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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, 2007

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.

(Exact name of small business issuer as specified 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                      |  | (518) 383-4600                      
|(Address of principal executive offices)                       |  | (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 ̈

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

At May 8,
2007, 14,896,562 shares of the registrants Common Stock, par value $0.01 per share, were outstanding.

Transitional Small Business Disclosure
Format:    Yes ̈No  x



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

Quarterly Report on Form 10-QSB

Quarterly Period Ended March 31, 2007

Table of Contents



|                                                                                                                                                                                     |  |   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --
|Part I  Financial Information                                                                                                                                                       |  |   
|                                                                                                                                                                                     | 
|Item 1. Financial Statements                                                                                                                                                         |  |   
|                                                                                                                                                                                     | 
|Consolidated Balance SheetMarch 31, 2007                                                                                                                                            |  | 3 
|                                                                                                                                                                                     | 
|Consolidated Statements of OperationsFor the Three Months Ended March 31, 2007 and 2006 and For the Period From July 1, 2005 (Inception of the Development Stage) to March 31, 2007 |  | 4 
|                                                                                                                                                                                     | 
|Consolidated Statement of Changes in Stockholders EquityFor the Period From July 1, 2005 (Inception of the Development Stage) to March 31, 2007                                    |  | 5 
|                                                                                                                                                                                     | 
|Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 and For the Period From July 1, 2005 (Inception of the Development Stage) to March 31, 2007 |  | 6 
|                                                                                                                                                                                     | 
|Notes to Consolidated Financial Statements                                                                                                                                           |  | 7 
|                                                                                                                                                                                     | 
|Item 2. Managements Discussion and Analysis or Plan of Operation                                                                                                                    |  | 14
|                                                                                                                                                                                     | 
|Item 3. Controls and Procedures                                                                                                                                                      |  | 19
|                                                                                                                                                                                     | 
|PART II  Other Information                                                                                                                                                          |  |   
|                                                                                                                                                                                     | 
|Item 6. Exhibits and Reports on Form 8-K                                                                                                                                             |  | 19
|                                                                                                                                                                                     | 
|Signatures                                                                                                                                                                           |  | 19



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##### Table of Contents

PART 1. FINANCIAL INFORMATION



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

DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                                                                     |  |               |             |  
|---------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | -
|                                                                                                     |  | March 31,2007 |            
|ASSETS                                                                                               |  |               |             |  
|Current Assets:                                                                                      |  |               |             |  
|Cash and cash equivalents                                                                            |  | $             | 4,139,173   |  
|Accounts receivable                                                                                  |  |               | 4,195       |  
|Other current assets                                                                                 |  |               | 818,849     |  
|                                                                                                     |  |               |             |  
|Total current assets                                                                                 |  |               | 4,962,217   |  
|Property and Equipment, at cost                                                                      |  |               | 13,952,906  |  
|Less accumulated depreciation and amortization                                                       |  |               | (3,300,145  | )
|                                                                                                     |  |               |             |  
|Net property and equipment                                                                           |  |               | 10,652,761  |  
|                                                                                                     |  |               |             |  
|Other Assets                                                                                         |  |               | 75,748      |  
|                                                                                                     |  |               |             |  
|Total Assets                                                                                         |  | $             | 15,690,726  |  
|                                                                                                     |  |               |             |  
|                                                                                                     | 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                 |  |               |             |  
|Current Liabilities:                                                                                 |  |               |             |  
|Accounts payable and accrued expenses                                                                |  | $             | 1,736,193   |  
|Notes and capital leases payable, current portion                                                    |  |               | 165,596     |  
|Deferred revenue                                                                                     |  |               | 67,000      |  
|                                                                                                     |  |               |             |  
|Total current liabilities                                                                            |  |               | 1,968,789   |  
|Long-Term Liabilities:                                                                               |  |               |             |  
|Notes and capital leases payable                                                                     |  |               | 313,947     |  
|Deferred revenue                                                                                     |  |               | 240,583     |  
|Stock warrants                                                                                       |  |               | 3,510,207   |  
|                                                                                                     |  |               |             |  
|Total long-term liabilities                                                                          |  |               | 4,064,737   |  
|                                                                                                     | 
|Commitments and Contingencies (Notes 2 and 7)                                                        |  |               |            |  
|                                                                                                     | 
|Stockholders Equity:                                                                                |  |               |             |  
|Preferred stock, $.01 par value; 3,000,000 shares authorized; 0 shares issued and outstanding        |  |               |            |  
|Common stock, $.01 par value; 60,000,000 shares authorized; 14,860,437 shares issued and outstanding |  |               | 148,604     |  
|Additional paid-in capital                                                                           |  |               | 61,914,897  |  
|Accumulated deficit                                                                                  |  |               | (10,145,391 | )
|Deficit accumulated during the development stage                                                     |  |               | (42,260,910 | )
|                                                                                                     |  |               |             |  
|Total stockholders equity                                                                           |  |               | 9,657,200   |  
|                                                                                                     |  |               |             |  
|Total Liabilities and Stockholders Equity                                                           |  | $             | 15,690,726  |  
|                                                                                                     |  |               |             |  

See accompanying notes to these consolidated financial statements.



3



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|-------------------------------------------------------------- |  | ----------------------------------- | ----------- | - | ----------------------------------------------------------------------------------- | - | ---------- | - |  | - | ----------- | -
|                                                               |  | For the Three Months EndedMarch 31, |             |   | For the Periodfrom July 1, 2005(Inception of theDevelopment Stage)to
March 31, 2007 |  
|                                                               |  | 2007                                |             |   | 2006                                                                                |   |           
|Revenue:                                                       |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Product revenue                                                |  | $                                   |            |   |                                                                                     | $ |           |   |  | $ | 3,528       |  
|Research and development contract revenue                      |  |                                     |            |   |                                                                                     |   | 30,000     |   |  |   | 555,000     |  
|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Total revenue                                                  |  |                                     |            |   |                                                                                     |   | 30,000     |   |  |   | 558,528     |  
|Costs and Expenses:                                            |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Research and development                                       |  |                                     | 2,293,632   |   |                                                                                     |   | 1,894,468  |   |  |   | 14,452,795  |  
|Selling, general and administrative                            |  |                                     | 1,401,079   |   |                                                                                     |   | 1,257,197  |   |  |   | 9,074,002   |  
|Restructuring                                                  |  |                                     | 1,382,801   |   |                                                                                     |   |           |   |  |   | 1,821,856   |  
|Depreciation and amortization                                  |  |                                     | 694,391     |   |                                                                                     |   | 218,072    |   |  |   | 2,821,194   |  
|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Total costs and expenses                                       |  |                                     | 5,771,903   |   |                                                                                     |   | 3,369,737  |   |  |   | 28,169,847  |  
|Other Income (Expense):                                        |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Other income                                                   |  |                                     | 43,214      |   |                                                                                     |   | 114,182    |   |  |   | 1,376,886   |  
|Interest expense                                               |  |                                     | (88,058     | ) |                                                                                     |   | (21,936    | ) |  |   | (1,866,260  | )
|Amortization of note discount and financing costs              |  |                                     | (3,800,588  | ) |                                                                                     |   |           |   |  |   | (8,548,395  | )
|Gain/(loss) on derivative liabilities                          |  |                                     | (2,206,754  | ) |                                                                                     |   |           |   |  |   | 485,360     |  
|Loss on extinguishment of debt                                 |  |                                     | (6,091,469  | ) |                                                                                     |   |           |   |  |   | (6,091,469  | )
|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Total other income (expense)                                   |  |                                     | (12,143,655 | ) |                                                                                     |   | 92,246     |   |  |   | (14,643,878 | )
|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Loss from Continuing Operations                                |  |                                     | (17,915,558 | ) |                                                                                     |   |           |   |  |   | (42,255,197 | )
|Loss from discontinued operations of DayStar Solar, LLC        |  |                                     |            |   |                                                                                     |   |           |   |  |   | (5,714      | )
|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Net Loss                                                       |  | $                                   | (17,915,558 | ) |                                                                                     | $ | (3,247,491 | ) |  | $ | (42,260,911 | )
|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Weighted average common shares outstanding (basic and diluted) |  |                                     | 12,570,489  |   |                                                                                     |   | 6,501,711  |   |  |   |             |  
|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  
|Net loss per share (basic and diluted)                         |  | $                                   | (1.43       | ) |                                                                                     | $ | (.50       | ) |  |   |             |  
|                                                               |  |                                     |             |   |                                                                                     |   |            |   |  |   |             |  

See accompanying notes to these consolidated financial statements.



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE PERIOD FROM JULY 1, 2005 (INCEPTION OF THE DEVELOPMENT STAGE) TO MARCH 31, 2007

(Unaudited)



|                                                                                                       |  |              |   |  |                     |         |   |                          |         |   |                                  |   |      |                    |  |   |                                              |   |  |       |          |   |  |   |             |   |  |   |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ------------------- | ------- | - | ------------------------ | ------- | - | -------------------------------- | - | ---- | ------------------ |  | - | -------------------------------------------- | - |  | ----- | -------- | - |  | - | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                       |  | Common Stock |   |  | Class BCommon Stock |         |   | AdditionalPaid-InCapital |         |   | DeferredEquity BasedCompensation |   |      | AccumulatedDeficit |  |   | DeficitAccumulatedDuring theDevelopmentStage |   |  | Total |         
|                                                                                                       |  | Shares       |   |  | Amount              |         |   | Shares                   |         |   | Amount                           |   |      |                    |  |   |                                             
|BALANCES, July 1, 2005                                                                                 |  | 5,083,258    |   |  | $                   | 50,833  |   |                          | 29,000  |   |                                  | $ | 290  |                    |  | $ | 22,443,181                                   |   |  | $     | (110,770 | ) |  | $ | (10,145,391 | ) |  | $ |            |   |  | $ | 12,238,143  |  
|Exercise of warrants and stock options, 7/05  12/05 at $6.00$8.25 per share                          |  | 1,190,748    |   |  |                     | 11,907  |   |                          |        |   |                                  |   |     |                    |  |   | 7,208,295                                    |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 7,220,202   |  
|Conversion of Class B common stock                                                                     |  | 58,000       |   |  |                     | 580     |   |                          | (29,000 | ) |                                  |   | (290 | )                  |  |   | (290                                         | ) |  |       |         |   |  |   |            |   |  |   |            |   |  |   |            |  
|Equity-based compensation                                                                              |  | 38,750       |   |  |                     | 388     |   |                          |        |   |                                  |   |     |                    |  |   | 411,912                                      |   |  |       | (292,940 | ) |  |   |            |   |  |   |            |   |  |   | 119,360     |  
|Net loss                                                                                               |  |             |   |  |                     |        |   |                          |        |   |                                  |   |     |                    |  |   |                                             |   |  |       |         |   |  |   |            |   |  |   | (3,904,151  | ) |  |   | (3,904,151  | )
|                                                                                                       |  |              |   |  |                     |         |   |                          |         |   |                                  |   |      |                    |  |   |                                              |   |  |       |          |   |  |   |             |   |  |   |             |   |  |   |             |  
|BALANCES, December 31, 2005                                                                            |  | 6,370,756    |   |  |                     | 63,708  |   |                          |        |   |                                  |   |     |                    |  |   | 30,063,098                                   |   |  |       | (403,710 | ) |  |   | (10,145,391 | ) |  |   | (3,904,151  | ) |  |   | 15,673,554  |  
|Reclassification upon adoption of SFAS 123(R)                                                          |  |             |   |  |                     |        |   |                          |        |   |                                  |   |     |                    |  |   | (403,710                                     | ) |  |       | 403,710  |   |  |   |            |   |  |   |            |   |  |   |            |  
|Exercise of warrants and stock options, 1/06, 3/06 & 9/06 at $2.06$7.50 per share                     |  | 132,815      |   |  |                     | 1,328   |   |                          |        |   |                                  |   |     |                    |  |   | 670,544                                      |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 671,872     |  
|Equity-based compensation                                                                              |  | 177,062      |   |  |                     | 1,771   |   |                          |        |   |                                  |   |     |                    |  |   | 1,320,949                                    |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 1,322,720   |  
|Beneficial conversion feature on convertible note                                                      |  |             |   |  |                     |        |   |                          |        |   |                                  |   |     |                    |  |   | 1,223,842                                    |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 1,223,842   |  
|Shares issued in payment of principal and interest on convertible note, 8/06 -12/06                    |  | 1,143,036    |   |  |                     | 11,430  |   |                          |        |   |                                  |   |     |                    |  |   | 7,366,729                                    |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 7,378,159   |  
|Warrants issued for placement of convertible note at $5.38 per share                                   |  |             |   |  |                     |        |   |                          |        |   |                                  |   |     |                    |  |   | 140,419                                      |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 140,419     |  
|Net loss                                                                                               |  |             |   |  |                     |        |   |                          |        |   |                                  |   |     |                    |  |   |                                             |   |  |       |         |   |  |   |            |   |  |   | (20,441,201 | ) |  |   | (20,441,201 | )
|                                                                                                       |  |              |   |  |                     |         |   |                          |         |   |                                  |   |      |                    |  |   |                                              |   |  |       |          |   |  |   |             |   |  |   |             |   |  |   |             |  
|BALANCES, December 31, 2006                                                                            |  | 7,823,669    |   |  | $                   | 78,237  |   |                          |        |   |                                  | $ |     |                    |  | $ | 40,381,871                                   |   |  | $     |         |   |  | $ | (10,145,391 | ) |  | $ | (24,345,352 | ) |  | $ | 5,969,365   |  
|Exercise of warrants and stock options, 1/07  3/07 at $2.00$3.45 per share                           |  | 208,500      |   |  |                     | 2,085   |   |                          |        |   |                                  |   |      |                    |  |   | 1,186,855                                    |   |  |       |          |   |  |   |             |   |  |   |             |   |  |   | 1,188,940   |  
|Equity-based compensation                                                                              |  | (4,687       | ) |  |                     | (47     | ) |                          |        |   |                                  |   |     |                    |  |   | 320,626                                      |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 320,579     |  
|Issuance of shares pursuant to offering, 2/07 at $2.00 per share                                       |  | 2,500,000    |   |  |                     | 25,000  |   |                          |         |   |                                  |   |      |                    |  |   | 4,975,000                                    |   |  |       |          |   |  |   |             |   |  |   |             |   |  |   | 5,000,000   |  
|Shares issued in payment of principal and interest on convertible note, 1/07  2/07 at $2.00 per share |  | 3,875,384    |   |  |                     | 38,754  |   |                          |        |   |                                  |   |     |                    |  |   | 12,657,449                                   |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 12,696,203  |  
|Shares issued for placement of note and offering 3/07 at $2.00 per share                               |  | 457,571      |   |  |                     | 4,575   |   |                          |        |   |                                  |   |     |                    |  |   | 2,393,096                                    |   |  |       |         |   |  |   |            |   |  |   |            |   |  |   | 2,397,671   |  
|Net loss                                                                                               |  |             |   |  |                     |        |   |                          |        |   |                                  |   |     |                    |  |   |                                             |   |  |       |         |   |  |   |            |   |  |   | (17,915,558 | ) |  |   | (17,915,558 | )
|                                                                                                       |  |              |   |  |                     |         |   |                          |         |   |                                  |   |      |                    |  |   |                                              |   |  |       |          |   |  |   |             |   |  |   |             |   |  |   |             |  
|BALANCES, March 31, 2007                                                                               |  | 14,860,437   |   |  | $                   | 148,604 |   |                          |        |   |                                  | $ |     |                    |  | $ | 61,914,897                                   |   |  | $     |         |   |  | $ | (10,145,391 | ) |  | $ | (42,260,910 | ) |  | $ | 9,657,200   |  
|                                                                                                       |  |              |   |  |                     |         |   |                          |         |   |                                  |   |      |                    |  |   |                                              |   |  |       |          |   |  |   |             |   |  |   |             |   |  |   |             |  

See accompanying notes to these consolidated financial statements.



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|----------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ------------------------------------------------------------------------------------ | - | ---------- | - |  | - | ----------- | -
|                                                                        |  | For the Years EndedMarch 31, |             |   | For the Periodfrom July 1,
2005(Inception of the Development Stage) to March 31,2007 |  
|                                                                        |  | 2007                         |             |   | 2006                                                                                 |   |           
|Cash Flows from Operating Activities:                                   |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Net loss                                                                |  | $                            | (17,915,558 | ) |                                                                                      | $ | (3,247,491 | ) |  | $ | (42,260,910 | )
|Adjustments to reconcile net loss to cash used in operating activities: |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Depreciation and amortization                                           |  |                              | 694,391     |   |                                                                                      |   | 218,072    |   |  |   | 2,821,194   |  
|Equity-based compensation                                               |  |                              | 320,579     |   |                                                                                      |   | 331,334    |   |  |   | 1,900,715   |  
|Non-cash interest                                                       |  |                              | 279,370     |   |                                                                                      |   |           |   |  |   | 1,605,084   |  
|Amortization of note discount and financing costs                       |  |                              | 3,634,439   |   |                                                                                      |   |           |   |  |   | 8,382,247   |  
|(Gain)/loss on derivative liabilities                                   |  |                              | 2,206,754   |   |                                                                                      |   |           |   |  |   | (485,360    | )
|Shares issued for restructuring                                         |  |                              | 340,600     |   |                                                                                      |   |           |   |  |   | 340,600     |  
|Loss on extinguishment of debt                                          |  |                              | 6,091,469   |   |                                                                                      |   |           |   |  |   | 6,091,469   |  
|Gain on sale of assets                                                  |  |                              |            |   |                                                                                      |   | (1,750     | ) |  |   | (13,049     | )
|Changes in operating assets and liabilities:                            |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Receivables                                                             |  |                              | (289        | ) |                                                                                      |   | 520,022    |   |  |   | (4,195      | )
|Other assets                                                            |  |                              | 2,786,105   |   |                                                                                      |   | (145,915   | ) |  |   | (782,915    | )
|Accounts payable and accrued expenses                                   |  |                              | (964,120    | ) |                                                                                      |   | 174,665    |   |  |   | 1,445,780   |  
|Deferred revenue                                                        |  |                              | (1,750      | ) |                                                                                      |   |           |   |  |   | 298,250     |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Net cash used in operating activities                                   |  |                              | (2,528,010  | ) |                                                                                      |   | (2,151,063 | ) |  |   | (20,661,090 | )
|Cash Flows from Investing Activities:                                   |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Purchase of investments                                                 |  |                              |            |   |                                                                                      |   | (3,122,334 | ) |  |   | (17,657,732 | )
|Proceeds from sale of investments                                       |  |                              |            |   |                                                                                      |   | 3,072,195  |   |  |   | 18,362,973  |  
|Purchase of equipment and improvements                                  |  |                              | (101,034    | ) |                                                                                      |   | (1,306,183 | ) |  |   | (10,519,080 | )
|Proceeds from sale of assets                                            |  |                              |            |   |                                                                                      |   |           |   |  |   | 3,120       |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Net cash used in investing activities                                   |  |                              | (101,034    | ) |                                                                                      |   | (1,356,322 | ) |  |   | (9,810,719  | )
|Cash Flows from Financing Activities:                                   |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Proceeds from sale of stock                                             |  |                              | 5,000,000   |   |                                                                                      |   |           |   |  |   | 5,000,000   |  
|Proceeds from issuance of notes                                         |  |                              |            |   |                                                                                      |   |           |   |  |   | 15,000,000  |  
|Payments on notes and capital leases                                    |  |                              | (1,518,700  | ) |                                                                                      |   | (17,162    | ) |  |   | (2,015,768  | )
|Cost of financing                                                       |  |                              |            |   |                                                                                      |   |           |   |  |   | (924,797    | )
|Proceeds from exercise of warrants and stock options                    |  |                              | 426,198     |   |                                                                                      |   | 532,470    |   |  |   | 8,180,219   |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Net cash provided by financing activities                               |  |                              | 3,907,498   |   |                                                                                      |   | 515,308    |   |  |   | 25,239,654  |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Increase \ (decrease) in cash and cash equivalents                      |  |                              | 1,278,454   |   |                                                                                      |   | (2,992,077 | ) |  |   | (5,232,155  | )
|Cash and cash equivalents, beginning of period                          |  |                              | 2,860,719   |   |                                                                                      |   | 7,283,295  |   |  |   | 9,371,328   |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Cash and cash equivalents, end of period                                |  | $                            | 4,139,173   |   |                                                                                      | $ | 4,291,218  |   |  | $ | 4,139,173   |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Supplemental Cash Flow Information:                                     |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Cash paid for interest                                                  |  | $                            |            |   |                                                                                      | $ | 13,397     |   |  |   |             |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Non-Cash Transactions:                                                  |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Principal payments on convertible note, in common stock                 |  | $                            | 7,047,556   |   |                                                                                      | $ |           |   |  |   |             |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  
|Warrants issued for placement of convertible note                       |  | $                            | 2,057,071   |   |                                                                                      | $ |           |   |  |   |             |  
|                                                                        |  |                              |             |   |                                                                                      |   |            |   |  |   |             |  

See accompanying notes to these consolidated financial statements.



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Principles of Consolidation, Organization and Nature of Operations:

DayStar Technologies, Inc. (the Company) is a development stage enterprise that was formed in 1997 for the purpose of developing,
manufacturing and marketing innovative products to the photovoltaic industry. From its inception, the Company has focused primarily on thin-film copper indium gallium selenide (CIGS) solar cells and secondarily on concentrator
photovoltaics. The principal source of revenue for the Company has been revenue from government funded research and development contracts.

The accompanying consolidated financial statements include the accounts of the Company 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. During the second quarter of 2005, the Company discontinued operations of DayStar Solar, LLC. Upon discontinuing operations of DayStar Solar, LLC, the Company became a development stage enterprise.

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, 2006. The results of operations for the three months ended March 31, 2007 and 2006 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, 2007 and the results of its operations and its cash flows for the three months ended March 31, 2007 and 2006 and for the period from July 1, 2005
(Inception of the Development Stage) to March 31, 2007.

2. Liquidity and Future Operations:

The Company currently spends approximately $1.2 million per month on research, development, selling, general and administrative costs and all funding
received to date has been utilized to maintain the monthly operational cost while in the development stage of business. For the three months ended March 31, 2007, the Company reported a net loss of approximately $17.9 million, which included
non-cash expenses of $13.1 million primarily associated with the Companys convertible note, its restructuring and ultimate conversion to shares of the Companys common stock.

The Companys consolidated financial statements for the year ended December 31, 2006 and for the three months ended March 31, 2007 were
prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company is in the development stage, and as such, has historically reported net
losses. The Company anticipates it will continue to incur losses in the future as it enters commercialization for its products utilizing its next generation (Gen-III) manufacturing processes. Commercialization activities will require significant
capital expenditures related to the manufacture of this next generation production equipment and build-out of the California facilities that will house the equipment, as well as the associated development and administrative costs. In order to fund
the costs associated with such development, the Company will require additional financing. Without additional financing, the Company would need to delay certain of these activities, and/or curtail operations.

The Companys financing options include (1) obtaining private equity funding, (2) evaluating the likelihood of converting the Class B
public warrants to common shares of the Companys stock, (3) completing a secondary public offering, (4) obtaining debt financing and (5) increasing government grant and other contract revenue. Such financing may not be available
to the Company on terms that are acceptable to it, if at all, and any new equity financing may be dilutive to its stockholders.

If the
Company is unable to raise sufficient capital, liquidity problems will cause the Company to curtail operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other such actions that could adversely affect future
operations. These factors raise substantial doubt as to the Companys ability to continue operations as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of assets or
the



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

3. Significant Accounting Policies:

Revenue
RecognitionThe Company recognizes revenue in accordance with Securities and Exchange Commissions Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the sellers price to the buyer is fixed and determinable; and
(4) collectibility is reasonably assured.

Research and development contract revenue is recognized as the Company meets milestones as
set forth under the contract. During the three months ended March 31, 2007, the Company did not recognize any contract revenue.

Research and Development CostsResearch and development costs are expensed as incurred. Funds obtained from government agencies that represent a cost reimbursement activity are reflected as reductions of Research and Development
expenses.

Share-Based CompensationEffective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors
based on estimated fair values. Additionally, the Company follows the Securities and Exchange Commission (the SEC)s Staff Accounting Bulletin No. 107 Share-Based Payment (SAB 107), issued in March 2005,
which provides supplemental SFAS 123(R) application guidance based on the views of the SEC. The Company adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, share-based compensation expense
recognized in the Companys Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested, as of
January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all share-based awards granted beginning January 1, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(R). Share-based compensation expense for the three months ended March 31, 2007 was $320,626, of which $169,426 was recorded to research and development and $151,200 to selling,
general and administrative expenses. Share-based compensation expense for the three months ended March 31, 2006 was $313,040, of which $139,382 was recorded to research and development and $173,658 to selling, general and administrative
expenses.

Loss Per ShareLoss per share is presented in accordance with the provisions of SFAS No. 128, Earnings Per
Share. Basic Earnings Per Share (EPS) is calculated by dividing the income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue shares of the Companys common stock, par value $0.01 per share (the Common Stock) were exercised or converted into Common Stock. These Common Stock equivalents
have been omitted from loss per share because they are anti-dilutive. Basic and diluted loss per share was the same in each of the three months ended March 31, 2007 and 2006.

Fair Value of Financial InstrumentsThe estimated fair values for financial instruments are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of receivables, accounts payable and accrued liabilities approximate fair value because of the short-term maturities of
these instruments. The fair value of capital lease obligations approximate fair value due to the proximity to the inception date.

Derivative Stock WarrantsCertain terms in the convertible note and related documents issued on May 25, 2006 as well as subsequent agreements entered into on January 19, 2007, require that the warrants issued in conjunction
with these documents be treated as a derivative instrument and, therefore, classified as a liability on the balance sheet. As such, the liability must be adjusted to fair value at the end of each reporting period, in accordance with No. SFAS 133
Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and any changes in fair value reported as a gain or loss on derivative liabilities in the Consolidated Statement of Operations. The Black-Scholes
option-pricing model is used to estimate the warrant fair values.

Deferred Financing CostsFinancing costs are capitalized and
amortized over the term of the related debt issuance using the effective interest method. If the underlying debt instrument related to the deferred financing costs is converted, any unamortized financing costs would immediately be recognized as an
expense upon conversion of the instrument.

Discontinued OperationsIn June 2005, the Company discontinued operations of DayStar
Solar, LLC. This entity was in the business of reselling and installing solar electricity systems for residential customers in northern California. The results of operations associated with this business, have been reported as discontinued
operations in the accompanying consolidated statements of operations. There were no results of operation from DayStar Solar, LLC for the three months ended March 31,



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



2007 and 2006. The accompanying consolidated statements of cash flows include the effects of both continuing and discontinued operations.

ReclassificationsCertain reclassifications have been made to the 2006 financial statements to conform to the 2007 presentation.

Impact of Recently Issued Accounting Pronouncements

SFAS No. 157, Fair Value Measurements. In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements
(SFAS 157), which establishes a framework for reporting fair value and expands disclosures about fair value measurements. SFAS 157 is effective for the Company January 1, 2008. The Company is currently evaluating the impact of this
new standard but does not anticipate a material impact on its consolidated financial statements as a result of the implementation of SFAS 157.

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and
liabilities are recorded on different bases. SFAS 159 also amends SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, by providing the option to record unrealized gains and losses on
held-for-sale and held-to-maturity securities currently. The Company is currently evaluating the impact of this new standard but does not anticipate a material impact on its consolidated financial statements as a result of the implementation of
SFAS 157.

4. Convertible Note:

On May 25, 2006, the Company entered into a series of agreements pursuant to a private placement transaction providing for, among other things, the issuance to the original holder (the Original Note Holder), of a senior
convertible note (the Note) in the aggregate principal amount of $15,000,000, warrants to purchase 782,609 shares of Common Stock and additional warrants in the event the Company causes a conversion of the Note into shares of Common
Stock.

The Note was convertible into 1,304,348 shares of Common Stock at any time at the option of the holder at an initial conversion
price of $11.50 per share, subject to adjustment. In November 2006, the Company obtained shareholder approval to increase the amount of shares issuable upon conversion of the Note to 1,968,217 shares of Common Stock. The Note was convertible at the
Companys option if the closing price of the Common Stock for each trading day of any twenty consecutive trading day period equaled or exceeded 150% of the conversion price and certain other criteria were satisfied.

Note principal payments, as well as interest at 7.5% per annum, were payable in cash or, at the option of the Company, if certain conditions were
satisfied, in shares of Common Stock. Any shares of Common Stock used to pay an installment of principal or interest were valued at a 13.5% discount to the volume weighted average price of the Companys Common Stock price for the five days
preceding the payment date.

The discount attributable to the issuance date aggregate fair value of the conversion options and warrants,
totaling $5,259,961, was amortized using the effective interest method over the term of the Note. The intrinsic value of the conversion option in the Note totaling $1,223,842 was calculated in accordance with EITF 00-27 Application of Issue
No. 98-5 to Certain Convertible Instruments and recorded, on the issuance date, as additional paid in capital and a corresponding reduction of the carrying value of the Note.

In connection with the financing arrangement, the Company incurred financing costs of $1,065,216, including the fair value of warrants to purchase 26,087
shares of Common Stock issued to the placement agent. The total financing costs were capitalized and amortized over the life of the Note using the effective interest method.

The following summarizes the activity for the convertible note and related deferred financing costs from the issuance date of May 25, 2006 through
December 31, 2006:



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



|                                    |  |                  |            |   |                        |   |            |     |  |   |            |   |  |   |           |  
|----------------------------------- |  | ---------------- | ---------- | - | ---------------------- | - | ---------- | --- |  | - | ---------- | - |  | - | --------- | -
|                                    |  | Convertible Note |            |   | DeferredFinancingCosts |  
|                                    |  | Principal        |            |   | Discount               |   |            | Net |  |  
|At Issuance Date, May 25, 2006      |  | $                | 15,000,000 |   |                        | $ | 5,259,961  |     |  | $ | 9,740,039  |   |  | $ | 1,065,216 |  
|Activity through December 31, 2006: |  |                  |            |   |                        |   |            |     |  |   |            |   |  |   |           |  
|Payments                            |  |                  | (6,452,444 | ) |                        |   |           |     |  |   | (6,452,444 | ) |  |   |           |  
|Amortization                        |  |                  |           |   |                        |   | (3,952,880 | )   |  |   | 3,952,880  |   |  |   | (794,926  | )
|                                    |  |                  |            |   |                        |   |            |     |  |   |            |   |  |   |           |  
|Balance, December 31, 2006          |  | $                | 8,547,556  |   |                        | $ | 1,307,081  |     |  | $ | 7,240,475  |   |  | $ | 270,290   |  
|                                    |  |                  |            |   |                        |   |            |     |  |   |            |   |  |   |           |  

Of the $6,452,444 in principal payments made through December 31, 2006, $400,000 was paid in
cash and $6,052,444 in stock, through the issuance of 1,088,161 shares of Common Stock. Additionally, interest of $389,702 was paid through December 31, 2006, $114,041 of which was paid in cash and $275,661 in stock, through the issuance of
54,875 shares of Common Stock. There was $209,860 in interest accrued as of December 31, 2006.

Under the terms of the Note, there was
$2,564,267 held in escrow as of December 31, 2006.

Restructuring, Sale and Conversion of Note

On January 19, 2007, the Company entered into a series of agreements with the Original Note Holder, a buyer of the Note (the Buyer), as
well as a group of investors, (the New Investors), pursuant to a restructuring and private placement transaction, providing for, among other things, the sale of the Note by the Original Note Holder to the Buyer, the issuance of an
additional Class A Warrant to purchase 317,394 shares of Common Stock to the Original Note Holder, and the issuance by the Company of 2,500,000 shares of Common Stock to the New Investors. Prior to the sale of the Note to the Buyer, the Company
paid $1,500,000 in cash previously held in escrow, and agreed to issue 825,181 shares of Common Stock to the Original Note Holder, representing principal payments of $983,289 and interest payments of $243,231, or a total of $1,226,520. The remaining
escrowed funds of $1,064,267 were released to the Company. Of the 825,181 shares of Common Stock issued to the Original Note Holder, 400,000 shares were issued on January 19, 2007 and 425,181 shares were issued on January 31, 2007. The
fair market value (closing price on the date of issuance) of the 825,181 shares totaled $2,569,529. This resulted in an excess of the consideration provided to the Original Note Holder over the principal and interest due, of $1,343,009, which was
recorded as Loss on Extinguishment of Debt on the Companys Statement of Operations.

The Buyer paid the outstanding balance of the
Note to the Original Note Holder and entered into a Note Terms Agreement with the Company for the remaining principal balance on the Note of $6,064,267. The Note Terms Agreement provided that upon the occurrence of both (i) Stockholder Approval
and / or exception from the NASDAQ Listing Qualifications Department and (ii) the consummation of the Stock Purchase Agreement with the Buyer, the Note would be converted into the number of shares of Common Stock equal to the sum of the
aggregate amount of accrued but unpaid principal and interest due in respect of the Note at a conversion price of $2.00 per share.

On
February 1, 2007, the Company received notification from the NASDAQ Listing Qualifications Department that its request for an exception from the requirement of seeking stockholder approval for the issuance of new securities in connection with
the transaction described above for a convertible note and a private placement of Common Stock was granted. On February 16, 2007, in accordance with this exception, the Company issued 3,050,203 shares of Common Stock to the Buyer in full
payment of outstanding principal and accrued interest on the Note. In addition, the Company issued 2,500,000 shares of Common Stock at $2.00 per share to the New Investors which generated gross proceeds of $5,000,000.

The restructuring of the Note and its conversion to Common Stock resulted in significant non-cash charges on the Companys Consolidated Statement of
Operations during the three months ended March 31, 2007. In addition to the excess consideration provided to the Original Note Holder discussed above, upon conversion of the outstanding principal and accrued interest on the Note, the Company
charged to expense, the unamortized note discount of $1,307,081 and deferred financing costs of $270,290, totaling $1,577,371. The fair market value (closing price on the date of the Note Terms Agreement) of the 3,050,203 shares of Common Stock
issued to the Buyer was $10,126,674, representing full payment of the outstanding principal and accrued interest on the Note of $6,100,405, resulted in a non-cash charge to Loss on Extinguishment of Debt of $4,026,269. Financing costs related to
this transaction totaled approximately $2.2 million, primarily due to placement fees of approximately $2.1 million, which were paid in shares of Common Stock.



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Warrant Liability

The Company is accounting for the free-standing warrants, issued in connection with the Note, as derivative liabilities in accordance with SFAS 133,
EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock and EITF No. 05-2, The Meaning of Conventional Convertible Debt Instrument in Issue
No. 00-19. The warrant liabilities are adjusted to their fair value at the end of each reporting period, using the Black-Scholes model, with the change in fair value reported as gain or loss on derivative liabilities.

The warrants had an exercise price of $12.65 at the issuance date, subject to adjustment upon certain events such as the sale of equity securities by the
Company at a price below the exercise price. The warrants are exercisable at any time through May 26, 2011. On January 19, 2007, the Company issued 317,394 Class A Warrants pursuant to the restructuring and sale of the Note. These
warrants have an exercise price of $2.00, which according to the Warrant Agreements reduced the exercise of all Class A Warrants to the Original Note Holder to $2.00. During the three months ended March 31, 2007, 200,000 Class A
Warrants were exercised which generated $400,000 in gross proceeds to the Company.

The stock warrant liability is summarized as follows:



|                           |  |                         |           |  
|-------------------------- |  | ----------------------- | --------- | -
|                           |  | Stock Warrant Liability |          
|Balance, December 31, 2006 |  | $                       | 1,344,004 |  
|Grants (317,394 shares)    |  |                         | 722,191   |  
|Exercises (200,000 shares) |  |                         | (762,742  | )
|Change in fair value       |  |                         | 2,206,754 |  
|                           |  |                         |           |  
|Balance, March 31, 2007    |  | $                       | 3,510,207 |  
|                           |  |                         |           |  

5. Income Taxes:

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN
48). FIN 48 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, the Company 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 de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures.

The Company adopted the provisions of FIN 48 on January 1, 2007.
There was no cumulative effect adjustment to retained earnings required related to the adoption of FIN 48. There were no unrecognized tax benefits at January 1, 2007, nor was there a change in unrecognized tax benefits during the three months
ended March 31, 2007. It is possible that the amount of unrecognized tax benefits could change in the next 12 months; however the Company does not expect the change to have a significant impact on its results of operations or financial
position.

The Company recognizes accrued interest and penalties, if any, associated with uncertain tax positions as part of the income tax
provision. There was no accrued interest or penalties recognized as of January 1, 2007.

The Company is subject to U.S. federal income
tax as well as income tax of multiple state jurisdictions. Federal and state income tax returns for 2003 through 2006 remain open to examination. The Companys 2005 New York State income tax return was examined by the state. There were no
material changes to the return as a result of this examination.

6. Warrants:

Class A public warrantsAs of March 31, 2007, there were no Class A public warrants to purchase Common Stock outstanding. On
August 11, 2005, the Company redeemed all then outstanding Class A public warrants.

Class B public warrantsAs of
March 31, 2007, 5,113,453 Class B public warrants to purchase Common Stock were outstanding. The exercise price of a Class B public warrant is $10.00. The Class B public warrants expire on February 11, 2009, the fifth anniversary of the
completion of the initial public offering. The Company does not have the right to redeem the Class B public warrants.

Representative
warrantsAs of March 31, 2007, 8,192 warrants issued to underwriters in connection with the initial public offering were outstanding. Each warrant gives the holder the right to purchase one unit for $6.00. A unit consists of



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



one share of Common Stock, one Class A redeemable public warrant and two Class B non-redeemable public warrants. As noted above, on August 11,
2005, any Class A public warrants then outstanding were redeemed.

Class A WarrantsAs of March 31, 2007,
900,003 Class A Warrants were outstanding. On May 25, 2006, the Company issued 782,609 Class A Warrants pursuant to a private placement offering, and each provides the holder the right to purchase one share of the Common Stock. The
Class A Warrants had an exercise price of $12.65 at the issuance date, subject to adjustment upon certain events such as the sale of equity securities by the Company at a price below the then current exercise price. On January 19, 2007,
the Company issued 317,394 Class A Warrants pursuant to the restructuring and sale of the Note (See Note 4). These Class A Warrants have an exercise price of $2.00 thus reducing the exercise of all Class A Warrants to $2.00. During the
three months ended March 31, 2007, 200,000 Class A Warrants were exercised which generated $400,000 in gross proceeds to the Company. The fair value of these Class A Warrants, calculated using the Black-Scholes pricing model, was
recorded as a derivative liability on the issuance date. As such, the liability is adjusted to fair market value, using the Black-Scholes pricing model, at the end of each reporting period. See assumptions detailed in Note 4.

Consultant warrantsAs of March 31, 2007, 65,487 Consultant warrants were outstanding. There were no Consultant warrants granted during
the three months ended March 31, 2007. Of the outstanding Consultant warrants, 39,400 were granted in prior years under contracts with certain consultants for services rendered to the Company, and contain an exercise price of $3.00.

On May 25, 2006, the Company issued 26,087 Consultant warrants to the placement agent in connection with the placement of a convertible note and
Class A warrants. Each warrant gives the holder the right to purchase one share of the Companys Common Stock at a price of $11.89 per share. The fair value of the warrants, calculated using the Black-Scholes pricing model, was recorded as
deferred financing costs and was amortized using the effective interest method over the life of the related note. See assumptions detailed in Note 4.

7. Commitments and Contingencies:

The series of agreements entered into on January 19, 2007 (See Note 4), included
registration rights agreements with the Original Note Holder, the Buyer, as well as the New Investors.

The Registration Rights Agreement
with the Original Note Holder requires that the registration statement must be declared effective by the SEC within 120 days (or 90 days if there is no review of the registration statement by the SEC) after the filing date of February 20, 2007,
and must remain effective and available for use until earlier of the date the Original Note Holder can sell all of the securities covered by the registration statement without restriction pursuant to SEC Rule 144(k) and the date all of such
securities have been sold pursuant to the registration statement.

If the Company fails to meet the deadlines for the filing or the
effectiveness of the registration statement or, subject to certain grace periods, if the registration is unavailable after it becomes effective, the Company is required to pay monthly liquidated damages of $25,000 until such failure is
cured. The total penalties payable for failure to have a registration statement declared effective are capped at $100,000.

The
Registration Rights Agreement with the Buyer requires that the registration statement must be declared effective by the SEC within 120 days (or 90 days if there is no review of the registration statement by the SEC) after the filing date of
February 20, 2007, and must remain effective and available for use until the earlier of the date all of such securities have been sold pursuant to the registration statement or the second anniversary of the date of the conversion of the Note.

If the Company fails to meet the deadlines for the filing or the effectiveness of the registration statement, the Company is required to
pay monthly liquidated damages of 1% of the outstanding principal amount of the Note plus accrued interest thereon until such failure is cured. The total penalties payable for failure to have a registration statement declared effective



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



are capped at 12%.

The Registration Rights
Agreement with the New Investors requires. The registration statement must be declared effective by the SEC within 120 days (or 90 days if there is no review of the registration statement by the SEC) after the filing date of February 20, 2007,
and must remain effective and available for use until earlier of the date all of such securities have been sold pursuant to the registration statement or date as of which all New Investors may sell all the shares of Common Stock without restriction
pursuant to Rule 144(k) of the Securities Act (or any successor rule thereto).

If the Company fails to meet the deadlines for the filing
or the effectiveness of the registration statement, the Company shall pay monthly to each New Investor an amount in cash equal to 1% of the aggregate purchase price paid by such New Investor until such failure is cured but in no event will the
Company be liable for liquidated damages under this Registration Rights Agreement in excess of 1% of the aggregate purchase price of the New Investors in any 30-day period and the maximum aggregate liquidated damages payable to a New Investor under
this Registration Rights Agreement shall be twelve percent (12%) of the aggregate purchase price paid by such New Investor pursuant to the Securities Purchase Agreement.



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|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 Companys 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 CIGS solar cells and more
cost-effective processes for manufacturing such solar cells. From inception, we have focused our efforts on research and development, manufacturing, development of an initial customer base and raising capital.

During the three months ended March 31, 2007, we achieved certain development milestones which were necessary to finalize the design of a commercial
manufacturing line. Through our proprietary sputter deposition process, we have reproducibly achieved greater than 10% cell efficiencies on large area solar cell devices. This milestone demonstrates a reproducible and highly scaleable deposition
process capable of performance benchmarks required for successful commercialization.

During the three months ended March 31, 2007, we
engaged in market analysis, including discussions with strategic partners as part of our intended transition from development stage to commercialization, and established a plan to accelerate near-term revenue generation. Combining an assessment of
the current market opportunities with our recent technical advances has led to the plan to build our first commercial manufacturing line to produce monolithically integrated CIGS modules on plate glass substrates. The resulting product has the
potential to achieve the performance and cost benchmarks to meet the needs of our customers and other stakeholders, in the shortest time frame. Our largest customer, Blitzstrom, has agreed to amend our contract to include monolithic modules. All
commercialization plans are contingent upon new financing for initiation.

Contingent upon new financing, we plan to build a 25 megawatt
(MW) capacity production line in our Santa Clara, California facility and operate this line to produce complete CIGS modules for sale to both current and future customers. To facilitate this operation, we will relocate select engineering
and administrative functions, as well as our corporate headquarters, to the Santa Clara facility, to focus on commercialization efforts. The state-of-the art equipment and intellectual capability that remains will form the DayStar Applications
Center targeted at continued development of future flexible product opportunities.

The transition to commercialization will require a
reduction of our New York based resources as we focus efforts on building our first large scale production line. The market for a flexible CIGS module is viewed as a large potential market for the future. However, there still remain significant
technical challenges in product packaging that inhibit early market penetration. We have made progress on some of these challenges and will continue to work with strategic partners to overcome them for future product diversification. Significant
additional capital infusion is required to execute our business plan to complete our next generation manufacturing processes. If adequate capital resources are not available to us, we will be forced to curtail or terminate operations.

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 notes 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.



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Revenue RecognitionWe recognize revenue in accordance with SEC Staff Accounting Bulletin
No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the sellers price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured.

PatentsCosts incurred to prosecute patents are expensed as incurred. Patent costs paid to obtain patents from third parties are capitalized and amortized over the life of the patent.

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.

Share-Based CompensationEffective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)), which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated
fair values. Additionally, we follow the Securities and Exchange Commission (SEC)s Staff Accounting Bulletin No. 107 Share-Based Payment (SAB 107), issued in March 2005, which provides supplemental SFAS
123(R) application guidance based on the views of the SEC. We adopted SFAS 123(R) using the modified prospective transition method. Under this transition method, share-based compensation expense recognized in our Consolidated Statements of
Operations for the three months ended March 31, 2007 and 2006 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123, and (b) compensation expense for all share-based awards granted beginning January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R).

Fair Value of Financial InstrumentsThe estimated fair values for financial instruments are determined at discrete points in
time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The carrying amounts of receivables, investments, accounts payable and accrued liabilities approximate fair value because of
the short-term maturities of these instruments. The fair value of capital lease obligations approximate fair value due to the proximity to the inception date.

Derivative Stock WarrantsCertain terms in the Note and related documents issued on May 25, 2006 require that the warrants issued in conjunction with the convertible note be treated as a derivative
instrument and, therefore, classified as a liability on the balance sheet. As such, the liability must be adjusted to fair value at the end of each reporting period, in accordance with SFAS 133 Accounting for Derivative Instruments and Hedging
Activities, and any changes in fair value reported as a gain or loss on derivative liabilities in the Consolidated Statement of Operations. The Black-Scholes option-pricing model is used to estimate the warrant fair values.

Results of Operations

Comparison of the Three Months Ended
March 31, 2007 and 2006

Certain reclassifications have been made to the 2006 financial information to conform to the 2007
presentation.

Research and development contract revenue. There was no research and development contract revenue for the three
months ended March 31, 2007. There was $30,000 in research and development contract revenue for the three months ended March 31, 2006. Our research and development contract revenue was primarily earned as a result of achieving various
milestones under an agreement with a New York State government agency.

Research and development expenses. Research and development
expenses were $2,293,632 for the three months ended March 31, 2007 compared to $1,894,468 for the three months ended March 31, 2006, an increase of $399,164 or 21%. These expenses increased due to the hiring of additional personnel and
related development costs as we established Gen-II pilot production capabilities to manufacture photovoltaic cells and increased activities in research and development of our next generation capabilities. We are designing, with the intent to
manufacture, prototype deposition equipment while procuring automated cell processing equipment for our next generation production line.



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Selling, general and administrative expenses. Selling, general and administrative expenses were
$1,401,079 for the three months ended March 31, 2007 compared to $1,257,197 for the three months ended March 31, 2006, an increase of $143,882 or 11%. The increase in selling, general and administrative expenses corresponded with our
additions to personnel and overall spending increases in support of development efforts over the comparative period.

Restructuring.
There was $1,382,801 in restructuring expense for the three months ended March 31, 2007. There was no spending related to restructuring for the three months ended March 31, 2006. The expense in 2007 relates to professional services
incurred with the restructuring of the Note.

Depreciation and amortization expenses. Depreciation and amortization expenses were
$694,391 for the three months ended March 31, 2007 compared to $218,072 for the three months ended March 31, 2006, an increase of $476,319. Depreciation and amortization expenses increased primarily as a result of the acquisition and
utilization of significant amounts of capital equipment as we continued to develop our manufacturing technologies and began the production of photovoltaic cells on our Gen-II production line.

Other income.Other income was $43,214 for the three months ended March 31, 2007 compared to $114,182 for the three months ended
March 31, 2006, a decrease of $70,968. Other income primarily represents interest on investments.

Interest expense. Interest
expense was $88,058 for the three months ended March 31, 2007 compared to $21,936 for the three months ended March 31, 2006, an increase of $66,122. The increase in interest expense was due primarily to the issuance in May 2006 of the $15
million Note carrying a 7.5% interest rate. The remaining interest costs result from capital lease obligations and notes payable.

Amortization of note discount and deferred financing costs.Amortization of note discount and deferred financing costs was $3,800,588 for the three months ended March 31, 2007. There was no amortization of note discount and
deferred financing costs for the three months ended March 31, 2006. The Note contained a beneficial conversion feature as well as warrants issued to the Original Note Holder. The aggregate fair value of the conversion feature and warrants
represented a discount to the Note, totaling $5.3 million and was amortized using the effective interest method over the life of the Note. The financing costs were capitalized and amortized over the life of the Note as well. During the three months
ended March 31, 2007, the Note was converted to Common Stock and all remaining deferred financing fees were charged to expense.

Gain /(Loss) on derivative liabilities. Loss on derivative liabilities was $2,206,754 for the three months ended March 31, 2007. There was no gain on derivative liabilities for the three months ended March 31, 2006. The
warrants issued in conjunction with the Note are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter. During the three months ended March 31, 2007, our Common Stock price increased which caused
an increase in the fair value of the warrant liability. This resulted in a loss on derivative liabilities of $2,206,754 for the three months ended March 31, 2007.

Loss on extinguishment of debt.Loss on extinguishment of debt was $6,091,469 for the three months ended March 31, 2007. There was no loss on extinguishment of debt for the three months ended
March 31, 2006. The loss is due to the excess of the consideration provided by the Company to the Original Note Holder in the form of cash payments, shares of Common Stock and additional Class A Warrants for payment of the outstanding
principal and accrued interest on the Note.

Net loss.Net loss was $17,915,558 for the three months ended March 31, 2007
compared to a loss of $3,247,491 for the three months ended March 31, 2006. The increase in net loss is due primarily to the non-cash expenses recognized on the extinguishment of the Note, write-off of the remaining note discount and financing
costs, and loss on derivative liabilities for the three months ended March 31, 2007.



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Liquidity and Capital Resources

Liquidity.At March 31, 2007, our cash and cash equivalents totaled $4,139,173. The net cash used during the quarter was primarily to fund operating activities. We currently spend approximately $1.2
million per month on research, development, selling, general and administrative costs and all funding received to date has been utilized to maintain this average monthly operational cost while in the development stage of business. During the three
months ended March 31, 2007, we reported a net loss of approximately $17.9 million, which included non-cash expenses of $13.1 million, primarily associated with the Note and series of agreements entered into on January 19, 2007, resulting in
the Notes ultimate conversion into Common Stock.

The following table summarizes the key components of the results of operations for
the three months ended March 31, 2007 and segregates between cash and non-cash transactions:



|                                                     |  |                                 |             |  
|---------------------------------------------------- |  | ------------------------------- | ----------- | -
|FIRST QUARTER 2007 PROFIT & LOSS SUMMARY             |  | Three MonthsEndedMarch 31, 2007 |            
|Total Operating Expenses(1)                          |  | $                               | 3,694,711   |  
|Depreciation/Amortization(2)                         |  |                                 | 694,391     |  
|Restructuring (cash component)(1)                    |  |                                 | 1,042,201   |  
|Restructuring (payment in stock)(2)                  |  |                                 | 340,600     |  
|Amortization of Note Discount and Financing Costs(2) |  |                                 | 3,800,588   |  
|Loss on Derivative Liabilities(2)                    |  |                                 | 2,206,754   |  
|Loss on Extinguishment of Debt(2)                    |  |                                 | 6,091,469   |  
|Net Interest Expense/(Other Income)(1),(2)           |  |                                 | 44,844      |  
|                                                     |  |                                 |             |  
|Reported Net Loss                                    |  | $                               | (17,915,558 | )
|                                                     |  |                                 |             |  

Notes:

| | (1) | Cash-related expenses
| | --- | ---------------------

| | (2) | Non-cash related expenses
| | --- | -------------------------

We are in the development
stage, and as such, have historically reported net losses. We anticipate continuing to incur losses in the future as we transition to commercialization. Commercialization activities will require significant capital expenditures related to the
purchase of production equipment and build-out of the California facilities that will house the equipment, as well as the associated development and administrative costs. In order to fund the costs associated with such development, we will require
additional financing. Without additional financing, we would need to delay certain of these activities, and/or curtail operations.

Our
financing options include (1) obtaining private equity funding, (2) evaluating the likelihood of converting the Class B public warrants to Common Stock, (3) completing a secondary public offering, (4) obtaining debt financing and
(5) increasing government grant and other contract revenue. 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 stockholders.

The transition to commercialization requires a reduction of the Companys New York based resources as we focus efforts on building our first large
scale production line. On May 15, 2007 the Company will reduce its New York staff by approximately 20 people, in line with the commercialization operating plan to transition corporate headquarters from New York to California. This staffing
reduction will reduce the number of our pilot production lines from three shifts to one, which will be maintained to continue product testing. Along with direct line personnel, the staffing reduction will include certain indirect support for
maintaining two additional shifts. The May 15, 2007 staffing reduction will also reduce the New York-based Research and Development group as part of the Companys transition from development to commercialization, as well as certain general
and administrative personnel as part of the transition of the corporate office from New York to California. The savings from these reductions are anticipated to be approximately $100,000 per month.



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If we are unable to raise sufficient capital, liquidity problems will cause the Company to curtail
operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other such actions that could adversely affect future operations. These factors raise substantial doubt as to the Companys ability to continue
operations as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

Capital Resources.We have historically financed our operations primarily from proceeds of
the sale of equity securities and revenues received under research and development contracts and grants.

We entered into a series of
agreements on January 19, 2007, with the Original Note Holder, the Buyer, and the New Investors. The Original Note Holder sold our Note to the Buyer for approximately $7.5 million. The Buyer provided approximately $6.0 million and we provided
$1.5 million from restricted cash escrows, additional Class A Warrants to purchase 317,394 shares of our Common Stock, and 825,181 shares of Common Stock in full payment of the outstanding principal and interest. On February 16, 2007, we
received $5,000,000 in gross proceeds from the issuance of 2,500,000 shares of Common Stock at $2.00 per share to the New Investors. These proceeds are to be used to fund business operations until additional financing is obtained.

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 will need significant additional cash infusions to execute our business plan beyond the first quarter of 2007, and will require additional capital funding to complete our next generation manufacturing
processes. In order to conserve cash and extend operations, we have reduced cash outlays by reducing operating expenses and ceasing new equipment purchases. Without significant additional financing, we would need to further delay certain programs
and activities.

Commitments.At March 31, 2007, we had outstanding approximately $470,000 of purchase orders for equipment and
improvements. Other material commitments include rental payments under operating leases for office space and equipment, and commitments under employment contracts with our executive officers. These commitments are discussed further in the
Commitments and Contingenciesfootnote to our consolidated financial statements.

Off-Balance Sheet Arrangements.The only
off-balance sheet obligations are for operating leases entered into in the ordinary course of business.

We lease approximately 32,000
square feet of office and manufacturing space in Halfmoon, New York. We lease 18,000 square feet in one location under a five year lease that commenced July 1, 2004 for $9,750 per month. In a second location in the same corporate park, we lease
5,500 square feet of office space under a forty-five month lease that commenced October 1, 2005 for $5,769 per month. In a third location also in the same office park, we lease 8,500 square feet of manufacturing and office space under a sixty
month lease that commenced June 1, 2006 for $5,590 per month. This lease may be terminated at our option at the completion of the eighteenth month. We also lease 50,000 square feet of factory and office space in Santa Clara, California under a
fifty-one month lease that commenced June 2006, for $18,144 per month and which increases beginning July 1, 2007. We also maintain two leases for certain office equipment.

As discussed under Commitments, at March 31, 2007, we had outstanding approximately $470,000 of purchase orders for equipment and improvements



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

The Companys Chief
Executive Officer and Controller, (acting Chief Accounting Officer) have reviewed the disclosure controls and procedures relating to the Company at March 31, 2007 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, as of the end of the
period covered by this report that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II. OTHER INFORMATION



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



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



|            |  |                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                            
|10.1*       |  | Transition Agreement with John R. Tuttle, dated February 1, 2007                                                                                       
|            | 
|10.29       |  | Blitzstrom Contract                                                                                                                                    
|            | 
|31.1        |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                         
|            | 
|31.2        |  | Certification of Chief Accounting Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                        
|            | 
|32.1        |  | Certification of the Chief Executive Officer 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 Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* | Management contract or compensatory plan or arrangement
|- | -------------------------------------------------------

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 15, 2007         |  |  |  | By: |  | /s/ STEPHAN J. DELUCA                                                  
|                           |  |  |  |     |  |                                                                        
|                           |  |  |  |     |  | Stephan J. DeLuca Chief Executive Officer
(Principal Executive Officer)
|                           |  |  | 
|Date: May 15, 2007         |  |  |  | By: |  | /s/ CHRISTOPHER T. LAIL                                                
|                           |  |  |  |     |  |                                                                        
|                           |  |  |  |     |  | Christopher T. Lail Controller (Acting Chief
Accounting Officer)       



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