOTE 3 - INVENTORY

 Inventory consists of the following:

	March 31, 2007 (Unaudited)			December 31, 2006
Raw materials	$	574,729		$	552,521
Work in process		--			12,177
Reserve for slow moving and obsolescence		(14,043	)		(14,043	)
	$	560,686		$	550,655

F-13

NOTE 4 - LICENSE TERMINATION

In August 2001, Finisar Corporation acquired 1,756,480 shares of Series A Preferred stock for $5 million in our first round of equity financing. In addition to Finisar’s equity investment, they 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 was $12 million including the preferred equity and debt. In January 2002, $45,500 of accrued interest was added to the balance of the loan. Through September 18, 2003, the Company paid $1,996,225 of principal on the loan to Finisar. On September 18, 2003, Finisar converted the $5,049,275 remaining principal balance on their term loan into 1,618,883 shares of our Series B Preferred Stock by executing an Exchange Agreement with the Company. During 2006, Finisar received 3,375,363 shares of common stock as a result of a stock dividend (see note 9). The 1,756,480 shares of Series A Preferred stock and 1,618,883 shares of Series B Preferred were ultimately exchanged for 3,375,363 shares of our common stock in the reverse merger transaction. As a result of the share dividend and the share exchange, Finisar ultimately held 6,750,726 shares of our common stock. At December 31, 2006 Finisar held 6,750,726 shares of our common stock.

Pursuant to the terms of the Exchange Agreement with Finisar, we granted Finisar a royalty free, fully paid, nonexclusive license to all of our existing and future intellectual property (the "IP License"). In addition, the Company granted Finisar favorable pricing assurances with respect to all Company products. Under terms contained in the original exchange agreement, the Company executed an agreement with Finisar Corporation to terminate the previously existing license agreement effective as of September 18, 2006. As consideration for terminating the IP License agreement, the Company issued to Finisar a $6,000,000 secured note payable (see Note 7). The value of the note was recognized as a license termination fee in the accompanying consolidated statements of operations for the year ending December 31, 2006.

NOTE 5 - PROPERTY AND EQUIPMENT

 Property and equipment consist of the following:

	March 31, 2007 (Unaudited)			December 31, 2006			Useful Lives
Computer software	$	66,932		$	66,932			3 years
Furniture and fixtures		121,558			121,558			6 years
Computer equipment		147,078			146,000			3 years
Office equipment		69,362			69,362			6 years
Lab and manufacturing equipment		5,012,318			4,964,608			6 years
Leasehold improvements		3,869,655			3,869,656			14 years
		9,286,903			9,238,116
Less accumulated depreciation and amortization		(5,524,087	)		(5,276,320	)
Property and equipment, net	$	3,762,816		$	3,961,796

F-14

Depreciation and amortization expense related to property and equipment amounted to $1,220,231 and $1,167,578 for the years ended December 31, 2006 and 2005 respectively. For the three months ended March 31, 2007 and 2006, depreciation and amortization expense was $247,767 and $301,190 respectively.

NOTE 6 - NOTE PAYABLE RELATED PARTIES

Notes payable related parties is as follows:

	December 31, 2006		December 31, 2005
Notes payable related parties	$	—	$	500,000
Loan discount	$	—		(156,800	)
	$	—	$	343,200

The Company was indebted to the Chairman of the Board of Directors and the Chief Financial Officer of the Company under a $500,000 note agreement entered into in November 2005. The note was due January 2006, was extended to April 25, 2006, and was paid in April 2006. Until the note was repaid, monthly interest only payments were required. The interest rate was 10% per annum. The note was secured by all the assets of the Company. The amount outstanding at December 31, 2005 was $500,000. The Company paid a $25,000 loan origination fee to the related parties in accordance with the note agreement. As part of the original loan agreement, the Company granted to the note holders warrants to purchase 320,000 shares of common stock. These warrants were valued at $0.98 per warrant using the Black-Scholes option pricing model. The assumptions used in the model were: risk free interest rate, 4.47%, expected life,10 years, expected volatility, 70%, no expected dividends. Accordingly, the Company recorded a loan discount of $313,600 which the Company amortized to interest expense over the original life of the loan, of which $156,800 was amortized during the year ending December 31, 2005. The remaining balance was of $156,800 fully amortized as of December 31, 2006 and is reflected as interest expense in the accompanying statement of operations. The Company issued 900,000 warrants to the note holders in 2006 as consideration for extending the original due date of the note from January 2006 to April 2006. The value of these warrants, approximately $690,000, was charged to interest expense during the year ended December 31, 2006. These warrants were valued using the Black-Scholes option pricing model. The assumptions used in the model were: risk free interest rate, 4.59% and 4.67%, expected life, 5 years, expected volatility, 70%, no expected dividends. Different interest rates were used because the warrants were issued on different days. 

F-15

NOTE 7 - NOTES PAYABLE

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

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

 As of March 31, 2007 notes payable consist of the following (Unaudited):

	Loan Balance		Loan discount			Current portion		Non-current Portion
Senior Secured Notes  (a)	$	578,274	$	(147,169	)	$	431,105	$	--
Subordinated Secured Convertible Notes  (b)		1,280,000		(116,800	)		683,800		479,400
Finisar Secured Note (c)		5,852,818		--			316,607		5,536,211
Secured Equipment Financing (d)		487,581		--			116,736		370,845
	$	8,198,673	$	(263,969	)	$	1,548,248	$	6,386,456

(a) Senior Secured Notes Payable

During 2004, the Company issued $3,250,000 of notes payable to investors. The term of the notes are 24 months, bearing interest at 10% per annum, with no principal and interest payments required for the initial 3 months. The remaining 21 months required principal and interest payments sufficient to pay the loan in full at the end of 24 months. The notes are secured by all of the assets of the Company, including its intellectual property. The notes have 1 warrant for every $1.33 of principal, with each warrant being exercisable into 1 share of common stock at $3.75 per share. The warrants are immediately vested and have a 6 year term. The Company determined there was no accounting value to be assigned to the warrants at the date of issuance, based a calculation using an option pricing model. In January 2006, we

F-16

NOTE 7 - NOTES PAYABLE (Continued)

adjusted the exercise price of 2,325,000 of these warrants to $1.25. The company recorded the difference in the value of the warrants immediately prior to the modification and the value of the warrants following modification of $744,000 as additional loan discount to be amortized over the remaining life of the loan. Interest expense includes $131,294 related to the amortization of this discount during the three months ended March 31, 2007. Of the total notes above, $2,500,000 was subscribed to by a limited partnership of which an officer of the Company is an owner, of which $523,237 was outstanding as of March 31, 2007.

During 2005, five of the seven note holders agreed to modify the terms of their notes. The modifications include deferring principal payments from April 2005 to March 2006, thereafter principal payments are due until the notes are fully paid in May 2007. As of March 31, 2007, the required monthly principal and interest payments are $149,571. In addition, warrants to purchase 840,000 shares of common stock were issued to the five note holders who elected to defer principal payments on their loans. The warrants were valued at $0.71 a warrant or $596,400, using an option pricing model and were reflected as a loan discount amount, which is netted against the loan principal balance. The assumptions used in the model were: risk free interest rate, 4.41%, expected life, 4.66 years, expected volatility, 70%, no expected dividends. The loan discount fee is being amortized over the remaining life of the loan. Interest expense includes $89,460 related to the amortization of this discount during the quarters ended March 31, 2007 and March 31, 2006. The effective interest rate on these loans, giving effect for the modified terms and the loan discount is 24.4%. 

 (b) Subordinated Secured Convertible Notes Payable

During 2005, the Company issued $1,280,000 of subordinated, secured notes to nine note holders. The terms of the notes include interest only payments for 24 months, thereafter the loans will be paid in full over the next twelve months. The loans are secured by all the assets of the Company but take a secondary position to the Senior Secured Notes. The interest rate on the loans is 10% per annum. The loans, at the option of the note holder, may be extended an additional three years, with the same terms as the original three year period. If the note holders elect to extend the loan, they will receive additional warrants to purchase 26,666 shares of the Company’s common stock for every $100,000 loaned to the Company. The conversion feature which is in effect during the time the loan is outstanding, allowed the note holder to convert outstanding principal and interest into common stock at a conversion price of $3.75.

The conversion price is subject to downward revision upon the occurrence of certain stock offerings. The downward revision is subject to a floor of $0.90 and allows the note holder to convert at the price of the most recent stock offering. The conversion price was reduced to $1.25 in December 2005.

The Company issued warrants to purchase 320,000 shares of the Company’s common stock in connection with this debt offering during 2005. The warrants were valued at $0.73 a warrant or $233,600, using an option pricing model and are reflected as a loan discount amount, which has been netted against the loan principal balance. The assumptions used in the model were: risk free interest rate, 4.41%, expected life, 5 years, expected volatility, 70%, no expected dividends. The loan discount fee is being amortized over the life of the loan. Interest expense includes $19,467 relating to the amortization of this discount during the quarters ending March 31, 2007 and March 31, 2006. 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 stock, the Company has sufficient authorized shares available for conversion , there is a fixed maximum shares that required to be issued and there are no provisions that could require a net cash settlement.

(c) Finisar Senior Secured Note

During the year ended December 31, 2006, an agreement between Finisar and QPC to terminate the License Agreement dated September 18, 2003 became effective. In consideration of the termination of the license, the Company issued

F-17

NOTE 7 - NOTES PAYABLE (Continued)

Finisar a $6 million promissory note. Payment terms of the note require $1,000,000 of the principal together with interest thereon payable at the rate of 9.7% per annum, in thirty-six monthly installments, commencing on October 18, 2006. The remaining $5,000,000 of the principal shall be paid in full on September 18, 2009 and accrues interest at the rate of 9.7% per annum payable in arrears, on the 18th day of each calendar month commencing on October 18, 2006. The note is secured by substantially all of our assets and is subject to an inter-creditor agreement with the senior secured note holders (see paragraph (a) above).

(d) Secured Equipment Financing

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

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

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

The aggregate maturities of long-term debt for each of the next five years are as follows as of March 31, 2007:

Year Ending December 31,	Amount
Remainder of 2007	$	1,338,329
2008		1,328,492
2009		5,395,838
2010		14,539
2011 and thereafter		121,475
	$	8,198,673

NOTE 8 - RECAPITALIZATION

On May 12, 2006, QPC Lasers, Inc. executed a Share Exchange Agreement by and among Julie Morin, its majority stockholder, and Quintessence Photonics Corporation and substantially all of its stockholders. Under the agreement QPC issued one share of its common stock to the Quintessence Stockholders in exchange for each share of Quintessence common stock. The transaction has been accounted for as a reverse merger (recapitalization) in the accompanying consolidated financial statements with Quintessence deemed to be the accounting acquirer, and QPC deemed to be the legal acquirer. As such, 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 additional paid in capital. Furthermore, the Series A, Series B, and Series C Preferred shares of Quintessence existing prior to the Share Exchange Agreement has been retroactively restated for the equivalent number of common shares received in the exchange.

All share and per share amounts have been retroactively restated as if the Share Exchange Agreement occurred at the beginning of the earliest period presented herein.

The effect of the recapitalization on the previously reported outstanding shares of preferred and common stock of Quintessence is as follows:

	Common Stock QPC		Quintessence			Preferred Stock Series A			Series B
January 1, 2004,  Previously Stated		-		5,166,156			3,172,203			2,525,468
Conversion of Quintessence Stock		5,166,156		(5,166,156	)		-			-
Conversion of Preferred Stock Series A and Series B to QPC Stock According to Terms of the Share Exchange Agreement, See Note 1		5,697,671		-			(3,172,203	)		(2,525,468	)
January 1, 2004, Restated		10,863,827		-			-			-

As part of the recapitalization, the preferred Series C stockholders converted each of their Series C shares for one share of QPC stock. The Series C preferred stock was issued subsequent to January 1, 2004 and is not presented above. All of the 1,597,975 shares of Series C preferred stock outstanding as of May 12, 2006 were converted to 1,597,975 shares of QPC common stock upon the reverse merger.

At December 31, 2005, the Company had 3,172,203 shares of $0.0001 par value Series A convertible voting preferred stock (“Series A”) outstanding, 2,525,468 shares of $0.0001 par value Series B convertible voting preferred stock (“Series B”) outstanding. All 5,697,671 shares of Series A and Series B preferred stock outstanding at May 12, 2006 were converted to 5,697,671 shares of QPC common stock upon the reverse merger as presented in the above table.

F-18

NOTE 8 - RECAPITALIZATION (Continued)

Terms of the Quintessence Photonics Corporation convertible preferred stock were as follows:

Dividends - The holders of outstanding Series A, B and C were entitled to receive, when and if declared by the Board of Directors, non-cumulative dividends at a rate of $0.23, $0.25, and $0.25 per share, respectively, as adjusted for any stock dividends, stock splits, recapitalization or similar events, payable in preference and priority to any distribution on common stock.

Liquidation Preference - In the event of liquidation, dissolution or winding up of the Company, either voluntary or involuntary, distributions to the stockholders of the Company shall be according to the following terms. The holders of Series A, B and C were entitled to receive prior and in preference to any distribution of any assets or property of the Company to holders of common stock an amount equal to $2.8466 per share for Series A, $3.11898 for Series B, and $3.75 for Series C, plus any declared and unpaid dividends. After payment had been made to the holders of Series A, B and C, the remaining assets and funds of the Company were available to be distributed among the holders of common stock and Series A, B and C on the basis of number of shares of common then outstanding and issuable upon conversion of Series A, B and C.

Voting Rights - The holders of Series A, B and C were entitled to the number of votes equal to the number of common stock into which each share of Series A, B and C could be converted on the record date with the same voting rights and powers equal to the voting rights and powers of the common stockholders. The holders of Series A, B and C were entitled to elect two directors. The holders of common stock were entitled to elect three directors.

Conversion - The holders of Series A, B and C had conversion rights into common stock at the option of the holder at any time after the issuance of such share. Each Series A, B and C shares would be automatically converted into common stock upon approval by vote or written consent of holders of more than 62⅔% of the total number of shares of Series A, B and C then outstanding. The number of shares of fully paid and non-assessable common stock into which each Series A, B and C could be converted would be determined by dividing the number of preferred shares by the Series A, B and C conversion price. The Series A, B and C conversion price was initially $2.8466, $3.11898 and $3.75, respectively, subject to adjustment for any stock dividends, stock splits, recapitalization or similar events. Each Series A, B and C shares would automatically convert into common stock upon effectiveness of an initial public offering, as defined, if the offering is less than $8.54 per share, as adjusted for any stock dividends, stock splits, recapitalization or similar events, and at a gross aggregate offering size of not less than $25,000,000.

NOTE 9 - STOCKHOLDERS’ EQUITY DEFICIENCY

Preferred Stock

The Company is authorized to issue a maximum of 20,000,000 shares of $0.001 par value preferred stock. No preferences have been set. The discretion of setting the preferences rests solely with the Company’s Board of Directors

Common Stock Issued

During 2005, 352,851 shares of QPC series C preferred stock were issued for net proceeds of $1,058,864. 221,000 shares of QPC common stock were issued for net proceeds of $215,500 and 90,000 shares of QPC common stock were issued upon exercise of options, resulting in proceeds of $32,400. These shares were exchanged for common stock of QPC in accordance with the recapitalization referred to in Note 8.

During the year ended December 31, 2006, the Company sold 11,726,681 shares of common stock in a private placement offering at $1.25 per share for gross proceeds of $14,658,351. The cash costs associated with these issuances was $2,323,942 resulting in net proceeds to the Company of $12,323,928. The private placement was made in two tranches.

F-19

NOTE 9 - STOCKHOLDERS’ EQUITY DEFICIENCY (Continued)

In Tranche I, the Company sold 572,526 units of equity instruments, at $5.00 per unit, consisting of 2,290,104 common shares and one warrant to purchase common stock for $1.50 for gross proceeds of $2,862,630. The purchase and sale agreement of these units included a requirement that the Company register such shares and warrants, and that if such shares are not registered, a penalty of 1% per month would accrue. The Company determined that penalty on the registration rights would cause the Company to recognize a warrant liability until such shares have been registered. As such, the Company determined that the fair value of the warrants of $211,835 at the date of issuance as calculated using an option pricing model should be established as a liability at the date of the agreement, and revalued each reporting period. The assumptions used in calculating the fair value of the warrants issued, using the Black-Scholes option pricing model were: risk free interest rate 4.76%, expected life 1.5 years, expected volatility 70%, no expected dividends. The Company filed a registration statement with the Securities and Exchange Commission on September 18, 2006, thereby fulfilling its obligations under the registration requirements. At September 18, 2006 the total fair value of the derivative liability was estimated to be $280,538. The net increase of $68,703 was recorded as loss on derivative instruments in the consolidated statement of operations, included in other income, and the remaining liability was eliminated and recorded in equity as it no longer met the criteria to be classified as a liability.

In Tranche II, the Company sold 9,436,577 shares of common stock at $1.25 per share for proceeds of $11,795,721. The underwriter also received warrants to purchase 2,345,341 shares of the Company’s common stock as compensation for the offering. The shares and warrants issued to the underwriter contain registration rights; however no penalties shall accrue in the event such shares are not registered. The Company calculated the value of the warrants issued to the underwriter as $1,984,612 based on an option pricing model. The value of such warrants was treated as a cost of capital.

During the year ended December 31, 2006, the Company issued 17,500 shares of common stock upon exercise of options, receiving net proceeds of $11,000. In addition, 2,500 shares of common stock were issued upon exercise of warrants for $3,750 of net proceeds. 

During the year ended December 31, 2006, the Company issued 1,200,000 shares of common stock to a consultant as compensation for services to be rendered. Fair value of the shares was determined to be $1.25 a share based on the offering price per common share of the private placements which occurred, and was calculated to be $1,500,000. The value of these shares was charged to investor relations expense.

Stock Dividend

On an action by unanimous written consent of the QPC Board of Directors dated October 10, 2005, the QPC Board of Directors approved the procedure of obtaining commitments from its then existing preferred stockholders to ensure it had enough proxy votes to facilitate an anticipated reverse merger. As such, during 2005 the Company offered to its then existing preferred stockholders, at the stockholder’s election, the ability to receive one share of common stock for each share of preferred stock owned. In order for the stockholder to elect this offer, the stockholder committed by proxy to vote for an anticipated reverse merger with a public company. As a result of this offer and acceptance by its then existing preferred stockholders, 7,160,111 shares of common stock was required to be issued by QPC. These shares were issued in 2006 and reflected as such in the accompanying consolidated statement of changes in stockholders' equity deficiency.

QPC also offered to the then existing preferred C stockholders who took advantage of the offer mentioned in the above paragraph, in exchange for a signed proxy, the choice of adjusting the exercise price of their warrants from $3.75 to $1.25 or to exchange their warrants for QPC common stock in the ratio of three shares of common stock for every four warrants held. There were warrants to purchase 2,220,537 shares of the Company’s common stock outstanding prior to the offer. 1,997,788 of those warrants were exchanged for stock, leaving, 222,749 of warrants originally issued to preferred C stockholders. As a result of this offer, 1,498,311 shares of common stock were required to be issued by QPC. These shares were issued in 2006 and reflected as such in the accompanying consolidated statements of changes in stockholders' equity deficiency.

The Company determined that the common stock to be issued to the preferred stockholders in exchange for their proxy should be accounted for as a stock dividend, with the value of the exchange being the fair value of the common stock to be issued. The fair value of $10,823,028 was determined based on the offering price of $1.25 per common share of the private placements which occurred subsequent to year end. As a result of the recapitalization referred to in Note 8, these consolidated financial statements reflect the dividend as a common stock dividend in the year ended December 31, 2005.

F-20

NOTE 10 - STOCK OPTIONS AND WARRANTS

Stock Options

In July 2001, QPC’s Board of Directors approved the 2001 Stock Option Plan (the “2001 plan”) under which certain employees, directors, officers and independent contractors may be granted options to purchase up to an aggregate of 1,215,295 shares of the Company’s common stock. In May 2004, the 2001 plan was amended to increase the number of options which may be granted to 2,555,295. The options vest over a four-year period. Upon the share exchange described in Note 1, these options were converted to options described in the next paragraph.

In May 2006, QPC adopted the 2006 stock option plan (the “2006 plan”) under which certain employees, directors, officers and independent contractors may be granted options to purchase up to an aggregate of 5,400,000 shares of the Company’s common shares. Option awards are generally granted with an exercise price equal to the market price of QPC stock on the date of grant. Vesting generally occurs on an award by award basis. The options may vest over a period not to exceed 10 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on the volatilities of public entities which are in the same industry as QPC. For purposes of determining the expected life of the option, the full contract life of the option is used. The risk-free rate for periods within the contractual life of the options is based on the U. S. Treasury yield in effect at the time of the grant.

	Three months ended March 31, 2007			Year ended December 31, 2006			Year ended December 31, 2005
Expected volatility		70	%		70	%		0	%
Weighted average volatility		70	%		70	%		0	%
Expected dividends		-			-			-
Expected term (in years)		6			10			10
Risk free rate		4.5.	%		4.37-4.71	%		3.94-5.05	%

F-21

NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)

A summary of option activity as of December 31, 2006, December 31, 2005 and March 31, 2007 and changes during the years and three months then ended is presented below:

Options	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2005		1,271,500		$	0.38
Granted		827,500		$	0.49
Exercised		(90,000	)	$	0.38
Forfeited or expired		(43,750	)	$	0.38
Outstanding at December 31, 2005		1,965,250		$	0.40
Granted		1,642,916		$	1.31
Exercised		(17,500	)	$	0.63
Forfeited or expired		(49,583	)	$	0.38
Outstanding at December 31, 2006		3,541,083		$	0.73
Granted		150,000		$	1.25
Exercised		--		$	--
Forfeited or expired		--		$	--
Outstanding at March 31, 2007		3,691,083		$	0.85		8.06	$	2,051,627
Exercisable at March 31, 2007		2,054,833		$	0.46		6.98	$	1,879,202

The weighted-average grant date fair value of options granted during 2005, 2006 and 2007 was $1.10, $1.07 and $0.83, respectively.

For the year ended December 31, 2006, the value of options vesting during the period was $295,743 and has been reflected as compensation cost in the accompanying consolidated financial statements.

F-22

NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)

For the three months ended March 31, 2007 and 2006, the value of options vesting during the period was $115,361 and $37,698 respectively, and has been reflected as compensation cost. As of March 31, 2007, the Company has unvested options of $2,255,107 which will be reflected as compensation cost in future periods as the options vest.

Warrants

The Company generally issues warrants in connection with certain debt and equity offerings. All warrants issued immediately vest. The warrants allow the holder to purchase QPC common stock at a fixed exercise price ranging from $1.25 to $3.75. 346,666 of the warrants outstanding do allow for a modification of the exercise price. The modification is a downward revision subject to a floor of $0.90 and allows the warrant holder to exercise at the price of the most recent stock offering. The fair value of each warrant is estimated on the date of grant using the Black-Scholes option pricing

model that uses the assumptions noted in the following table. Expected volatility is based on the volatilities of public entities which are in the same industry as QPC. For purposes of determining the expected life of the warrant, the full contract life of the warrant is used. The risk-free rate for periods within the contractual life of the warrants is based on the U.S. Treasury yield in effect at the time of the grant. Of the 8,456,464 warrants outstanding at March 31, 2007, all but 572,526 warrants have a cashless exercise feature. The feature allows the warrant holder, at the election of the warrant holder, to receive an amount of stock equal to stock the warrant holder is otherwise entitled to receive, multiplied by the amount the warrant is in-the-money, divided by the market price of the stock.

	Year ended December 31, 2006			Year ended December 31, 2005
Expected Volatility		70	%		70	%
Weighted Average Volatility		70	%		70	%
Expected term (in years)		5			6
Risk-free rate		4.38% - 5.02	%		4.41	%

There were no warrants granted, exercised or cancelled during the three months ended March 31, 2007.

F-23

NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)

A summary of warrant activity and changes during the years ended December 31, 200 and December 31, 2006 and the three months ended March 31, 2007 is presented below:

Warrants	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)
Outstanding at January 1, 2005		4,305,186		$	3.75
Granted		2,207,033		$	1.25
Cancelled		(1,997,788	)	$	3.75
Outstanding at December 31, 2005		4,514,431		$	2.53
Granted		3,944,533		$	1.30
Exercised		(2,500	)	$	1.50
Outstanding at December 31, 2006 and March 31, 2007		8,456,464		$	1.30		3.36
Exercisable at December 31, 2006 and March 31, 2007		8,456,464		$	1.30		3.36

The warrants outstanding were issued and accounted for as follows:

Underlying transaction Leading to Issuance of warrant	Warrants Issued			Accounting Treatment		Exercise Price		Approximate Remaining Term (Years)
Issued to senior secured note holders (*)	2,437,500			Based on an option pricing model, the Company determined there was no accounting value to be assigned to the warrants		$1.25-3.75		1.2-3.2
Issued to Series C stockholders tranche I		1,867,686			Charged to series C stock	$	3.75		--
Outstanding at December 31, 2004		4,305,186
Issued to Series C stockholders tranche II		352,851			Charged to series C stock	$	3.75		2
Warrants cancelled - Series C stockholders		(1,997,788	)
Issued to senior secured note holders who elected to modify their note terms		840,000			Loan discount fee	$	1.25		3.2
Issued to subordinated secured convertible note holders		320,000			Loan discount fee	$	1.25		3.3
Consultants used in a successful stock offering		374,182			Additional paid in capital.	$	1.25		2
Issued to related parties in connection with a related party loan		320,000			Loan discount fee	$	1.25		3.6
Outstanding at December 31, 2005		4,514,431
Consultant used for investor relations		100,000			Charged to general and administrative expense	$	1.25		3.4
Issued to subordinated note holder upon loan extension		26,666			Charged to debt financing cost	$	1.25		8.3
Issued to related parties in connection with extension of a related party loan		900,000			Interest expense	$	1.25		5
Issued to stock dealers associated with a stock offering		2,345,341			Additional paid in capital	$	1.25		4.3
Issued to investors in common stock		572,526			Additional paid in capital	$	1.50		0.6
Warrants exercised		(2,500	)
Total Warrants outstanding at March 31, 2007		8,456,464

Subsequent to March 31, 2007 the Company issued 29,256,319 warrants in connection with a financings (see note 13).

F-24

NOTE 11 -   INCOME TAXES

At December 31, 2006, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $33,000,000 for Federal and for state purposes. The Federal carryforward expires in 2026 and the state carryforward expires in 2016. Given the Company’s history of net operating losses, management has determined that it is more likely than not the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit. Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carryforwards and will recognize a deferred tax asset at that time.

Significant components of the Company’s deferred income tax assets are as follows:

	March 31, 2007 (Unaudited)			December 31, 2006
Deferred income tax asset:
Net operating loss carryforward		12,040,000		$	11,220,000
Valuation allowance		(12,040,000	)		(11,220,000	)
Net deferred income tax asset	$	—		$	—

For the three months ended March 31, 2007, management is evaluating the value of its carryforwards given the change of control which has occurred. Management does not believe the carrying value of the deferred tax asset will change materially for that presented above.

Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:

	Three Months Ended March 31,						Year Ended December 31,
	2007			2006			2006			2005
Tax expense at the U.S. statutory income tax		(34.00	)%		(34.00	)%		(34.00	)%		(34.00	)%
Increase in the valuation allowance		34.00	%		34.00	%		34.00	%		34.00	%
Effective tax rate		—	%		—	%		—	%		—	%

F-25

NOTE 12 -   COMMITMENTS AND CONTINGENCIES

Operating Lease

On June 1, 2001, the Company signed an operating lease for office, research and development, and manufacturing space. The lease term is 60 months beginning June 1, 2001. The lease provides for two 5-year renewal terms. On August 22, 2005, the original lease was amended to extend the lease term to May 2016 and includes one 5 year renewal term. The Company also leases a vehicle under an operating lease. The Company has made a substantial investment in leasehold improvements based upon its ability to renew its lease for the periods shown above. The table below includes an estimate for estimated renewals.

The future minimum lease commitments are as follows as of March 31, 2007:

Year Ended December 31	Amount
Remainder of 2007	$	228,718
2008		304,957
2009		304,957
2010		304,957
2011		304,957
Thereafter		1,346,894
Total minimum lease payments	$	2,795,440

Rent expense for the years ended December 31, 2006 and 2005 was $300,192 and $299,534, respectively. For the three months ended March 31, 2007 and 2006, rent expense was $76,239 and $76,239 (Unaudited), respectively.

During 2005 and 2004, the Company subleased a portion of its leased office, research and development, and manufacturing space under three separate subleases. The three sublease terms were 24 months beginning January 8, 2003, a month-to-month beginning April 1, 2004, and a month-to-month that began in January 2002. The sublease which commenced January 8, 2003 has converted to a month-to-month lease beginning January 2006. Rental income for the years ended December 31, 2006 and 2005 was $88,452 and $85,580, respectively. Rental income for the three months ended March 31, 2007 and 2006 was $16,170 and $21,420 (Unaudited), respectively. Rental income is included in other income.

Employee Benefit Plan

The Company established a defined contribution plan allowing eligible employee income deferrals as permitted by Section 401 (k) of the Internal Revenue Code effective January 1, 2002. This plan covers substantially all full-time employees after minimum service requirements are met. The Company contributes a percentage of participants’ cash contribution subject to certain limits.

F-26

NOTE 13 - SUBSEQUENT EVENT

Effective April 16, 2007, the Company entered into securities purchase agreements with certain investors, pursuant to which the Company issued the investors secured convertible debentures in the aggregate principal amount of $7,976,146 at an original issue discount of 10%. The April Secured Debentures have a term of 2 years and pay interest at the rate of 10% per annum, and are convertible into shares of the Company’s common stock at an initial conversion price of $1.05 per share, subject to customary adjustments as set forth therein and any applicable Milestone Adjustments as described below. In addition, the Company issued to the investors five year warrants to purchase up to 11,394,495 shares of the common stock at an exercise price of $1.05 per share, subject to adjustment therein, including full-ratchet and other standard anti-dilution protection and any applicable Milestone Adjustments as described below.

The aggregate purchase price for the April Secured Debentures and the warrants was $7,178,531. The conversion price of the April Secured Debentures and the exercise price of the warrants may be adjusted downwards (“Milestone Adjustments”) if the Company fails to meet certain revenue projections for any one or more of the following periods (i) the nine (9) month period ending September 30, 2007, or (ii) the twelve (12) month period ending December 31, 2007 and (iii) the six (6) month period ending June 30, 2008. The effective date of the Securities Purchase Agreements is April 16, 2007.

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 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.

The Company is in the process of evaluating the recent financing transactions to determine the appropriate accounting treatment, and presently believes elements of the financial instrument may be required to be accounted for as derivative liabilities under FAS 133 an EITF 00-19. The valuation of the potential derivatives, if so determined, is expected to be significant to the balance sheet and statement of operations in the second quarter of 2007.

NOTE 14 - RESTATEMENT OF PRIOR PERIODS

Restatement of Prior Periods - June 30, 2006

The Company has restated its financial statements as of and for the three and six months ended June 30, 2006.  In addition, certain disclosures in note 7 of the notes to the consolidated financial statements have been revised to reflect the restatement adjustments.  The Company’s determination to restate these financial statements was made after a reexamination of the transactions to account for shares of common stock issued for services and the modification of warrants to purchase shares of common stock that occurred in January 2006. The Company determined the original accounting treatment was inappropriate under GAAP.

Consultant Shares

On April 3, 2006 the Company entered into an agreement with a consultant to provide services to the Company over a one year period. As compensation for the services to be provided, the Company issued 1.2 million shares of common stock to the consultant. In accordance with EITF 96-18, “Accounting For Equity Instruments That Are Issued To Other Than Employees For Acquiring, or in Conjunction with Selling, Goods and Services,” the Company valued the shares at grant date and determined the value of the shares issued based upon the current price of the sales of common stock, which was approximately $1.25 per share. These shares were accounted for as deferred compensation at the time of issuance to be expensed over the term of the contract. In September 2006, the Company re-evaluated the accounting treatment of the shares granted to the consultant and determined that in accordance with EITF 00-18, “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees,” the full value of the shares should have been expensed at June 30, 2006 since the shares were fully vested and non-forfeitable on the date of issuance. In order to reflect this change, our restated financial statements for the period ending June 30, 2006 remove the deferred compensation value of these shares on our balance sheet and record the expense for the full value of these shares in our consolidated statement of operations. This non-cash expense is included within our General and Administrative expenses for the three and six months ended June 30, 2006.

Modification of Warrants

In the second quarter of 2004, we issued 2,437,500 warrants to purchase common stock to various lenders in connection with a senior secured two-year note transaction. The exercise price of each warrant was initially $3.75. In the second quarter of 2005, approximately $2.1 million of the $2.4 million outstanding balance of the note was extended for an additional year. In January 2006, we adjusted the exercise price of 2,325,000 of these warrants to $1.25 upon the closing of the Brookstreet Tranche I offering. We did not initially record the expense associated with this modification, and our financial statements did not reflect the expense associated with this modification at June 30, 2006. In order to reflect this change, the Company has recorded the change in fair value of the warrants immediately prior to the modification and the value of the warrants following the modification as an additional loan discount of $744,000 to be amortized over the remaining life of the loan. Interest expense includes $132,395 and $262,589 related to the amortization of this discount for the three and six months ending June 30, 2006, respectively.

The accompanying financial statements for the three and six months ended June 30, 2006 have been restated to reflect the changes described above. The impact of these adjustments are summarized below: 

F-27

NOTE 14 - RESTATEMENT OF PRIOR PERIODS (Continued)

Changes to Statement of Operations:

		For the three months ended June 30, 2006			For the six months ended June 30, 2006
Net Loss
Net Loss as previously reported	$	(3,127,904	)	$	(6,258,306	)
Additional investor relations expense for the issuance of stock for services		(1,125,000	)		(1,125,000	)
Additional interest expense as a result of warrant modification		(132,395	)		(262,589	)
Net Loss as restated	$	(4,385,299	)	$	(7,645,895	)
Loss per share
Loss per share as previously reported	$	(0.10	)	$	(0.20	)
Recognition of adjustments		(0.04	)		(0.05	)
Loss per share as restated	$	(0.14	)	$	(0.25	)

Changes to Balance Sheet:

		June 30, 2006 Previously Reported			Adjustments			June 30, 2006 As Restated
Current Liabilities	$	2,382,330		$	(481,411)	(A)	$	1,900,919
Long term debt less current portion		1,104,800			—			1,104,800
Total Liabilities		3,487,130			(481,411	)		3,005,719
Stockholders’ Equity
Common stock		37,311			—			37,311
Additional paid in capital		47,613,729			744,000	(B)		48,357,729
Unearned compensation		(1,125,000	)		1,125,000	(C)		—
Accumulated deficit		(39,072,092	)		(1,387,589	)(D)		(40,459,681	)
Total Stockholders’ Equity		7,453,948			481,411			7,935,359
Total liabilities & stockholders’ equity	$	10,941,078		$	—		$	10,941,078

(A)	Represents additional loan discount of $744,000 for modification of 2,325,000 warrants measured as the change in fair value of the warrants immediately preceding the modification and the fair value of the warrants following the modification less $262,589 accumulated amortization of the additional loan discount
(B)	Represents $744,000 for modification of 2,325,000 warrants measured as the change in fair value of the warrants immediately preceding the modification and the fair value of the warrants following the modification
(C)	Represents a $1,125,000 decrease in unearned compensation as a result of recognizing the expense associated with the issuance of common stock for services
(D)	Represents $1,125,000 additional General and Administrative expense for the issuance of common stock for services and $262,589 of additional interest expense as a result of amortization of the additional loan discount for the modification of warrants

The net loss, issuance of common stock for services, and warrant modification line items in the consolidated statements of cash flows for the six months ended June 30, 2006 have been adjusted to reflect the restatements; however, cash flows from operating, investing and financing activities were not affected by the restatement.

Restatement of Prior Periods - September 30, 2006

The Company restated its financial statements as of and for the three and nine months ended September 30, 2006.  In addition, certain disclosures in the notes to the consolidated financial statements have been revised to reflect the restatement adjustments. We concluded that it was necessary to restate our financial results for the interim period ended September 30, 2006 to reflect additional non-operating losses related to the classification of and accounting for: (1) the conversion feature of our subordinated convertible notes payable issued in August 2005, the warrants to purchase common stock associated with these notes, and the amortization of the discount recorded with respect to the subordinated convertible note (see Note 7 for further discussion), (2) the note payable issued to Finisar Corporation for $6,000,000 for the license termination, (3) the modification of warrants held by investors in our Senior Secured Notes Payable, and (4) common stock issued to a consultant for services rendered in the three months ended June 30, 2006.

Embedded Derivatives

We initially classified the value of the conversion features and warrants to purchase common stock related to the issuance of our subordinated secured convertible notes payable in the equity section of the balance sheet. In September 2006, we analyzed these instruments and determined they should be treated as derivative liabilities subject to FAS 133, “Accounting for Derivative Instruments and Hedging Activities.” In filing our Amendment No. 2 to a registration statement on Form SB-2 which was subsequently withdrawn, we restated our previous December 31, 2005 financial statements and accounted for these instruments as derivatives and recorded changes in the fair value of these instruments in the consolidated statement of operations as “gain (loss) on change in fair value of embedded derivatives.”

In December 2006, the Company reevaluated the features of these instruments, and determined that the initial accounting treatment was appropriate as the instruments are to be settled in shares and fulfill the conditions set forth in EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” According to paragraphs 12 through 32 of EITF 00-19 these instruments are not derivative liabilities, based on the analysis, principally because they are convertible into unregistered common shares, we have sufficient authorized shares available for conversion, there is a fixed maximum shares that required to be issued and there are no provisions that could require cash settlement. Therefore, these derivative instruments are accounted for in the equity section of the balance sheet. We have restated our balance sheet and statement of operations for the nine months ended September 30, 2006 to adjust for this. The December 31, 2005 financial statements reflect the original accounting treatment as previously audited and reported.

F-28

NOTE 14 - RESTATEMENT OF PRIOR PERIODS (Continued)

License Termination Fee

We executed an agreement effective as of September 18, 2006 with Finisar Corporation to terminate a previously existing license agreement dated September 18, 2003 (“IP License Agreement”). As consideration for termination of the IP License Agreement, we issued to Finisar a $6,000,000 secured note payable (see Note 7).

Based on our historical relationship with Finisar since 2001, and their substantial equity ownership in our Company, we originally accounted for this transaction as a deemed distribution of equity to Finisar at September 30, 2006. Upon further review of this transaction, we have determined that this transaction should have been expensed in the period in which it was incurred. Accordingly, we have restated our results for the nine months ended September 30, 2006 to recognize this expense.

Modification of Warrants

In the second quarter of 2004, we issued 2,437,500 warrants to purchase common stock to various lenders as part of a senior secured two-year note transaction. The exercise price of each warrant was initially $3.75. In the second quarter of 2005, approximately $2.1 million of the $2.4 million outstanding balance of the note was extended for an additional year. In January 2006, we adjusted the exercise price of 2,325,000 of these warrants upon the closing of the Brookstreet Tranche I offering. We have recorded a loan discount of $744,000 in the nine months ended September 30, 2006 to record the difference in the value of the warrants immediately prior to the modification and the value of the warrants following modification. Interest expense includes $393,882 related to amortization of this discount.

The accompanying financial statements for the nine months ended September 30, 2006 have been restated to effect the changes described above. The impact of these adjustments are summarized below: 

Changes to Statement of Operations:

		For the nine months ended September 30, 2006			For the nine months ended September 30, 2005
Net Loss
As previously reported	$	(9,038,663	)	$	(5,809,509	)
Remove gain on embedded derivative		(788,000	)		(12,000	)
Additional interest expense as a result of warrant modification		(393,882	)		—
Remove additional offering expense associated with embedded derivative		—			188,000
Lower amortization of loan discount		261,600			38,033
License Termination Fee		(6,000,000	)		—
As restated	$	(15,958,945	)	$	(5,595,476	)
Loss per share
As previously reported	$	(0.31	)	$	(0.47	)
Recognition of adjustments		(0.24	)		0.02
As restated	$	(0.55	)	$	(0.45	)

Changes to Balance Sheet:

		September 30, 2006 Previously Reported			Adjustments			September 30, 2006 As Restated
Current Liabilities	$	2,751,611		$	(1,041,429	)(A)	$	1,710,182
Long term debt less current portion		6,160,564			553,356	(B)		6,713,920
Total Liabilities		8,912,175			(488,073	)		8,424,102
Stockholders’ Equity
Common stock		38,559			—			38,559
Additional paid in capital		43,146,254			6,977,600	(C)		50,123,854
Accumulated deficit		(42,283,204	)		(6,489,527	)(D)		(48,772,731	)
Total Stockholders’ Equity		901,609			488,073			1,389,682
Total liabilities & stockholders’ equity	$	9,813,784		$	—		$	9,813,784

(A)	Represents the sum of $800,000 decrease for fair value of embedded derivative, additional senior secured loan discount of $431,118, less $189,689 net decrease in subordinated secured convertible loan discount
(B)	Represents an $814,956 decrease in loan discount less $261,600 less amortization of loan discount
(C)	Represents the sum of $233,600 value of the loan discount, $6,000,000 license termination fee originally charged to paid in capital, and $744,000 value of warrant modification
(D)	Represents the sum of $120,000 eliminate recognition of loss on embedded derivative 2005, $122,755 lower amortization of loan discount in 2005, $188,000 value of embedded derivative over loan amount charged to offering expense in 2005, $261,600 lower amortization of subordinated secured loan discount, less $788,000 elimination of recognition of gain on embedded derivative, less $393,882 additional amortization of senior secured loan discount, and less $6,000,000 license termination fee

The net loss, loan discount, license termination fee, warrant modification, and loss on change in fair value of embedded derivative line items in the consolidated statements of cash flows for the nine months ended September 30, 2006 has been adjusted to reflect the restatements; however, cash flows from operating, investing and financing activities were not affected by the restatement.

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NOTE 14 - RESTATEMENT OF PRIOR PERIODS (Continued)

Consultant Shares

In addition to the adjustments presented above, the year-to-date totals reflect the adjustment discussed above with respect to consultant shares. This non-cash expense is included within our General and Administrative expenses for the nine months ended September 30, 2006.

Restatement of Prior Periods - Year Ended December 31, 2005

The Company restated its financial statements for the year ended December 31, 2005.  In addition, certain disclosures in the notes to the consolidated financial statements have been revised to reflect the restatement adjustments. We concluded that it was necessary to restate our financial results for the year ended December 31, 2005 to include the loss attributable to common stockholders as a result of the preferred stock dividend that occurred in 2005. In October 2005, our Board authorized the issuance of one share of common stock for each outstanding share of preferred stock held by a preferred stockholder who granted a proxy to management in connection with a proposed reorganization of the Company. As originally filed in a registration statement which was subsequently withdrawn, our financial statements for the year ended December 31, 2005 did not reflect any charge for this stock issuance. Upon further review of the guidance provided in EITF topics D-42 and D-82, we determined that the fair value of the stock issued to preferred shareholders should be accounted for as a stock dividend. The fair value of $10,823,028 was determined based on the offering price of $1.25 per share in certain private placements which occurred in early 2006. The effect of this change to our Statement of Operations is reflected below.

Changes to Statement of Operations:

		For the year ended December 31, 2005
Net Loss
Net Loss as previously reported	$	(7,777,858	)
Preferred stock dividend		(10,823,028	)
Net Loss as restated	$	(18,600,886	)
Loss per share
Loss per share as previously reported	$	(0.63	)
Recognition of adjustments		(0.86	)
Loss per share as restated	$	(1.49	)

F-30

PART II — INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

Our Articles of Incorporation limit the liability of our directors to the fullest extent permitted under Section 78.037 of the Nevada General Corporation Law. As permitted by Section 78.037 of the Nevada General Corporation Law, our Bylaws and Articles of Incorporation also include provisions that eliminate the personal liability of each of its officers and directors for any obligations arising out of any acts or conduct of such officer or director performed for or on behalf of the Company. To the fullest extent allowed by Section 78.751 of the Nevada General Corporation Law, we will defend, indemnify and hold harmless our directors or officers from and against any and all claims, judgments and liabilities to which each director or officer becomes subject to in connection with the performance of his or her duties and will reimburse each such director or officer for all legal and other expenses reasonably incurred in connection with any such claim of liability. However, we will not indemnify any officer or director against, or reimburse for, any expense incurred in connection with any claim or liability arising out of the officer’s or director’s own gross negligence or willful misconduct.

The provisions of our Bylaws and Articles of Incorporation regarding indemnification are not exclusive of any other right of the Company to indemnify or reimburse our officers or directors in any proper case, even if not specifically provided for in our charter or Bylaws.

Item 25. Other Expenses of Issuance and Distribution.

The following is an itemized statement of all expenses, all of which we will pay, in connection with the registration of the common stock offered hereby:

	Amount
SEC Filing Fee	$	458
Blue Sky Fees and Expenses		14,000	*
Legal Fees		75,000	*
Accounting Fees and Expenses		50,000	*
Printing and Engraving Expenses		10,000,	*
Miscellaneous		10,000	*
Total	$	159,458

*Estimates

Item 26. Recent Sales of Unregistered Securities.

In September 2004, while we were known as “Planning Force, Inc.”, we issued 10,000,000 shares of our common stock to Julie Morin, our founding stockholder and an officer and director, in exchange for cash in the amount of $10,000. This sale of stock did not involve any public offering, general advertising or general solicitation. At the time of the issuance, Ms. Morin had fair access to and was in possession of all available material information about our Company, as she was then an officer and director of Planning Force, Inc. The shares bear a restrictive transfer legend in accordance with Rule 144 under the Securities Act. On the basis of these facts, we claim that the issuance of stock to our founding stockholder qualifies for the exemption from registration contained in Section 4(2) of the Securities Act.

In November 2004, we completed an offering of our common stock to a group of private investors. We issued 460,000 shares of our common stock for cash at $0.05 per share to twenty three stockholders for a total offering price of $23,000. This November 2004 transaction (1) involved no general solicitation or general advertising, (2) involved less than thirty-five non-accredited purchasers, and (3) relied on a detailed disclosure document to communicate to the investors all material facts about Planning Force, Inc., including an audited balance sheet and reviewed statements of income, changes in stockholders' equity and cash flows. Thus, we believe that the offering was exempt from registration under Regulation D, Rule 505 of the Securities Act.

II-1

On May 12, 2006, we entered into a Share Exchange Agreement with Quintessence, and the Quintessence Stockholders, and closed the Share Exchange on the same date. Prior to the Share Exchange, we had 24 stockholders of record. Pursuant to the Share Exchange Agreement, QPC issued one share of its common stock to the Quintessence Stockholders in exchange for each share of their Quintessence common stock. The Quintessence Stockholders transferred substantially all of the shares of equity stock of Quintessence, thereby making Quintessence a subsidiary of QPC, and QPC issued an aggregate of 26,986,119 shares of its common stock to the Quintessence Stockholders. Furthermore, all Derivative Securities and preferred stock that may be exercised or converted into Quintessence common stock were exchanged for Derivative Securities that may be exercised or converted into shares of common stock of QPC. The number of shares of common stock of QPC underlying the new QPC Derivative Security was equal to the number of shares of common stock of QPC that would have been issued to the Quintessence Stockholders, had they exercised or converted the Quintessence Derivative Security into Quintessence common stock immediately prior to the closing of the Share Exchange. Pursuant to the Share Exchange Agreement, QPC issued options, warrants or convertible notes that may be exercised or converted, as the case may be, into 10,776,879 shares of common stock of QPC. After closing the Share Exchange, the Quintessence stockholders held at least 87% of the outstanding shares of common stock of QPC. We had 521 stockholders of record after the closing of the Share Exchange. This May 2006 transaction (1) involved no general solicitation or general advertising, and (2) involved no non-accredited purchasers. Thus, we believe that the offering was exempt from registration under Regulation D, Rule 505 of the Securities Act.

From May 19, 2006 to July 16, 2006, QPC held six closings in which it offered and sold an aggregate of 6,065,800 shares of its common stock at $1.25 per share to certain accredited investors and received gross proceeds of $7,582,250 (the “Offering”) pursuant to subscription agreements. These shares were offered through a private placement in which Brookstreet Securities Corporation (“Brookstreet”) acted as the placement agent. The placement agent received a commission of 8.0% of the gross proceeds along with a 2.0% non-accountable marketing allowance and a 3.0% non-accountable expense allowance. QPC received net proceeds of $6,596,558 from the Offering. The issuance of the securities described above were exempt from the registration requirements of the Securities Act under Regulation D and the rules thereunder, including Rule 506 insofar as: (1) the purchasers were each an accredited investor within the meaning of Rule 501(a); (2) the transfer of the securities were restricted by us in accordance with Rule 502(d); (3) there were no other non-accredited investors involved in the transaction within the meaning of Rule 506(b); and (4) the offer and sale of the securities was not effected through any general solicitation or general advertising within the meaning of Rule 502(c).

During 2006, Brookstreet also received warrants to purchase our common stock in an amount equal to 20% of the shares sold, at an exercise price of $1.25 per share. Based on the sale of 11,726,681 shares in the Offering, Brookstreet received warrants to purchase 2,345,340 shares of common stock. The value of the warrants issued to Brookstreet was $1,948,744.

 In May, 2006, we issued 1,200,000 shares of restricted common stock to an investor relations firm for services to be performed over twelve months. The value of the shares was $1,500,000. In March and May, 2006, we issued a total of 100,000 warrants to purchase common stock at a price of $1.25 per share to an investor relations firm for services; the warrants were valued at $31,000 and expire on August 1, 2010. The warrants are fully vested and may be exercised in a cashless manner. We relied upon the exemption from registration as set forth in Section 4(2) of the Securities Act for the issuance of these securities. The recipient took its securities for investment purposes without a view to distribution and had access to information concerning us and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or general advertising for the acquisition of these securities.

During 2006, we issued 2,500 shares of restricted common stock upon warrant exercise for total gross proceeds of $3,750 to one investor. We relied upon the exemption from registration as set forth in Section 4(2) of the Securities Act for the issuance of these securities. The recipient took its securities for investment purposes without a view to distribution and had access to information concerning us and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or general advertising for the acquisition of these securities

Effective April 16, 2007, the Company entered into securities purchase agreements with certain investors, pursuant to which the Company issued the investors secured convertible debentures in the aggregate principal amount of $7,976,146 at an original issue discount of 10%. The April Secured Debentures have a term of 2 years and pay interest at the rate of 10% per annum, and are convertible into shares of the Company’s common stock at an initial conversion price of $1.05 per share, subject to customary adjustments as set forth therein and any applicable Milestone Adjustments as described therein. In addition, the Company issued to the investors five year warrants to purchase up to 11,394,495 shares of the common stock at an exercise price of $1.05 per share, subject to adjustment therein, including full-ratchet and other standard anti-dilution protection and any applicable Milestone Adjustments.

II-2

We sold the April Secured Debentures and the warrants in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D as promulgated by the SEC under the Securities Act, based upon the following: (i) each of the investors provided information to the Company confirming that such investor is an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and that such investor has such knowledge and expertise in financial and business matters that it is capable of evaluating the merits and risks of the investment in the securities; (ii) all investors were solicited through direct contact and no means of general solicitation was employed in connection with the offering; (iii) the investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer or sell such securities only in a transaction registered under the Securities Act, exempt from registration under the Securities Act, or to an “affiliate” (as defined in Rule 144 promulgated under the Securities Act) of the investor who is an accredited investor, and (iv) legends were placed on each of the warrants and April Secured Debentures setting forth the restrictions on transfer applicable to such securities.

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.

We sold the May Secured Debentures and the warrants in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D as promulgated by the SEC under the Securities Act, based upon the following: (i) each of the May Investors provided information to the Company confirming that such May Investor is an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and that such May Investor has such knowledge and expertise in financial and business matters that it is capable of evaluating the merits and risks of the investment in the securities; (ii) all May Investors were solicited through direct contact and no means of general solicitation was employed in connection with the offering; (iii) the May Investors acknowledged that all securities being purchased were “restricted securities” for purposes of the Securities Act, and agreed to transfer or sell such securities only in a transaction registered under the Securities Act, exempt from registration under the Securities Act, or to an “affiliate” (as defined in Rule 144 promulgated under the Securities Act) of the May Investor who is an accredited investor, and (iv) legends were placed on each of the warrants and May Secured Debentures setting forth the restrictions on transfer applicable to such securities.

II-3

Item 27. Exhibits.

Exhibit Number	Description of Document
2.1	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)
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)

II-4

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

II-5

10.20	Loan Agreement by and among the Quintessence and senior secured lenders dated as of May 21, 2004 (4)
10.21	Security Agreement by and between the Company and DBA Money USA, as collateral agent, dated as of May 21, 2004 (“Security Agreement regarding Senior Secured Notes”) (4)
10.22	First Amendment to Loan Agreement by and among Quintessence and senior secured lenders dated as of March 24, 2005 (4)
10.23	First Amendment to Security Agreement regarding Senior Secured Notes dated as of March 24, 2005 (4)
10.24	Phase II Award/Contract dated as of March 24, 2006 by and between the U. S. Army and the Company (9)(10)(**)
10.25	April Securities Purchase Agreement*
10.26	Form of April Secured Debenture (7)
10.27	Form of April Warrant (7)
10.28	April Registration Rights Agreement (7)
10.29	April Security Agreement (7)
10.30	May Securities Purchase Agreement*
10.31	Form of May Secured Debenture (8)
10.32	Form of May Warrant (8)
10.33	May Registration Rights Agreement (8)
10.34	May Security Agreement (8)
10.35	Intercreditor Agreement (8)
10.36	Transaction Fee Agreement by and between the Company and T.R. Winston & Company, LLC*
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 (10)
23.1	Consent of Weinberg & Company, P.A.*
23.2	Consent of Morrison & Foerster LLP (***)
24.1	Power of Attorney (10)

(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 Registrant’s Current Report on Form 8-K on April 20, 2007
(8)	Filed with Registrant’s Current Report on Form 8-K on May 31, 2007
(9)	Filed with Amendment No. 3 to the Registration Statement on Form SB-2 filed on January 26, 2007
(10)	Filed with Registrant’s Registration Statement on Form SB-2 filed on June 15, 2007
(*)	Filed herewith
(**)	Confidential treatment requested as to portions of the Exhibit. Omitted materials filed separately with the Securities and Exchange Commission.
(***)	To be filed by amendment.

II-6

Item 28. Undertakings.

The undersigned registrant hereby undertakes:

1.   To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:

(i) Include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement.

(iii) Include any additional or changed material information on the plan of distribution

2.   For determining liability under the Securities Act of 1933, treat each post-effective amendment as a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering.

3.   File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of offering.

4. For determining liability of the undersigned small business issuer under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned small business issuer undertakes that in a primary offering of securities of the undersigned small business issuer pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned small business issuer will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned small business issuer relating to the offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned small business issuer or used or referred to by the undersigned small business issuer;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned small business issuer or its securities provided by or on behalf of the undersigned small business issuer; and

(iv) Any other communication that is an offer in the offering made by the undersigned small business issuer to the purchaser.

5.   Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

II-7

6.   In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

7. Each prospectus filed by the undersigned issuer pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement.

8. Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date;

9. Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

II-8

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Sylmar, California on July 31, 2007.

QPC LASERS, INC.
By:	/s/ George Lintz
	George Lintz, Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

Name	Title	Date
*	Chief Executive Officer and Director	July 31, 2007
Jeffrey Ungar	(Principal Executive Officer)
/s/ George Lintz	Chief Financial Officer and Director	July 31, 2007
George Lintz	(Principal Financial Officer)
*	Director	July 31, 2007
Merrill A. McPeak
*	Director	July 31, 2007
Israel Ury
	Director	July 31, 2007
Robert V. Adams
*	Vice President of Finance	July 31, 2007
Blima Tuller	(Principal Accounting Officer)
* By: /s/ George Lintz
George Lintz, as Attorney-in-fact

EX-10.25

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (this "AGREEMENT," “PURCHASE AGREEMENT,” or “SECURITIES PURCHASE AGREEMENT”), dated as of April 16, 2007, by and among QPC LASERS, INC., a Nevada corporation, ("COMPANY"), and each buyer identified on the signature pages hereto (each, including its successors and assigns, a “BUYER” and collectively the “BUYERS”).

WHEREAS:

A. The Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D ("REGULATION D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 ACT" or the “SECURITIES ACT”);

B. Buyers desire to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement, (i) secured convertible debentures (the “DEBENTURES”) of the Company and (ii) Warrants (as defined in Section 1(b)(iv) in the form described in this Agreement, to purchase shares of Common Stock of the Company in a private offering. The minimum aggregate Commitment Amount (as defined in Section 10) of this offering of the Debentures to all Buyers shall be Four Million Two Hundred Fifty Thousand Dollars (U.S. $4,250,000) and the maximum aggregate Commitment Amount of this offering of the Debentures to all Buyers shall be Twelve Million U.S. Dollars (U.S. $12,000,000)(the “OFFERING”);

C.The terms of the Debentures, including the terms on which the Debentures may be converted into common stock, $0.001 par value, of the Company (the "COMMON STOCK"), are set forth in Debenture, in the form attached hereto as Exhibit A;

D.Contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached hereto as EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws.

NOW THEREFORE, the Company and each Buyer, severally and not jointly, hereby agree as follows:

1. PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

(a) CERTAIN DEFINITIONS. This Securities Purchase Agreement, the Debenture, the Registration Rights Agreement, the Warrants, and any other agreements delivered together with this Agreement or in connection herewith shall be referred to herein as the “TRANSACTION DOCUMENTS.” The Company and the each Buyer mutually agree to the terms of each of the Transaction Documents. For purposes hereof:

“COMMON STOCK EQUIVALENTS” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire, directly or indirectly, at any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

“CLOSING” means the closing of the purchase and sale of the Securities pursuant to Section 1(b).

“CLOSING DATE” means the date of Closing.

“EXEMPT ISSUANCE” means the issuance of (a) shares of Common Stock or options to employees, officers, directors or consultants (provided that no such common stock or options shall be issued to consultants unless such options are unregistered and subject to volume limitations under Rule 144, provided that such issuances to consultants shall not exceed 200,000 shares, subject to adjustment for reverse and forward stock splits and the like, and provided that the price of such issuances of Common Stock, and the conversion or exercise price of such issuance of options, to consultants shall not be subject to any adjustments or resets after issuance) of the Company in any 12 month period, provided that such issuance of shares of Common Stock or options to employees, officers, directors or consultants occurs pursuant to a stock or option plan duly adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (b) up to 300,000 warrants or options (with an exercise price no less than $1.00) to equipment lessors, and (c) securities upon the exercise, exchange of, conversion or redemption of, or payment of interest or liquidated or similar damages on, any Securities issued hereunder and/or other securities exercisable, exchangeable for, convertible into, or redeemable for shares of Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities (and including any issuances of securities pursuant to the anti-dilution provisions of any such securities).

“PERSON” shall mean an individual, a limited liability company, a partnership, a joint venture, an exempted company, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

“PAYMENT SHARES” shall mean (i) Default Shares (as defined in the Debenture), (ii) Interest Payment Shares (as defined in the Debenture) and (iii) shares issuable upon conversion of Failure Payments and other Required Cash Payments (as each is defined in the Debenture) into Common Stock of the Company. The Payment Shares shall be treated as Common Stock issuable upon conversion of the Debentures for all purposes hereof and thereof and shall be subject to all of the limitations and afforded all of the rights of the other shares of Common Stock issuable hereunder, including without limitation, the right to be included in the Registration Statement (as defined in the Registration Rights Agreement) filed pursuant to the Registration Rights Agreement.

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“PERMITTED LIENS” means (i) Liens (as defined in Section 5 hereof) in favor of the Buyer; (ii) Liens in favor of the Holder; (iii) Liens for unpaid taxes that either (A) are not yet delinquent, or (B) are being contested in good faith in an appropriate manner, (c) Liens set forth on Schedule A, (iv) the interests of lessors or sublessors under operating leases, (v) purchase money Liens or the interests of lessors under capital leases so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (vi) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of the Company’s or the Subsidiary’s business and not in connection with the borrowing of money, and which Liens either (A) are for sums not yet delinquent, or (B) are being contested in good faith in an appropriate manner, (vii) Liens or deposits to secure performance of bids, tenders, or leases incurred in the ordinary course of business and not in connection with the borrowing of money, (viii) Liens granted as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of business, (ix) Liens resulting from any judgment or award that would not otherwise constitute a default hereunder, (x) any interest or title of a licensee or licensor under any license agreement permitted by this Agreement, (xi) Liens that arise in the ordinary course of business and do not in any material respect affect the property, (xii) Liens which are being contested in good faith in an appropriate manner, (xiii) Liens on patents, trademarks, trade names, service marks, copyrights, trade secrets or other intellectual property to the extent such Liens arise solely from the granting of licenses composing Permitted Transfers thereto or from any Person in the ordinary course of business consistent with past practice, (xiv) Liens in favor of the Existing Creditors (as defined in Section 5), and (xv) existing Liens shown on Schedule 5.

“PERMITTED TRANSFERS” means any disposition of property that is either (i) in the ordinary course of the business of the Company or its Subsidiaries, (ii) to a third party for reasonably equivalent value as deemed appropriate by the Company or its Subsidiaries in their reasonable business judgment, and that, in either case, that does not result, in a single transaction or a series of related transactions, in the disposition or sale of all or substantially all of the assets of the Company or its Subsidiaries, (iii) an Allowable IP Sale or Allowable Non-Exclusive IP Transaction as set forth in Section 4(m) hereof, or (iv) approved in writing by the Buyers.

“PURCHASE PRICE” shall mean the purchase price paid by the Buyer for the Debentures and the Warrants to be purchased by each Buyer.

“SECURITIES” means the Debentures, the Warrants, the Conversion Shares and the Warrant Shares.

“SECURITY AGREEMENT” means the Security Agreement, dated the date hereof, among the Company and the Purchasers, in the form of Exhibit C attached hereto.

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“WARRANT AMOUNT” shall have the meaning ascribed to it in Section 1(e)(v).

(b) CLOSING OF THE PURCHASE OF DEBENTURES AND WARRANTS. The Closing shall occur not later than April 16, 2007. On the Closing Date, subject to the satisfaction or waiver of the terms and conditions set forth herein, the Company agrees to sell, and each Buyer, severally and not jointly, agrees to purchase, from the Company a Debenture having a purchase price equal to the Commitment Amount, and an accompanying number of Warrants (as described below) to purchase a number of shares equal to the applicable Warrant Amount.

(c) CLOSING PROCEDURES; WARRANTS.

(i) Form of Debenture. Each Debenture shall be in the form annexed hereto as EXHIBIT “A.”

(ii) Purchase Price of Debentures and Warrants; Original Issue Discount. Each Buyer shall pay $0.90 (the “PURCHASE PRICE”) for each $1.00 of principal amount of Debentures and related Warrants to be purchased by such Buyer at the Closing, representing a ten percent (10%) original issue discount.

(iii) Form Of Payment. On or before each Closing Date (as defined below), (i) each Buyer shall pay the applicable Purchase Price for the Debenture and the Warrants to be issued and sold to it at the Closing (as defined below) by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions, against delivery of duly executed certificates representing the Debenture (“DEBENTURE CERTIFICATE”) having an aggregate initial principal amount (the “ORIGINAL PRINCIPAL AMOUNT”) equal to $1.00 for each $0.90 of the Purchase Price and the number of Warrants equal to the applicable Warrant Amount, and (ii) the Company shall deliver such Debenture Certificates and Warrants duly executed on behalf of the Company, to such Buyer, against delivery of such Purchase Price.

(iv) Closing Date. Subject to the satisfaction or waiver of the terms and conditions of this Agreement, the Closing shall occur when subscriber funds representing the aggregate Purchase Price of the Debenture being purchased by the Buyers are transmitted by wire transfer of immediately available funds by each Buyer to the Company, assuming that the Transaction Documents are signed by both parties prior to or within three (3) business days following such transmission. The date of the Closing shall be referred to herein as the “CLOSING DATE.” Unless otherwise mutually agreed by the parties, the Closing hereunder shall occur not later than April 16, 2007. The Closing contemplated by this Agreement shall occur on the applicable Closing Date at the offices of the Company, or at such other location as may be agreed to by the parties.

(v) Warrants. Each of Buyer’s Debentures shall be accompanied by a number of warrants (“WARRANTS”) equal to the Original Principal Amount of the Debenture being purchased by such Buyer, divided by the Initial Conversion Price (as defined in the Debenture), multiplied by 150% (the “WARRANT AMOUNT”). The Warrants shall be in the form of the Warrant annexed hereto as EXHIBIT “D,” except that the “Initial Exercise Price,” as defined therein, shall equal $1.05 (the “INITIAL WARRANT EXERCISE PRICE”), subject to adjustment therein. The Warrants shall contain Exercise Price adjustment provisions that are consistent with the adjustment provisions afforded to the Conversion Price of the Debenture in the Debenture and shall have a five (5) year term.

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"MARKET PRICE," for any security as of any date, shall have the meaning ascribed to it in the applicable security.

(vi) Closing Deliveries. On the Closing Date, the Company will deliver or cause to be delivered to each Buyer:

(A) the items required to be delivered to Buyer pursuant to Section 8, duly executed by the Company where so required,

(B) certificates representing the applicable Debenture and Warrant,

(C) a certificate ("CLOSING CERTIFICATE") signed by its chief executive officer or chief financial officer (1) representing the truth and accuracy of all the representations and warranties made by the Company contained in this Agreement, as of the applicable Closing Date, as if such representations and warranties were made and given on all such dates, (2) adopting the covenants and conditions set forth in this Agreement in relation to the applicable Debenture and Warrants, (3) representing the timely compliance by the Company with the Company's registration requirements set forth in the Registration Rights Agreement, and (4) certifying that an Event of Default has not occurred,

(D) a legal opinion in substantially the form of Exhibit E attached hereto in relation to the Company, the applicable Debenture, the applicable Warrant and the Transaction Documents ("CLOSING LEGAL OPINION"),

(E) a Debenture with a principal amount equal to such Buyer’s Original Principal Amount, registered in the name of such Buyer,

(F) a Warrant registered in the name of such Buyer to purchase up to a number of shares of Common Stock equal to the Warrant Amount (as defined in Section 1(b)(v)) with an exercise price equal to the Initial Warrant Exercise Price (as defined in Section 1(b)(v)) subject to adjustment therein,

(G) Limited Standstill Agreements, in the form of Exhibit F hereto, duly executed by each of the Designated Insiders (as defined in Section 4(r)).

On the Closing Date, each Buyer shall deliver or cause to be delivered to the Company the following:

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(A) this Securities Purchase Agreement and the Registration Rights Agreement duly executed by such Buyer,

(B) funds in the amount of such Buyer’s applicable Purchase Price by wire transfer to the account as specified in writing by the Company.

2. BUYER’S REPRESENTATIONS AND WARRANTIES. Each Buyer represents and warrants to the Company solely as to such Buyer that:

(a) STATUS OF BUYER. As of the date hereof, the Buyer is purchasing the Debenture and the shares of Common Stock issuable upon conversion of the Debenture or otherwise pursuant to the Debenture and the other Transaction Documents (including, without limitation, the Payment Shares) (such shares of Common Stock being collectively referred to herein as the “CONVERSION SHARES") and the Warrants and the shares of Common Stock issuable upon exercise thereof (the "WARRANT SHARES" and, collectively with the Debenture, Warrants and Conversion Shares, the "SECURITIES") for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933 Act; PROVIDED, HOWEVER, that by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act and applicable state securities laws.

(b) ACCREDITED INVESTOR STATUS. The Buyer is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D (an "ACCREDITED INVESTOR").

(c) RELIANCE ON EXEMPTIONS. The Buyer understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities.

(d) INFORMATION. The Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigation conducted by Buyer or any of its advisors or representatives shall modify, amend or affect Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. The Buyer understands that its investment in the Securities involves a significant degree of risk, provided that the Buyer shall not be entitled to rely on a representation which it knows to be untrue.

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(e) GOVERNMENTAL REVIEW. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities.

(f) TRANSFER OR RE-SALE. The Buyer understands that (i) except as provided in the Registration Rights Agreement, the sale or re-sale of the Securities has not been and is not being registered under the 1933 Act or any applicable state securities laws, and the Securities may not be transferred or resold unless (a) the Securities are sold pursuant to an effective registration statement under the 1933 Act, (b) the Buyer shall have delivered to the Company an opinion of counsel (which opinion shall be in form, substance and scope reasonably satisfactory to counsel to the Company) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, (c) the Securities are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule)) ("RULE 144") of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor, or (d) the Securities are sold pursuant to Rule 144 or Rule 144(k); and (ii) any sale of such Securities made in reliance on Rule 144 or Rule 144(k) may be made only in accordance with the terms of said Rule. Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a BONA FIDE margin account or other lending arrangement.

(g) ORGANIZATION; AUTHORIZATION; ENFORCEMENT. If Buyer is an entity, the Buyer is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized. Buyer has all requisite power and authority to enter into and perform this Agreement and the Registration Rights Agreement and to consummate the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof. The execution and delivery of this Agreement and the Registration Rights Agreement have been duly and validly authorized and no further consent or authorization of Buyer, its manager or members is required. This Agreement has been duly executed and delivered on behalf of the Buyer, and this Agreement constitutes, and upon execution and delivery by the Buyer of the Registration Rights Agreement, such agreement will constitute, legal, valid and binding agreements of the Buyer enforceable in accordance with their terms.

(h) KNOWLEDGE AND EXPERIENCE. Buyer has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Securities.

(i) SHORT SALES PRIOR TO THE DATE HEREOF. Buyer and its Affiliates have not from the time that such Buyer first received a term sheet (written or oral) from the Company or any other person setting forth the material terms of the transactions contemplated hereunder until the date hereof entered into or effected, or attempted to induce any third party to enter into or effect, any short sales of the Common Stock, or any hedging transaction which establishes a net short position with respect to the Common Stock.

(j) NO GENERAL SOLICITATION. Buyer has not been the subject of general solicitation and has not relied on the content of the Company’s registration statement on Form SB-2, File #333-137413 in making its investment decision for this Offering. Furthermore, the Buyer acknowledges that it understands that the Company’s registration statement on Form SB-2, File #333-137413 and all subsequently filed amendments to such registration statement have been withdrawn.

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3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Buyer that, except as set forth on the Company’s disclosure schedules or any update thereto prior to the Closing Date:

(a) ORGANIZATION AND QUALIFICATION. The Company and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. SCHEDULE 3(A) sets forth a list of all of the Subsidiaries of the Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the Securities, (ii) the business, operations, assets, financial condition or prospects of the Company and its Subsidiaries, if any, taken as a whole, (iii) on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith or (iv) the authority or the ability of the Company to perform its obligation under this Agreement, the Registration Rights Agreement, the Debenture or the Warrants. "SUBSIDIARIES" means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly, any equity or other ownership interest.

(b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Debenture and the Warrants and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii) except as otherwise set forth in SCHEDULE 3(B), the execution and delivery of this Agreement, the Registration Rights Agreement, the Debenture and the Warrants by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Debenture and the Warrants and the issuance and reservation for issuance of the Conversion Shares issuable upon conversion of or otherwise pursuant to the Debenture and the Warrant Shares issuable upon exercise of or otherwise pursuant to the Warrants) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its stockholders is required, (iii) this Agreement has been duly executed and delivered by the Company, and (iv) this Agreement constitutes, and upon execution and delivery by the Company of the Registration Rights Agreement, the Debenture and the Warrants, each of such agreements and instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

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(c) CAPITALIZATION.As of the date hereof, the authorized capital stock of the Company is as set forth on SCHEDULE 3(C-1). The authorized capital stock of the Company consists of 180,000,000 shares of Common Stock, of which approximately 38,559,283 shares are outstanding as of the date hereof and 20,000,000 shares of preferred stock, par value $0.001 per share, of which none are outstanding as of the date hereof. There are no outstanding securities which are convertible into shares of Common Stock, whether such conversion is currently exercisable or exercisable only upon some future date or the occurrence of some event in the future, except as disclosed on SCHEDULE 3(C-1). If any such securities are listed on the SCHEDULE 3(C-1), the number or amount of each such outstanding convertible security and the conversion terms are set forth in said SCHEDULE 3(C-1). All of such outstanding shares of capital stock set forth in SCHEDULE 3(C-1) are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable.

No shares of capital stock of the Company are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Except as disclosed in SCHEDULE 3(C-2), as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries, (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of its or their securities under the 1933 Act (except the Registration Rights Agreement) and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Debenture, the Warrants, the Conversion Shares or Warrant Shares. The Company has furnished to each Buyer true and correct copies of the Company's Articles of Incorporation as in effect on the date hereof ("ARTICLES OF INCORPORATION"), the Company's By-laws, as in effect on the date hereof (the "BY-LAWS"), and the terms of all securities convertible into or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto. In the event that the date of execution of this Agreement is not the Closing Date, the Company shall provide each Buyer with a written update of this representation signed by the Company's President and Chief Executive or Chief Financial Officer on behalf of the Company as of the Closing Date. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Buyers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

The Company owns all of the outstanding shares of capital stock of Quintessence Photonics Corporation, a Delaware corporation (“Quintessence”). All such shares are validly issued, fully paid, nonassessable and free of preemptive rights or other similar rights and are owned directly or indirectly by the Company, free and clear of any Liens (as defined in Section 5 hereof). There are no subscriptions, options, warrants, voting trusts, proxies or other commitments, understandings, restrictions or arrangements relating to the issuance, sale, voting or transfer of any shares of capital stock or other equity interests of Quintessence, including any right of conversion or exchange under any outstanding security, instrument or agreement. The Company has no material investment in any entity other than Quintessence.

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(d) ISSUANCE OF SHARES. Upon issuance upon conversion of the Debenture and upon exercise of the Warrants in accordance with their respective terms, and receipt of the exercise price therefor, the Conversion Shares and Warrant Shares, along with any Payment Shares or any other shares issued pursuant to the terms of the Transaction Documents, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances and shall not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof, other than restrictions on transfer arising under applicable federal or state securities laws.

(e) ACKNOWLEDGMENT OF DILUTION. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares upon conversion of or otherwise pursuant to the Debenture or upon issuance of the Warrant Shares upon exercise of or otherwise pursuant to the Warrants. The Company's directors and executive officers have studied and fully understand the nature of the Securities being sold hereunder. The Company further acknowledges that it may not refuse to issue Conversion Shares upon conversion of or otherwise pursuant to the Debenture and to issue Warrant Shares upon exercise of or otherwise pursuant to the Warrants in accordance with this Agreement, regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. Taking the foregoing into account, the Company's Board of Directors has determined, in its good faith business judgment, that the issuance of the Securities hereunder and under the Debenture and the Warrants and the consummation of the transactions contemplated hereby and thereby are in the best interest of the Company and its stockholders.

(f) NO CONFLICTS. The execution, delivery and performance of each of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance of the Conversion Shares and Warrant Shares) will not (i) except as otherwise set forth in SCHEDULE 3(F), conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws, (ii) except as otherwise set forth in SCHEDULE 3(F), trigger any resets of conversion or exercise prices in other outstanding convertible securities, warrants or options of the Company, (iii) trigger the issuance of securities by the Company to any third party, (iv) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (v) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except, in the case of clauses (i), (iv) and (v) above, for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time or both could put the Company or any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible

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defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its Subsidiaries, if any, are not being conducted, and shall not be conducted so long as a Buyer owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity the violation of which would have a Material Adverse Effect. Except as disclosed in SCHEDULE 3(F) or as specifically contemplated by this Agreement or as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement, the Registration Rights Agreement, the Debenture or the Warrants in accordance with the terms hereof or thereof or to issue and sell the Debenture and Warrants in accordance with the terms hereof and to issue the Conversion Shares upon conversion of or otherwise pursuant to the Debenture and the Warrant Shares upon exercise of or otherwise pursuant to the Warrants. Except as disclosed in SCHEDULE 3(F), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is not in violation of the trading requirements of the Principal Market (as defined herein) and does not reasonably anticipate that the Common Stock will cease to be traded on the Principal Market in the foreseeable future. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.

(g) SEC DOCUMENTS; FINANCIAL STATEMENTS. Since at least May 12, 2006, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the foregoing filed prior to the date hereof and since at least May 12, 2006, and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference therein, being hereinafter referred to herein as the "SEC DOCUMENTS"). For purposes of this agreement, “Timely Filed” shall mean that the applicable document was filed (i) by its original due date under the 1934 Act, or, if a request for an extension was timely filed, (ii) by such extended due date. True and complete copies of the SEC Documents are available on the SEC’s internet website (www.sec.gov), except for such exhibits and incorporated documents. Upon the request of a Buyer, the Company will promptly provide copies of the SEC Documents to such Buyer. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the statements made in any such SEC Documents is, or has been, required to be amended or updated under applicable law (except for such statements as have been amended or updated in subsequent filings prior to the date hereof). As of their respective dates, the financial statements of the Company (and the notes thereto) included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of the Company’s most recent 10-Q or 10-K and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. The Company is the subject of the going concern qualification described in SCHEDULE 3(G) attached hereto.

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(h) ABSENCE OF CERTAIN CHANGES. Except for losses incurred in the ordinary course of business that have been publicly disclosed prior to the date hereof or as set forth on SCHEDULE 3(H) hereof, since the date of the Company’s most recent 10-Q or 10-K, there has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations or prospects of the Company or any of its Subsidiaries. For purposes of this Section 3(h), the terms "MATERIAL ADVERSE CHANGE" and "MATERIAL ADVERSE DEVELOPMENT" shall exclude continuing losses that are consistent with the Company's historical losses.

(i) ABSENCE OF LITIGATION. Except as disclosed in SCHEDULE 3(I)(A), to the knowledge of the Company or any of its Subsidiaries, there is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such. SCHEDULE 3(I)(B) contains a complete list and summary description of any known pending or threatened proceeding against or affecting the Company or any of its Subsidiaries, without regard to whether it, if adversely decided, would have a Material Adverse Effect. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.

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(j) PATENTS, COPYRIGHTS, ETC. All of the Company’s material patents, patent applications, Patents (as defined below), patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names and copyrights ("INTELLECTUAL PROPERTY") are set forth in SCHEDULE 3(J-1) hereof.Any liens, encumbrances or licenses that have been granted against the Intellectual Property are listed in Schedule 3(J-2). Except as otherwise set forth on Schedule 3(J-2), the Company owns all right and title to the Intellectual Property free and clear of any liens or encumbrances and has not granted any licenses or rights to use any of the Patents to any third party. The Company and each of its Subsidiaries owns or possesses the requisite licenses or rights to use all Intellectual Property necessary to enable it to conduct its business as now operated, including but not limited to the intellectual property set forth in SCHEDULE 3(J-1) hereof (and, except as otherwise set forth in SCHEDULE 3(J-2) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future), except for such licenses or rights the failure of which to own or possess would not, individually or in the aggregate, have a Material Adverse Effect; there is no claim or action by any person pertaining to, or proceeding pending, or to the Company's knowledge threatened, which challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct its business as now operated (and, except as otherwise set forth in SCHEDULE 3(J-2) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future), except for actions or claims which, if adversely decided, would not have a Material Adverse Effect; to the best of the Company's knowledge, the Company's or its Subsidiaries' current and intended products, services and processes do not infringe on any Intellectual Property or other rights held by any person, and the Company is unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their Intellectual Property.

For purposes hereof, "PATENTS" means all domestic and foreign letters patent, design patents, utility patents, industrial designs, inventions, trade secrets, ideas, concepts, methods, techniques, processes, proprietary information, technology, know-how, formulae, rights of publicity and other general intangibles of like nature, now existing or hereafter acquired (including, without limitation, all domestic and foreign letters patent, design patents, utility patents, industrial designs, inventions, trade secrets, ideas, concepts, methods, techniques, processes, proprietary information, technology, know-how and formulae described in Schedule 3(J) hereof), all applications, registrations and recordings thereof (including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office, or in any similar office or agency of the United States or any other country or any political subdivision thereof), and all reissues, divisions, continuations, continuations in part and extensions or renewals thereof, in each case owned by the Company or any of its Subsidiaries.

“CORE INTELLECTUAL PROPERTY” shall mean the Intellectual Property designated as “Core Intellectual Property” on SCHEDULE 3(J-3) hereto.

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(k) NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is reasonably likely in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company's officers has or is reasonably likely to have a Material Adverse Effect.

(l) TAX STATUS. Except as set forth on SCHEDULE 3(L), the Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax. Except as set forth on SCHEDULE 3(L), none of the Company's tax returns is presently being audited by any taxing authority.

(m) CERTAIN TRANSACTIONS. Except as set forth on SCHEDULE 3(M) and except for arm's length transactions pursuant to which the Company or any of its Subsidiaries makes payments in the ordinary course of business upon terms no less favorable than the Company or any of its Subsidiaries could obtain from third parties and other than the grant of stock options disclosed on SCHEDULE 3(C), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

(n) DISCLOSURE. To the best of the Company’s knowledge, all information relating to or concerning the Company or any of its Subsidiaries set forth in this Agreement and provided to each Buyer pursuant to Section 2(d) hereof and otherwise in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which has not been publicly announced or disclosed but under applicable law, rule or regulation, requires public disclosure or announcement by the Company (assuming for this purpose that the Company's reports filed under the 1934 Act are being incorporated into an effective registration statement filed by the Company under the 1933 Act).

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(o) ACKNOWLEDGMENT REGARDING BUYER’S PURCHASE OF SECURITIES. The Company acknowledges and agrees that each Buyer is acting solely in the capacity of arm's length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that each Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and that any statement made by each Buyer or any of its respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Buyer’s purchase of the Securities and has not been relied upon by the Company, its officers or directors in any way. The Company further represents to each Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.

(p) NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance of the Securities to any Buyer. The issuance of the Securities to each Buyer will not be integrated with any other issuance of the Company's securities (past, current or future) for purposes of any stockholder approval provisions applicable to the Company or its securities.

(q) NO BROKERS. Other than as set forth on SCHEDULE 3(Q), the Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments relating to this Agreement or the transactions contemplated hereby. The Company shall indemnify and hold harmless each of Buyer, its employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees.

(r) PERMITS; COMPLIANCE. The Company and each of its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "COMPANY PERMITS"), except where the failure to so possess any such Company Permits would not have a Material Adverse Effect, and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits. To the best of the Company's knowledge, neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Since May 12, 2006, neither the Company nor any of its Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect.

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(s) ENVIRONMENTAL MATTERS.

(i) Except as set forth in SCHEDULE 3(S), there are, to the Company's knowledge, with respect to the Company or any of its Subsidiaries or any predecessor of the Company, no past or present violations of Environmental Laws (as defined below), releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the Company's knowledge, threatened in connection with any of the foregoing. The term "ENVIRONMENTAL LAWS" means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes (collectively, "HAZARDOUS MATERIALS") into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

(ii) Other than those that are or were stored, used or disposed of in compliance with applicable law, no Hazardous Materials are contained on or about any real property currently owned, leased or used by the Company or any of its Subsidiaries, and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company or any of its Subsidiaries during the period the property was owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the Company's or any of its Subsidiaries' business.

(iii) Except as set forth in SCHEDULE 3(S), there are no underground storage tanks on or under any real property owned, leased or used by the Company or any of its Subsidiaries that are not in compliance with applicable law.

(t) TITLE TO PROPERTY. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as are described in SCHEDULE 3(T) or such as would not have a Material Adverse Effect. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect.

(u) INSURANCE. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.

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(v) INTERNAL ACCOUNTING CONTROLS. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company's board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(w) FOREIGN CORRUPT PRACTICES. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

(x) SOLVENCY. The Company (both before and after giving effect to the transactions contemplated by this Agreement) is solvent (i.e., its assets have a fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute and matured) and currently the Company has no information that would lead it to reasonably conclude that the Company would not have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time to time incurred in connection therewith as such debts mature. Except as disclosed in SCHEDULE 3(X), the Company did not receive a qualified opinion from its auditors with respect to its most recent fiscal year end and does not anticipate or know of any basis upon which its auditors might issue a qualified opinion in respect of its current fiscal year.

(y) NO INVESTMENT COMPANY. The Company is not, and upon the issuance and sale of the Securities as contemplated by this Agreement will not be an "investment company" required to be registered under the Investment Company Act of 1940 (an "INVESTMENT COMPANY"). The Company is not controlled by an Investment Company.

(z) NO MARKET MANIPULATION. The Company has not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock of the Company to facilitate the sale or resale of the Securities or affect the price at which the Securities may be issued or resold.

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(aa) STOP TRANSFER. The Securities, when issued, will be restricted securities. The Company will not issue any stop transfer order or other order impeding the sale, resale or delivery of any of the Securities, except as may be required by any applicable federal or state securities laws and unless contemporaneous notice of such instruction is given to the Buyers.

(bb) NO UNDISCLOSED LIABILITIES. The Company has no liabilities or obligations which are material, individually or in the aggregate, other than those incurred in the ordinary course of the Company's businesses which have been disclosed in the Company’s public filings and which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect other than as set forth in SCHEDULE 3(BB).

(cc) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Other than events or circumstances which have been disclosed in the Company’s public filings, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the Reports.

(dd) NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS. There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the Company and the accountants and lawyers formerly or presently employed by the Company, including but not limited to disputes or conflicts over payment owed to such accountants and lawyers. Attached hereto as SCHEDULE DD are signed letters from the Company’s current accounting firm and outside law firm attesting to the facts in the immediately preceding sentence (the “ACCOUNTANT AND LAWYER LETTERS”).

(ee) COMPANY ACKNOWLEDGMENT. The Company hereby acknowledges that each Buyer may elect to hold the Debenture and the Warrants for various periods of time, as permitted by the terms of the Transaction Documents and the Company further acknowledges that Investor has made no representations or warranties, either written or oral, as to how long the Securities will be held by such Buyer or regarding Investor’s trading history or investment strategies.

(ff) DISCLOSURE. The Company confirms that neither it nor any other Person acting on its behalf has provided any of the Buyers or their agents or counsel with any information that constitutes material, nonpublic information concerning the Company or its Subsidiaries other than the existence of the transactions contemplated by this Agreement or the other Transaction Documents. The Company understands and confirms that each of the Buyers will rely on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Buyers regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each press release issued by the Company or any of its Subsidiaries during the twelve (12) months preceding the date of this Agreement did not at the time of release contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.

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(gg) ABSENCE OF CERTAIN COMPANY CONTROL PERSON ACTIONS OR EVENTS. To the Company’s knowledge, none of the following has occurred during the past five (5) years with respect to a Company Control Person (as defined below):

(i) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such Company Control Person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

(ii) Such Company Control Person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

(iii) Any order, judgment or decree, was entered within the past five (5) years and was not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

(A) acting, as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, any other Person regulated by the Commodity Futures Trading Commission (“CFTC”) or engaging in or continuing any conduct or practice in connection with such activity;

(B) engaging in any type of business practice; or

(C) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;

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(iv) Such Company Control Person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such Company Control Person to engage in any activity described in paragraph (iii) of this item, or to be associated with Persons engaged in any such activity; or

(v) Such Company Control Person was found by a court of competent jurisdiction in a civil action or by the CFTC or SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the CFTC or SEC has not been subsequently reversed, suspended, or vacated.

For purposes hereof, “COMPANY CONTROL PERSON” means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Company pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act.

(hh) DTC STATUS. The Company's transfer agent is a participant in and the Common Stock is eligible for transfer pursuant to the Depository Trust Company Automated Securities Transfer Program. The name, address, telephone number, fax number, contact person and email address of the Company transfer agent is set forth on SCHEDULE 3(HH) hereto.

(ii) SARBANES-OXLEY; INTERNAL ACCOUNTING CONTROLS. The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date.

(jj)SENIORITY. Except as set forth on SCHEDULE 3(JJ), as of the Closing Date, no indebtedness or other equity of the Company is senior to or pari passu with the Debenture in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured by purchase money security interests (which is senior only as to underlying assets covered thereby) and capital lease obligations (which is senior only as to the property covered thereby).

(kk)REGISTRATION RIGHTS. Except as set forth on SCHEDULE 3(KK) hereto, other than each of the Buyers, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company.

(ll)TRANSACTIONS WITH AND OBLIGATIONS TO AFFILIATES.   Except as disclosed on SCHEDULE 3(LL), none of the officers, directors or employees of the Company or any of its Subsidiaries is presently a party to any transaction with the Company or any of its Subsidiaries (other than for ordinary course services as employees, officers or directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director or employee or, to the knowledge of the Company or any of its Subsidiaries, any corporation, partnership, trust or other entity in which any such officer, director, or employee has a substantial interest or is an officer, director, trustee or partner. SCHEDULE 3(LL) sets forth any loans, payables, payments, transactions, debt or equity securities, or similar agreements or obligations between the Company and any officers, directors, management or affiliates of the Company.

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EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

QPC Lasers, Inc.

We hereby consent to the inclusion in the foregoing Amendement No. 1 to the Registration Statement on Form SB-2 of our report dated March 6, 2007, except for Note 14 which is July 25, 2007, relating to the consolidated financial statements of QPC Lasers, Inc. and Subsidiary as of December 31, 2006 and for the years ended December 31, 2006 and 2005 which appears in the QPC Lasers, Inc. Annual Report as amended on Form 10-KSB/A filed with the Securities and Exchange Commission on July 25, 2007. We also consent to the reference to our Firm under the caption “Experts”.

WEINBERG & COMPANY, P.A.

Certified Public Accountants

Los Angeles, California

July 31, 2007