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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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(Mark One)

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



For the quarterly period ended March 31, 2005



or



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the Transition Period from
 to



Commission File No. 000-50508



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DayStar Technologies, Inc.

(Name of small business issuer in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 84-1390053                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|13 Corporate Dr Halfmoon, New York                             |  | 12065                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



(518) 383-4600

(Issuers telephone number)



---



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



At May 13, 2005, 3,491,830 shares of the registrants Common Stock, par value $0.01 per share, were outstanding and 29,000 shares of
the registrants Class B Common Stock, par value $0.01 per share, were outstanding.



Transitional Small Business Disclosure Format: Yes ̈No x



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DAYSTAR TECHNOLOGIES, INC.



Quarterly Report on Form 10-QSB

Quarterly Period Ended March 31, 2005

Table of Contents



|                                                                                                     |  |   
|---------------------------------------------------------------------------------------------------- |  | --
|Part I  Financial Information                                                                       |  |   
|                                                                                                     | 
|Item 1. Financial Statements                                                                         |  |   
|                                                                                                     | 
|Consolidated Balance Sheet  March 31, 2005                                                          |  | 3 
|                                                                                                     | 
|Consolidated Statements of Operations - For the three months ended March 31, 2005 and 2004           |  | 4 
|                                                                                                     | 
|Consolidated Statements of Changes in Stockholders Equity for the three months ended March 31, 2005 |  | 5 
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004             |  | 6 
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | 7 
|                                                                                                     | 
|Item 2. Managements Discussion and Analysis or Plan of Operation                                    |  | 11
|                                                                                                     | 
|Item 3. Controls and Procedures                                                                      |  | 14
|                                                                                                     | 
|PART II  Other Information                                                                          |  |   
|                                                                                                     | 
|Item 1. Legal Proceedings                                                                            |  | 15
|                                                                                                     | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                  |  | 15
|                                                                                                     | 
|Item 6. Exhibits and Reports on Form 8-K                                                             |  | 15
|                                                                                                     | 
|Signatures                                                                                           |  | 16



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PART 1. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEET



(Unaudited)



|                                                                                                                                   |  |                |            |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | -
|                                                                                                                                   |  | March 31, 2005 |           
|ASSETS                                                                                                                             |  |                |            |  
|CURRENT ASSETS:                                                                                                                    |  |                |            |  
|Cash and cash equivalents                                                                                                          |  | $              | 472,448    |  
|Investments                                                                                                                        |  |                | 1,755,939  |  
|Prepaid expense                                                                                                                    |  |                | 85,500     |  
|                                                                                                                                   |  |                |            |  
|Total current assets                                                                                                               |  |                | 2,313,887  |  
|PROPERTY AND EQUIPMENT, at cost,                                                                                                   |  |                | 3,145,250  |  
|Less accumulated depreciation and amortization                                                                                     |  |                | (327,680   | )
|                                                                                                                                   |  |                |            |  
|Net property and equipment                                                                                                         |  |                | 2,817,570  |  
|OTHER ASSETS                                                                                                                       |  |                |            |  
|Patents (net of amortization of $18,540)                                                                                           |  |                | 34,410     |  
|Security deposits                                                                                                                  |  |                | 18,653     |  
|                                                                                                                                   |  |                |            |  
|Total other assets                                                                                                                 |  |                | 53,063     |  
|                                                                                                                                   |  |                |            |  
|TOTAL ASSETS                                                                                                                       |  | $              | 5,184,520  |  
|                                                                                                                                   |  |                |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                               |  |                |            |  
|CURRENT LIABILITIES:                                                                                                               |  |                |            |  
|Accounts payable                                                                                                                   |  | $              | 344,209    |  
|Wages payable                                                                                                                      |  |                | 66,001     |  
|Notes payable, current portion                                                                                                     |  |                | 34,080     |  
|Capital lease obligations, current portion                                                                                         |  |                | 56,596     |  
|Accrued expenses                                                                                                                   |  |                | 38,323     |  
|Deferred gain                                                                                                                      |  |                | 7,000      |  
|                                                                                                                                   |  |                |            |  
|Total current liabilities                                                                                                          |  |                | 546,209    |  
|LONG-TERM LIABILITIES:                                                                                                             |  |                |            |  
|Notes payable                                                                                                                      |  |                | 388,653    |  
|Capital lease obligations                                                                                                          |  |                | 138,077    |  
|Deferred gain                                                                                                                      |  |                | 14,583     |  
|                                                                                                                                   |  |                |            |  
|Total long-term liabilities                                                                                                        |  |                | 541,313    |  
|STOCKHOLDERS EQUITY:                                                                                                              |  |                |            |  
|Preferred stock, $.01 par value; 3,000,000 shares authorized; 0 shares issued and outstanding                                      |  |                |           |  
|Common stock, $.01 par value; 19,850,000 shares authorized; 3,491,830 shares issued and outstanding                                |  |                | 34,918     |  
|Common stock Class B, $.01 par value; 150,000 shares authorized, convertible to common stock; 29,000 shares issued and
outstanding |  |                | 290        |  
|Additional paid-in capital                                                                                                         |  |                | 12,903,377 |  
|Deferred equity compensation                                                                                                       |  |                | (165,623   | )
|Accumulated deficit                                                                                                                |  |                | (8,675,964 | )
|                                                                                                                                   |  |                |            |  
|Total stockholders equity                                                                                                         |  |                | 4,096,998  |  
|                                                                                                                                   |  |                |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                         |  | $              | 5,184,520  |  
|                                                                                                                                   |  |                |            |  



See accompanying
notes to these consolidated financial statements.



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS



(Unaudited)



|                                                               |  |                                     |            |   |      |   |            |  
|-------------------------------------------------------------- |  | ----------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                               |  | For the Three MonthsEnded March 31, |           
|                                                               |  | 2005                                |            |   | 2004 |  
|PRODUCT REVENUES                                               |  | $                                   | 34,597     |   |      | $ | 49,078     |  
|COST OF PRODUCT REVENUES                                       |  |                                     | 26,665     |   |      |   | 44,734     |  
|                                                               |  |                                     |            |   |      |   |            |  
|GROSS PROFIT                                                   |  |                                     | 7,932      |   |      |   | 4,344      |  
|OPERATING EXPENSES:                                            |  |                                     |            |   |      |   |            |  
|Selling, general and administration                            |  |                                     | 551,350    |   |      |   | 284,448    |  
|Research and development                                       |  |                                     | 655,074    |   |      |   | 58,682     |  
|Equity based compensation                                      |  |                                     | 61,766     |   |      |   | 316,527    |  
|Depreciation and amortization                                  |  |                                     | 132,319    |   |      |   | 21,100     |  
|                                                               |  |                                     |            |   |      |   |            |  
|Total operating expenses                                       |  |                                     | 1,400,509  |   |      |   | 680,757    |  
|OTHER INCOME (EXPENSE):                                        |  |                                     |            |   |      |   |            |  
|Interest expense                                               |  |                                     | (14,243    | ) |      |   | (585,936   | )
|Other income                                                   |  |                                     | 17,239     |   |      |   | 7,626      |  
|                                                               |  |                                     |            |   |      |   |            |  
|Total other income (expense)                                   |  |                                     | 2,996      |   |      |   | (578,310   | )
|                                                               |  |                                     |            |   |      |   |            |  
|NET LOSS                                                       |  | $                                   | (1,389,581 | ) |      | $ | (1,254,723 | )
|                                                               |  |                                     |            |   |      |   |            |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC AND DILUTED) |  |                                     | 3,549,830  |   |      |   | 2,753,053  |  
|                                                               |  |                                     |            |   |      |   |            |  
|NET LOSS PER SHARE:                                            |  |                                     |            |   |      |   |            |  
|(Basic and diluted)                                            |  | $                                   | (0.39      | ) |      | $ | (0.46      | )
|                                                               |  |                                     |            |   |      |   |            |  



See accompanying
notes to these consolidated financial statements.



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY



FOR THE THREE MONTHS ENDED MARCH 31, 2005



(Unaudited)



|                                             |  |              |  |                     |        |                          |        |                                  |   |     |                    |   |            |       |   |          |   |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | ------------ |  | ------------------- | ------ | ------------------------ | ------ | -------------------------------- | - | --- | ------------------ | - | ---------- | ----- | - | -------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                             |  | Common Stock |  | Class BCommon Stock |        | AdditionalPaid-InCapital |        | DeferredEquity BasedCompensation |   |     | AccumulatedDeficit |   |            | Total |  
|                                             |  | Shares       |  | Amount              |        | Shares                   |        | Amount                           |   |     |                    |  
|BALANCES, December 31, 2004                  |  | 3,491,830    |  | $                   | 34,918 |                          | 29,000 |                                  | $ | 290 |                    | $ | 12,903,377 |       | $ | (227,389 | ) |  | $ | (7,286,383 | ) |  | $ | 5,424,813  |  
|Amortization of deferred stock compensation  |  |             |  |                     |       |                          |       |                                  |   |    |                    |   |           |       |   | 55,385   |   |  |   |           |   |  |   | 55,385     |  
|Amortization of warrants issued for services |  |             |  |                     |       |                          |       |                                  |   |    |                    |   |           |       |   | 6,381    |   |  |   |           |   |  |   | 6,381      |  
|Net loss                                     |  |             |  |                     |       |                          |       |                                  |   |    |                    |   |           |       |   |         |   |  |   | (1,389,581 | ) |  |   | (1,389,581 | )
|                                             |  |              |  |                     |        |                          |        |                                  |   |     |                    |   |            |       |   |          |   |  |   |            |   |  |   |            |  
|BALANCES, March 31, 2005                     |  | 3,491,830    |  | $                   | 34,918 |                          | 29,000 |                                  | $ | 290 |                    | $ | 12,903,377 |       | $ | (165,623 | ) |  | $ | (8,675,964 | ) |  | $ | 4,096,998  |  
|                                             |  |              |  |                     |        |                          |        |                                  |   |     |                    |   |            |       |   |          |   |  |   |            |   |  |   |            |  



See accompanying
notes to these consolidated financial statements.



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Unaudited)



|                                                                        |  |                                     |            |   |      |   |            |  
|----------------------------------------------------------------------- |  | ----------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                        |  | For the Three MonthsEnded March 31, |           
|                                                                        |  | 2005                                |            |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                   |  |                                     |            |   |      |   |            |  
|Net loss                                                                |  | $                                   | (1,389,581 | ) |      | $ | (1,254,723 | )
|Adjustments to reconcile net loss to cash used in operating activities: |  |                                     |            |   |      |   |            |  
|Depreciation and amortization                                           |  |                                     | 132,319    |   |      |   | 21,100     |  
|Stock-based compensation                                                |  |                                     | 55,385     |   |      |   | 316,527    |  
|Warrants issued for services                                            |  |                                     | 6,381      |   |      |   |           |  
|Calculated interest on conversion of equity units to common stock       |  |                                     |           |   |      |   | 506,650    |  
|Gain on sale/leaseback                                                  |  |                                     | (1,750     | ) |      |   | (1,750     | )
|Charge off of deferred financing costs to interest expense              |  |                                     |           |   |      |   | 67,687     |  
|Changes in operating assets and liabilities:                            |  |                                     |            |   |      |   |            |  
|(Increase) decrease in:                                                 |  |                                     |            |   |      |   |            |  
|Accounts receivable                                                     |  |                                     |           |   |      |   | (412       | )
|Prepaid expenses and other                                              |  |                                     | (65,618    | ) |      |   | (104,333   | )
|Increase (decrease) in:                                                 |  |                                     |            |   |      |   |            |  
|Accounts payable                                                        |  |                                     | (201,182   | ) |      |   | (318,824   | )
|Accrued expenses                                                        |  |                                     | 13,078     |   |      |   | (88,515    | )
|                                                                        |  |                                     |            |   |      |   |            |  
|Net cash used in operating activities                                   |  |                                     | (1,450,968 | ) |      |   | (856,593   | )
|CASH FLOWS FROM INVESTING ACTIVITIES:                                   |  |                                     |            |   |      |   |            |  
|Investments                                                             |  |                                     | 2,174,762  |   |      |   | (7,488,587 | )
|Purchase of equipment                                                   |  |                                     | (563,983   | ) |      |   | (48,066    | )
|                                                                        |  |                                     |            |   |      |   |            |  
|Net cash provided by (used in) investing activities                     |  |                                     | 1,610,779  |   |      |   | (7,536,653 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                   |  |                                     |            |   |      |   |            |  
|Proceeds from notes payable                                             |  |                                     |           |   |      |   | 130,000    |  
|Payments on notes payable                                               |  |                                     |           |   |      |   | (230,000   | )
|Proceeds from sale of stock                                             |  |                                     |           |   |      |   | 8,978,110  |  
|Payments on capital leases                                              |  |                                     | (3,404     | ) |      |   | (9,530     | )
|                                                                        |  |                                     |            |   |      |   |            |  
|Net cash provided by financing activities                               |  |                                     | (3,404     | ) |      |   | 8,868,580  |  
|                                                                        |  |                                     |            |   |      |   |            |  
|INCREASE IN CASH                                                        |  |                                     | 156,407    |   |      |   | 475,334    |  
|CASH, at beginning of period                                            |  |                                     | 316,041    |   |      |   | 64,979     |  
|                                                                        |  |                                     |            |   |      |   |            |  
|CASH, at end of period                                                  |  | $                                   | 472,448    |   |      | $ | 540,313    |  
|                                                                        |  |                                     |            |   |      |   |            |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                                     |  |                                     |            |   |      |   |            |  
|Cash paid for interest                                                  |  | $                                   | 7,127      |   |      | $ | 11,599     |  
|                                                                        |  |                                     |            |   |      |   |            |  
|NON-CASH TRANSACTIONS:                                                  |  |                                     |            |   |      |   |            |  
|Equipment lease financing                                               |  | $                                   | 38,595     |   |      | $ |           |  
|                                                                        |  |                                     |            |   |      |   |            |  
|Equipment note payable                                                  |  | $                                   | 415,618    |   |      | $ |           |  
|                                                                        |  |                                     |            |   |      |   |            |  



See accompanying
notes to these consolidated financial statements.



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



1. Principles Of Consolidation, Organization
And Nature Of Operations:



The accompanying financial statements include
the accounts of DayStar Technologies, Inc. and DayStar Solar, LLC (formerly International Energy Trading, LLC), a wholly-owned subsidiary of DayStar Technologies, Inc. All significant intercompany transactions have been eliminated in consolidation.



Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted from these unaudited consolidated financial statements. These unaudited consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2004. The results of operations for the three months ended March 31, 2005 and 2004 are
not necessarily indicative of the operating results for the full year.



In the
opinion of management, all adjustments, consisting only of normal recurring accruals, have been made to present fairly the Companys financial position at March 31, 2005 and the results of its operations and its cash flows for the three months
ended March 31, 2005 and 2004.



DayStar Technologies, Inc. (the
Company) was formed in 1997 for the purpose of researching, developing and marketing innovative products to the renewable energy / photovoltaic industry. From its inception to present, the Company has focused primarily on concentrating
photovoltaic and thin-film solar cells. The principal source of revenue for the Company has been revenue from government funded research and development contracts.



International Energy Trading, LLC (IET) was formed in 2001 to manufacture and sell thin-film photovoltaic products developed and
patented by DayStar Technologies, Inc. IET was a dormant subsidiary until 2003 at which time the name was formally changed to DayStar Solar, LLC and the company commenced selling and installing solar energy systems.



To date, the Company has historically funded operations principally from government contracts
and the sale of equity securities. The Company expects to be dependent on additional capital infusions to execute our business plan, and will require additional capital to complete our next generation manufacturing processes which include a
partially-continuous pallet manufacturing process (Stage II) and continuous, roll-to-roll manufacturing process (Stage III). If adequate capital resources are not available to us, the Company will be forced to curtail or terminate operations.



As a result of the investment required to develop our proposed manufacturing
processes, the Company expects selling, general and administrative expenses, and research and development expenses to increase substantially in 2005 as new personnel are hired and investment made in new equipment. The Company therefore anticipates
that net losses will increase substantially until the latter part of 2005 when the Company expects an offset, to a limited degree, by revenue from the sale of CIGS solar cells.



2. Significant Accounting Policies:



Stock-Based Compensation  The Company accounts for stock-based compensation for employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost for stock, stock options or other similar instruments, granted to employees is measured as the
excess, if any, of the quoted market price of the Companys common stock at the measurement date (generally, the date of grant) over the amount an employee must pay to acquire the stock.



The Company accounts for stock-based compensation for non-employees under
Accounting for Stock-Based Compensation(SFAS No. 123). SFAS No. 123 requires that options, warrants, and similar instruments which are granted to non-employees for goods and services be recorded at fair value on the grant date. Fair value is
generally



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determined under an option pricing model using the criteria set forth in SFAS No. 123. The Company is subject to the pro forma disclosure requirements for
stock-based compensation for employees.



SFAS No. 123 requires
the Company to provide pro forma information regarding net income as if compensation costs for the Companys option plans and other awards had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The
Company estimates the fair value of each award at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                          |  |                             |      |   |      |   |      |  
|------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                          |  | Three Months EndedMarch 31, |     
|                          |  | 2005                        |      |   | 2004 |  
|Expected volatility       |  |                             | 89   | % |      |   | 82   | %
|Risk-free interest rate   |  |                             | 4.50 | % |      |   | 4.83 | %
|Expected dividends        |  | $                           |     |   |      | $ |     |  
|Expected terms (in years) |  |                             | 10   |   |      |   | 10   |  



|                                                         |  |                             |            |   |      |   |            |  
|-------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                         |  | Three Months EndedMarch 31, |           
|                                                         |  | 2005                        |            |   | 2004 |  
|Net loss, as reported                                    |  | $                           | (1,389,581 | ) |      | $ | (1,254,723 | )
|Pro forma stock compensation expense, net of tax benefit |  |                             | (45,011    | ) |      |   |           |  
|Employee stock compensation under the intrinsic method   |  |                             |           |   |      |   |           |  
|                                                         |  |                             |            |   |      |   |            |  
|Pro forma net loss                                       |  | $                           | (1,434,592 | ) |      | $ | (1,254,723 | )
|                                                         |  |                             |            |   |      |   |            |  
|Net loss per share, basic and diluted,                   |  |                             |            |   |      |   |            |  
|As reported                                              |  | $                           | (0.39      | ) |      | $ | (0.46      | )
|Pro forma stock compensation expense                     |  |                             | (0.01      | ) |      |   |           |  
|Employee stock compensation under the intrinsic method   |  |                             |           |   |      |   |           |  
|                                                         |  |                             |            |   |      |   |            |  
|Pro forma                                                |  | $                           | (0.40      | ) |      | $ | (0.46      | )
|                                                         |  |                             |            |   |      |   |            |  



Loss Per Share
 Loss per share is presented in accordance with the provisions of SFAS No. 128, Earnings Per Share. Basic EPS is calculated by dividing the income or loss available to common stockholders by the weighted number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. These common stock equivalents have been omitted from earnings per share
because they are anti-dilutive. Basic and diluted EPS were the same for the three months ended March 31, 2005 and 2004.



At March 31, 2005 common stock equivalents are comprised of:



|                               |  |              |  |                        |  |                        |  |                    |  |          
|------------------------------ |  | ------------ |  | ---------------------- |  | ---------------------- |  | ------------------ |  | ---------
|                               |  | Common Stock |  | Class A public warrant |  | Class B public warrant |  | Consultant warrant |  | Total    
|Public Warrants                |  |             |  | 2,371,830              |  | 4,743,660              |  |                   |  | 7,115,490
|Representatives Warrants      |  | 210,000      |  | 210,000                |  | 420,000                |  |                   |  | 840,000  
|Warrants issued to consultants |  |             |  |                       |  |                       |  | 135,000            |  | 135,000  
|Stock options                  |  | 140,100      |  |                       |  |                       |  |                   |  | 140,100  
|                               |  |              |  |                        |  |                        |  |                    |  |          
|Total                          |  |              |  |                        |  |                        |  |                    |  | 8,230,590



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Impact of Recently Issued Accounting Pronouncements 



In December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) is effective for public companies for annual periods beginning after December 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.



SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. The new
standard will be effective for the Company, beginning January 1, 2006. The Company has not yet completed their evaluation but expects the adoption to have an effect on the financial statements similar to the pro-forma effects reported above.



In November 2004, the FASB issued SFAS 151, Inventory Costs,
which revised ARB 43, relating to inventory costs. This revision is to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the criterion specified in ARB 43. In addition, this Statement requires the allocation of fixed production overheads to the costs of conversion be based on normal capacity of the
production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS 151 will have a material impact on the Companys financial
statements.



The FASB issued SFAS 153, Exchanges of Nonmonetary
Assets, which changes the guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is
effective during fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS 153 will have a material impact on the Companys financial statements.



3. Note Payable



In January 2005, the Company finalized an equipment purchase agreement to complete the acquisition of several pieces of equipment from a vendor. The Company paid $120,000
in 2004 as a down payment and took possession of certain equipment. Under the agreement, the Company will have 30 monthly payments of $5,323 followed by another 30 monthly payments of $16,339. The Company recorded a note payable of $415,618 based on
the present value of the payments using an interest rate of 14.75%. If, after January 2007, the Companys common stock trades above $10.00 for 10 consecutive days in a particular month, then the Company will be obligated for an additional
$4,877 in the subsequent months payments as additional consideration of the purchase.



4. Capital Lease Obligation



In March
2005 the Company leased equipment under an agreement classified as a capital lease. Equipment under this lease has a cost of $ 38,595. Future minimum lease payments under this capital lease is as follows:



|                                            |  |        |  
|------------------------------------------- |  | ------ | -
|Year                                        |  | Amount |  
|2005                                        |  | 8,910  |  
|2006                                        |  | 11,880 |  
|2007                                        |  | 11,880 |  
|2008                                        |  | 11,880 |  
|2009                                        |  | 3,960  |  
|                                            |  |        |  
|Total future minimum lease payments         |  | 48,510 |  
|Less amount representing interest           |  | (9,915 | )
|                                            |  |        |  
|Present value of net minimum lease payments |  | 38,595 |  



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5. Equity Incentive Plan



The Company has an Equity Incentive Plan to enable employees, outside directors and consultants to acquire an equity interest in the Company. The Plan reserves shares
of the Companys Common Stock for issuance for these purposes. Under the plan, the term of stock options shall not exceed ten years and incentive stock options shall not be granted with an exercise price of less than 100% of the fair market
value of the common stock, and non-qualified stock options shall not be granted with an exercise price of less than 85% of the fair market value of the common stock.



In January 2005, the Company granted 12,000 fully vested stock options under the plan with an exercise price of $2.59 per share. In February
2005, 10,000 stock options were granted under the plan vesting over 48 months with an exercise price of $4.81 per share. In April 2005, 16,400 stock options were granted under the plan with an exercise price of $6.83 per share, vesting over 48 month
period. All grants were at the market price on the date of grant.



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6. Consultant Warrants



In April 2005, the Company granted 30,000 fully vested warrants to consultants to purchase common stock at a price of $3.00. The fair value of the warrant was
calculated using the Black-Scholes pricing model with the following assumptions: dividend yield of zero percent; expected volatility of 89%; risk free interest rate of 4.50% and a term of five years. The fair value of the warrants, $168,856, will be
charged to income in April 2005 as Equity based compensation expense.



In
addition, monthly grants of 1,550 warrants to purchase one share of the Companys Common Stock at a price of $3.00 will be issued at the end of each calendar quarter to three consultants based on terms under their respective consulting
agreements based on service rendered.



|Item 2. | Managements Discussion and Analysis or Plan of Operation
|------- | ---------------------------------------------------------



The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial
condition. You should read this analysis in conjunction with our audited consolidated financial statements and related footnotes. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future
financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these forward-looking statements, including those set forth in the Annual Report on Form 10-KSB.



The following discussion and analysis should be read in conjunction with the unaudited financial statements contained in Part I, Item 1, and the related notes.



Overview



We began operations in 1997 for the purpose of developing thin-film, copper-indium-gallium-selenide solar cells, known as a CIGS solar cell,
and more cost-effective processes for manufacturing such solar cells. From inception, we have focused our efforts on research and development and raising capital.



On February 11, 2004, we successfully closed an initial public offering of 2.1 million units. A unit consisted of one share of common stock,
one Class A redeemable public warrant and two Class B non-redeemable public warrants, each warrant to purchase one share of common stock. The net proceeds from the offering, after deducting underwriting fees and offering expenses, were $8.3 million.
The proceeds are being used to fund (1) research and development expenses to further develop and refine our proprietary thin-film solar cell fabrication processes, (2) purchase capital equipment to create development-scale vacuum deposition
hardware, measurement and test equipment, and solar cell packaging hardware, (3) fund general, sales and corporate expenses, and (4) pay outstanding obligations. Although we do not anticipate significant revenue from operations in the near future,
as a result of the completion of the initial public offering we believe that our past performance is not necessarily indicative of future operations.



In addition to the investment required to develop our first and second generation (Gen-I and Gen-II) production lines, we expect our selling,
general and administrative expenses, and research and development expenses to increase substantially in 2005 as we hire new personnel and invest in new equipment. We therefore anticipate that our net losses will increase substantially until the
latter part of 2005 when we expect they will be offset to a limited degree by revenue from the sale of CIGS solar cells.



To date, we have historically funded our operations principally from government contracts and the sale of equity securities. We expect to be dependent on additional
capital infusions to execute our business plan, and will require additional capital to complete our next generation manufacturing processes which will be characterized by a fully continuous manufacturing process (Gen-III) and continuous,
roll-to-roll manufacturing process (Gen-IV). If adequate capital resources are not available to us, we will be forced to curtail or terminate operations.



Effective August 2004, we relocated our corporate headquarters from Grass Valley, California to Halfmoon, New York in order to take
advantage of state and local economic incentives. These incentives include capital grants for the reimbursement for a portion of machinery and equipment purchased, funding for a manufacturing renewable energy incentive program, and wage and
investment tax credits. We entered into a five year lease for an 18,000 square foot facility in Halfmoon where the Company has located research and development and plans to engage in manufacturing.



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Critical Accounting Policies and Estimates



The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosures. A summary of those accounting policies can be found in the footnotes to the consolidated financial statements set forth in the Annual Report on Form 10-KSB. Certain of our
accounting policies are considered critical as they are both important to the portrayal of our financial condition and results of operations and require judgments on the part of management about matters that are uncertain. We have identified the
following accounting policies that are important to the presentation of our financial condition and results of operations.



Revenue Recognition



The Company recognizes revenue on product sales as product is sold, collectibility is reasonably assured, and delivery has occurred. We recognize research revenues at the time costs benefiting the contract are
incurred, which approximates the percentage of completion method. The percentage-of-completion is measured by the total costs incurred to date compared to the estimated total costs for each contract. Revenue from the sale and installation of solar
electricity systems is recognized when installation is complete and collectibility is reasonably assured.



Patents



Patent costs incurred to
prosecute patents developed by us are expensed as incurred. Patent costs paid to obtain patents from third parties are capitalized and amortized over the life of the patent. We review the functional life of our patents on a regular basis. If it is
determined that the functional life is less than the legal life, we would accordingly change the amortization period to the functional life.



Long-lived Assets



Our policy regarding long-lived assets is to evaluate the recoverability or usefulness of these assets when the facts and circumstances suggest that these assets may be impaired. This analysis relies on a number of
factors, including changes in strategic direction, business plans, regulatory developments, economic and budget projections, technological improvements, and operating results. The test of recoverability or usefulness is a comparison of the asset
value to the undiscounted cash flow of its expected cumulative net operating cash flow over the assets remaining useful life. Any write-downs would be treated as permanent reductions in the carrying amount of the asset and an operating loss
would be recognized. To date, we have had recurring operating losses and the recoverability of our long-lived assets is contingent upon executing our business plan that includes monitoring our manufacturing costs and significantly increasing sales.
If we are unable to execute our business plan, we may be required to write down the value of our long-lived assets in future periods



Non-employees Equity Grants



The Company accounts for stock-based compensation for non-employees under Accounting for Stock-Based Compensation(SFAS No. 123). SFAS No. 123 requires that
options, warrants, and similar instruments which are granted to non-employees for goods and services be recorded at fair value on the grant date. Fair value was determined using the Black-Scholes option-pricing model and using the criteria set forth
in SFAS No. 123.



Results of Operations



Comparison of Three Months Ended March 31, 2005 and 2004



Revenues. Our total revenues were $34,597 for the three months ended March 31, 2005
compared to $49,078 for the three months ended March 31, 2004. These revenues were from the sale of residential solar systems by our subsidiary Daystar Solar.



Cost of revenues. Our cost of product revenues related to the sale of residential solar systems was $26,665 (77.1% of revenue) for the three months ended March
31, 2005 compared to $44,734 (91.1% of revenues) for the three months ended March 31, 2004.



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Selling, general and administrative. Selling, general and administrative expenses were $551,350 for the three
months ended March 31, 2005 compared to $284,448 for the three months ended March 31, 2004, an increase of $266,902 or 94%. The increase in selling, general and administrative expenses resulted primarily from increased salaries and costs related to
conducting business as a public company and recruiting new employees. In addition, subsequent to the IPO, we moved our corporate headquarters and principal development and production facilities from Grass Valley, California to Halfmoon, New York.



Research and development expenses. Research and development expenses
were $655,074 for the three months ended March 31, 2005 compared to $58,682 for the three months ended March 31, 2004, an increase of $596,392 or 1016%. Research and development expenses increased due to an increase in the number of employees,
recruiting new employees and increased development activities related to creating the capability to manufacture photovoltaic cells. We expect research and development expenses to increase in 2005 as additional engineering personnel are added.



Equity-based compensation. Equity-based compensation was $61,766 for
the three months ended March 31, 2005 compared to $316,527 for the three months ended March 31, 2004, a decrease of $254,761 or 80%. During the later part of 2003, we adopted an Equity Incentive Plan to enable employees, outside directors and
consultants to acquire an equity interest in the Company. As a result of grants of restricted stock to various officers and employees under the Plan during 2003, we recorded a non-cash expense of $55,385 for the three months ended March 31, 2005 and
$316,527 for the three months ended March 31, 2004. Also included in the expense for the three months ended March 31, 2005 is $6,381 related to warrants issued to consultants.



Depreciation and amortization. Depreciation and amortization expenses were $132,319 for the three months ended March 31, 2005
compared to $21,100 for the three months ended March 31, 2004, an increase of $111,219 or 527%. Depreciation and amortization expense increased primarily as a result of capital equipment being placed in service in the Halfmoon facility since the
latter part of 2004.



Interest expense. Interest expense was $14,243 for
the three months ended March 31, 2005 compared to $585,936 for the three months ended March 31, 2004. In February 2004 we recognized non-cash interest expense of $506,650 related to the conversion of the equity unit subscriptions from debt to
equity. Other interest costs result from financing costs on capital lease obligations and notes payable



Other income. Other income was $17,239 for the three months ended March 31, 2005, compared to $7,626 for the three months ended March 31, 2004. Other income results primarily from the investment of excess funds
from the initial public offering in interest bearing instruments.



Net
loss. Our net loss was $1,389,581 for the three months ended March 31, 2005 compared to a loss of $1,254,723 for the three months ended March 31, 2004. The increase in net loss was due primarily to the investment required to develop our process
for manufacturing photovoltaic cells in our initial production facility, in addition to an increase in selling, general and administrative activity, equity-based compensation expense, and interest expense recorded as a result of the conversion of
the equity unit subscriptions to common stock. In view of the level of expenditures required to sustain operations without significant product or research revenue anticipated in 2005, we also expect to experience a significant net loss for the
remainder of 2005.



Liquidity and Capital Resources



Liquidity At March 31, 2005, our cash and cash equivalents and
investments totaled $2,228,387. During the first quarter of 2004, we successfully completed our initial public offering, which generated net proceeds of $8,356,559.



Net cash used in operating activities was $1,450,968 for the three months ended March 31, 2005 compared to $856,593 for the
three months ended March 31, 2004. The activity for the three months ended March 31, 2005 is primarily the result of operating expenses paid in cash of $551,350 for selling, general and administrative expense, and $655,074 for research and
development expenses. Since the IPO in February 2004, we have invested in expanding operations in Halfmoon, New York, and hired personnel and consultants to begin production and sales of our thin-film solar cells. In addition, during the three
months ended March 31, 2005, we reduced accounts payable by $201,182, primarily due to payables related to equipment purchases of $249,595 at December 31, 2004 being converted into a note payable.



Expenditures for equipment purchases for the three months ended March 31,
2005 were $563,983. We continue to purchase equipment and adapting the Halfmoon facility to establish our initial production lines in New York.



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During the three months ended March 31, 2005 we neither completed any new equity financing arrangement
nor debt not related to equipment purchases. We did enter into an equipment note payable for $415,618 and an equipment financing lease of $38,595.



Capital Resources.We have historically financed our operations primarily from proceeds of the sale of equity securities, revenues received under
research and development contracts, non-cash compensation arrangements and equipment lease financing. We presently do not have a credit facility with a lending institution.



In January 2005, the New York State Energy Research and Development Authority (NYSERDA) awarded us a $1,000,000 competitive
grant. Payment of the award will be in phases as the Company meets facility scale-up and production milestones to commercially produce solar cells. Under the contract, the first $250,000 is based on completion of the production facility at HalfMoon
which is expected to be received in the second quarter of 2005. The next $350,000 is based on meeting certain production capacity milestones, which are expected to be met in subsequent quarters in 2005. The final $400,000 is based on product sales
coupled with the Companys commitment to a new facility at the Saratoga Technology + Energy Park. In the past, we were awarded government research contracts to develop our thin-film and concentrating PV technologies. While we expect to continue
to pursue similar cost-sharing government research contracts in the future, there can be no assurance that we will obtain such funds.



We have experienced negative cash flows from operations since our inception and do not anticipate generating sufficient positive cash flows to fund our
operations in the foreseeable future. We expect that our available cash balance, including the proceeds from the IPO, monies from New York state incentives, equipment financing and the projected small amounts, if any, of cash that may be generated
from operations, will be sufficient to finance our activities only until the fourth quarter of 2005. Accordingly, the Company is currently exploring additional financing. By the end of 2005, we expect to be in production with our initial Gen-I and
Gen-II manufacturing processes in the Halfmoon facility and will be developing a next generation Gen-III continuous manufacturing process. Although product sales may generate some revenues during 2006, we will require significant additional
financing to fund further capital expenditures related to expansion of our manufacturing operations, especially as we approach implementation of the Gen-III continuous manufacturing process.



Without additional financing, the Company would need to delay certain of
these activities and defer certain capital expenditures currently planned at the Halfmoon facility. The Company is currently considering various opportunities to obtain private equity funding. In the alternative, the Company is also considering
conducting a new public offering of its securities. Such financing may not be available to us on terms that are acceptable to us, if at all, and any new equity financing may be dilutive to our stockholders. If such funds are not available, the
Company will be required to reduce or curtail research and development efforts to generate positive cash flow at the manufacturing operations at the Halfmoon facility.



Capital Commitments.At March 31, 2005, we had outstanding $250,000 of purchase orders for equipment and factory
build-out. The equipment is expected to be received during the second quarter of 2005. Other material commitments include rental payments under operating leases for office space and equipment, and commitments under employment contracts with our
President and Chief Executive Officer, Chief Financial Officer, and a Vice President.



Off-Balance Sheet Arrangements.The Companys only off-balance sheet obligations are for operating leases entered into in the Companys ordinary course of business. Additional information regarding
these off-balance sheet obligations is disclosed in footnote 6 to the consolidated financial statements set forth in the Annual Report on Form 10-KSB.



|Item 3. | Controls and Procedures.
|------- | ------------------------



The Companys President and Chief Executive Officer and the Companys Chief Financial Officer have reviewed the disclosure controls and procedures relating to
the Company at March 31, 2005 and concluded that such controls and procedures were effective to provide reasonable assurance that all material information about the financial and operational activities of the Company was made known to them. There
were no changes in the Companys internal control over financial reporting during the three months ended March 31, 2005 that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------



There are at present no legal proceedings pending against the Company.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------



Use of Proceeds From Sales of Registered Securities



On February 5, 2004, the SEC declared effective our Registration Statement on Form SB-2 (Reg. No. 333-110337), and we closed our initial public offering
of 2,100,000 units on February 11, 2004. Each unit consisted of one share of common stock, one Class A redeemable public warrant and two Class B non-redeemable public warrants. The managing underwriter of our initial public offering was Paulson
Investment Company, Inc. The initial public offering price was $5.00 per unit. The gross proceeds of the offering were $10,500,000. Our net proceeds from the offering, after deducting the underwriters discount of $840,000 and other fees and
expenses, aggregated $8,282,250. On March 5, 2004 the underwriters exercised a portion of their over-allotment option to purchase 18,500 additional units at the initial public offering price, resulting in additional offering proceeds of $92,500.
After deducting estimated offering expenses and underwriting discounts, we received $74,308 of net proceeds.



As of March 31, 2005, we had applied proceeds from the initial public offering as follows:



|                           |  |   |          
|-------------------------- |  | - | ---------
|Research and development   |  | $ | 1,730,903
|Capital equipment          |  |   | 2,403,000
|Sales and marketing        |  |   | 170,192  
|General corporate expenses |  |   | 1,840,575
|                           |  |   |          
|Total                      |  | $ | 6,144,670
|                           |  |   |          



|Item 6. | Exhibits and Reports on Form 8-K:
|------- | ---------------------------------



(a) The following exhibits are filed as part of this report:



|            |  |                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                           
|            | 
|31.1        |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    
|            | 
|31.2        |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.    
|            | 
|32.1        |  | Certification of the Chief Executive pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        
|            | 
|32.2        |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES



In accordance with the requirements
of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                           |  |  |  |     |  |                         |  |                                                                                             
|-------------------------- |  |  |  | --- |  | ----------------------- |  | --------------------------------------------------------------------------------------------
|DAYSTAR TECHNOLOGIES, INC. |  |  |  |    
|                           |  |  | 
|Date: May 13, 2005         |  |  |  | By: |  | /s/ JOHN R. TUTTLE     
|                           |  |  |  |     |  |                         |  | John R. Tuttle Chairman, President and Chief Executive Officer (Principle Executive Officer)
|                           |  |  | 
|Date: May 13, 2005         |  |  |  | By: |  | /s/ STEPHEN A. AANDERUD
|                           |  |  |  |     |  |                         |  | Stephen A. Aanderud Chief Financial Officer (Principal Financial and Accounting Officer)    



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