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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 September 30, 2006

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 November 10, 2006, 7,391,053 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 September 30,
2006

Table of Contents



|                                                                                                                                                                                                               |  |   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Part I  Financial Information                                                                                                                                                                                 |  |   
|                                                                                                                                                                                                               | 
|Item 1. Financial Statements                                                                                                                                                                                   |  |   
|                                                                                                                                                                                                               | 
|Consolidated Balance Sheet - September 30, 2006                                                                                                                                                                |  | 3 
|                                                                                                                                                                                                               | 
|Consolidated Statements of Operations - For the Three Months and Nine Months Ended September 30, 2006 and 2005 and For the Period From July 1, 2005 (Inception of the Development Stage) to September 30, 2006 |  | 4 
|                                                                                                                                                                                                               | 
|Consolidated Statement of Changes in Stockholders Equity - For the Period From July 1, 2005 (Inception of the Development Stage) to September 30, 2006                                                        |  | 5 
|                                                                                                                                                                                                               | 
|Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 and For the Period From July 1, 2005 (Inception of the Development Stage) to September 30, 2006                    |  | 6 
|                                                                                                                                                                                                               | 
|Notes to Consolidated Financial Statements                                                                                                                                                                     |  | 7 
|                                                                                                                                                                                                               | 
|Item 2. Managements Discussion and Analysis or Plan of Operation                                                                                                                                              |  | 17
|                                                                                                                                                                                                               | 
|Item 3. Controls and Procedures                                                                                                                                                                                |  | 24
|                                                                                                                                                                                                               | 
|PART II  Other Information                                                                                                                                                                                    |  |   
|                                                                                                                                                                                                               | 
|Item 2. Unregistered Sales of Equity Securities                                                                                                                                                                |  | 24
|                                                                                                                                                                                                               | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                                                                                    |  | 25
|                                                                                                                                                                                                               | 
|Item 6. Exhibits and Reports on Form 8-K                                                                                                                                                                       |  | 25
|                                                                                                                                                                                                               | 
|Signatures                                                                                                                                                                                                     |  | 26



2



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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)



|                                                                                                    |  |                   |             |  
|--------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | -
|                                                                                                    |  | September 30,2006 |            
|ASSETS                                                                                              |  |                   |             |  
|Current Assets:                                                                                     |  |                   |             |  
|Cash and cash equivalents                                                                           |  | $                 | 4,042,472   |  
|Investments                                                                                         |  |                   | 4,177,594   |  
|Accounts Receivable                                                                                 |  |                   | 151,429     |  
|Other current assets                                                                                |  |                   | 434,813     |  
|                                                                                                    |  |                   |             |  
|Total current assets                                                                                |  |                   | 8,806,308   |  
|Property and Equipment, at cost,                                                                    |  |                   | 12,615,331  |  
|Less accumulated depreciation and amortization                                                      |  |                   | (1,842,629  | )
|                                                                                                    |  |                   |             |  
|Net property and equipment                                                                          |  |                   | 10,772,702  |  
|Other Assets:                                                                                       |  |                   |             |  
|Deferred financing costs                                                                            |  |                   | 466,990     |  
|Restricted cash                                                                                     |  |                   | 3,111,172   |  
|Other assets                                                                                        |  |                   | 79,382      |  
|                                                                                                    |  |                   |             |  
|Total other assets                                                                                  |  |                   | 3,657,544   |  
|                                                                                                    |  |                   |             |  
|Total Assets                                                                                        |  | $                 | 23,236,554  |  
|                                                                                                    |  |                   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                |  |                   |             |  
|Current Liabilities:                                                                                |  |                   |             |  
|Accounts payable                                                                                    |  | $                 | 2,379,376   |  
|Wages payable                                                                                       |  |                   | 415,404     |  
|Notes payable, current portion                                                                      |  |                   | 37,019      |  
|Convertible note, net of discount, current portion                                                  |  |                   | 10,890,136  |  
|Capital lease obligations, current portion                                                          |  |                   | 71,964      |  
|Accrued expenses                                                                                    |  |                   | 489,681     |  
|Deferred gain                                                                                       |  |                   | 7,000       |  
|                                                                                                    |  |                   |             |  
|Total current liabilities                                                                           |  |                   | 14,290,580  |  
|Long-Term Liabilities:                                                                              |  |                   |             |  
|Notes payable                                                                                       |  |                   | 373,492     |  
|Convertible note, net of discount                                                                   |  |                   | 185,919     |  
|Capital lease obligations                                                                           |  |                   | 33,695      |  
|Deferred revenue                                                                                    |  |                   | 300,000     |  
|Deferred gain                                                                                       |  |                   | 4,083       |  
|Stock warrants                                                                                      |  |                   | 2,383,026   |  
|                                                                                                    |  |                   |             |  
|Total long-term liabilities                                                                         |  |                   | 3,280,215   |  
|Commitments and Contingencies (Note 8)                                                              |  |                   |            |  
|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; 6,904,108 shares issued and outstanding |  |                   | 69,041      |  
|Additional paid-in capital                                                                          |  |                   | 34,396,078  |  
|Accumulated deficit                                                                                 |  |                   | (10,145,391 | )
|Deficit accumulated during the development stage                                                    |  |                   | (18,653,969 | )
|                                                                                                    |  |                   |             |  
|Total stockholders equity                                                                          |  |                   | 5,665,759   |  
|                                                                                                    |  |                   |             |  
|Total Liabilities and Stockholders Equity                                                          |  | $                 | 23,236,554  |  
|                                                                                                    |  |                   |             |  

See accompanying notes to these consolidated financial statements.



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DAYSTAR TECHNOLOGIES, INC. AND SUBSIDIARY

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|-------------------------------------------------------------- |  | ---------------------------------------- | ---------- | - | --------------------------------------- | - | ---------- | ------------------------------------------------------------------------------------- |  | - | ----------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                               |  | For the Three Months Ended September 30, |            |   | For the Nine Months Ended September 30, |   |            | For the Periodfrom July 1,2005
(Inceptionof theDevelopmentStage) toSeptember 30, 2006 | 
|                                                               |  | 2006                                     |            |   | 2005                                    |   |            | 2006                                                                                  |  |   | 2005        |   | 
|Revenue:                                                       |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Product revenue                                                |  | $                                        | 1,050      |   |                                         | $ |           |                                                                                       |  | $ | 1,050       |   |  | $ |           |   |  | $ | 1,050       |  
|Research and development contract revenue                      |  |                                          | 150,000    |   |                                         |   | 115,000    |                                                                                       |  |   | 180,000     |   |  |   | 365,000    |   |  |   | 555,000     |  
|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Total revenues                                                 |  |                                          | 151,050    |   |                                         |   | 115,000    |                                                                                       |  |   | 181,050     |   |  |   | 365,000    |   |  |   | 556,050     |  
|Costs and Expenses:                                            |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Research and development                                       |  |                                          | 3,275,243  |   |                                         |   | 824,467    |                                                                                       |  |   | 7,641,507   |   |  |   | 2,139,731  |   |  |   | 9,840,100   |  
|Selling, general and administrative                            |  |                                          | 1,490,177  |   |                                         |   | 714,487    |                                                                                       |  |   | 4,056,378   |   |  |   | 2,198,681  |   |  |   | 5,957,711   |  
|Depreciation and amortization                                  |  |                                          | 502,315    |   |                                         |   | 178,677    |                                                                                       |  |   | 994,035     |   |  |   | 477,999    |   |  |   | 1,361,914   |  
|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Total costs and expenses                                       |  |                                          | 5,267,735  |   |                                         |   | 1,717,631  |                                                                                       |  |   | 12,691,920  |   |  |   | 4,816,411  |   |  |   | 17,159,725  |  
|Other Income (Expense):                                        |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Other income                                                   |  |                                          | 206,506    |   |                                         |   | 102,416    |                                                                                       |  |   | 464,921     |   |  |   | 139,607    |   |  |   | 704,166     |  
|Interest expense                                               |  |                                          | (600,314   | ) |                                         |   | (22,813    | )                                                                                     |  |   | (757,066    | ) |  |   | (69,773    | ) |  |   | (801,943    | )
|Amortization of note discount and deferred financing costs     |  |                                          | (2,517,082 | ) |                                         |   |           |                                                                                       |  |   | (3,599,895  | ) |  |   |           |   |  |   | (3,599,895  | )
|Gain on derivative liabilities                                 |  |                                          | 1,738,622  |   |                                         |   |           |                                                                                       |  |   | 1,653,092   |   |  |   |           |   |  |   | 1,653,092   |  
|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Total other income (expense)                                   |  |                                          | (1,172,268 | ) |                                         |   | 79,603     |                                                                                       |  |   | (2,238,948  | ) |  |   | 69,834     |   |  |   | (2,044,580  | )
|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Loss from Continuing Operations                                |  |                                          | (6,288,953 | ) |                                         |   | (1,523,028 | )                                                                                     |  |   | (14,749,818 | ) |  |   | (4,381,577 | ) |  |   | (18,648,255 | )
|Loss from discontinued operations of DayStar Solar, LLC        |  |                                          |           |   |                                         |   | (2,088     | )                                                                                     |  |   |            |   |  |   | (2,547     | ) |  |   | (5,714      | )
|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Net Loss                                                       |  | $                                        | (6,288,953 | ) |                                         | $ | (1,525,116 | )                                                                                     |  | $ | (14,749,818 | ) |  | $ | (4,384,124 | ) |  | $ | (18,653,969 | )
|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Weighted Average Common Shares Outstanding (Basic And Diluted) |  |                                          | 6,759,500  |   |                                         |   | 6,050,112  |                                                                                       |  |   | 6,617,851   |   |  |   | 4,563,204  |   |  |   |             |  
|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  
|Net Loss Per Share (Basic and Diluted)                         |  | $                                        | (0.93      | ) |                                         | $ | (0.25      | )                                                                                     |  | $ | (2.23       | ) |  | $ | (0.96      | ) |  |   |             |  
|                                                               |  |                                          |            |   |                                         |   |            |                                                                                       |  |   |             |   |  |   |            |   |  |   |             |  

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 SEPTEMBER 30, 2006

(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 Class A public warrants at $6.00 per share     |  | 893,519      |  |                     | 8,935  |        |                         |   |        |                                  |     |   |                    |   | 5,352,179  |                                              |  |   |         |   |  |   |            |   |  |   |           |   |  |   | 5,361,114  |  
|Redemption of Class A public warrants at $.25 per share    |  |             |  |                     |       |        |                         |   |        |                                  |     |   |                    |   | (4,273     | )                                            |  |   |         |   |  |   |            |   |  |   |           |   |  |   | (4,273     | )
|Exercise of Class B public warrants at $10.00 per share    |  | 125          |  |                     | 1      |        |                         |   |        |                                  |     |   |                    |   | 1,249      |                                              |  |   |         |   |  |   |            |   |  |   |           |   |  |   | 1,250      |  
|Exercise of Consultant warrants at $5.18 - $8.25 per share |  | 85,000       |  |                     | 850    |        |                         |   |        |                                  |     |   |                    |   | 566,450    |                                              |  |   |         |   |  |   |            |   |  |   |           |   |  |   | 567,300    |  
|Exercise of Representative warrants at $6.00 per share     |  | 188,979      |  |                     | 1,890  |        |                         |   |        |                                  |     |   |                    |   | 1,108,584  |                                              |  |   |         |   |  |   |            |   |  |   |           |   |  |   | 1,110,474  |  
|Conversion of Class B common stock                         |  | 58,000       |  |                     | 580    |        | (29,000                  | ) |        |                                  | (290 | ) |                    |   | (290       | )                                            |  |   |         |   |  |   |            |   |  |   |           |   |  |   |           |  
|Exercise of stock options at $2.06 - $4.00 per share       |  | 23,125       |  |                     | 231    |        |                         |   |        |                                  |     |   |                    |   | 64,446     |                                              |  |   |         |   |  |   |            |   |  |   |           |   |  |   | 64,677     |  
|Acceleration of stock option vesting                       |  |             |  |                     |       |        |                         |   |        |                                  |     |   |                    |   | 28,925     |                                              |  |   |         |   |  |   |            |   |  |   |           |   |  |   | 28,925     |  
|Grants of restricted stock at $10.64 per share             |  | 38,750       |  |                     | 388    |        |                         |   |        |                                  |     |   |                    |   | 411,912    |                                              |  |   | (412,300 | ) |  |   |            |   |  |   |           |   |  |   |           |  
|Amortization of deferred stock compensation                |  |             |  |                     |       |        |                         |   |        |                                  |     |   |                    |   |           |                                              |  |   | 119,360  |   |  |   |            |   |  |   |           |   |  |   | 119,360    |  
|Warrants issued for services at $10.70 per share           |  |             |  |                     |       |        |                         |   |        |                                  |     |   |                    |   | 90,735     |                                              |  |   |         |   |  |   |            |   |  |   |           |   |  |   | 90,735     |  
|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 Class B public warrants at $10.00 per share                |  | 1,800     |  |   | 18     |  |  |  |   |  |  |   | 17,982     |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 18,000      |  
|Exercise of Consultant warrants at $3.00 - $7.50 per share             |  | 37,050    |  |   | 370    |  |  |  |   |  |  |   | 133,281    |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 133,651     |  
|Exercise of Representative warrants at $6.00 per share                 |  | 77,530    |  |   | 775    |  |  |  |   |  |  |   | 464,405    |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 465,180     |  
|Exercise of stock options at $2.06 - $2.54 per share                   |  | 13,918    |  |   | 139    |  |  |  |   |  |  |   | 30,218     |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 30,357      |  
|Grants of restricted stock at $8.77 - $12.75 per share                 |  | 187,375   |  |   | 1,874  |  |  |  |   |  |  |   | (1,874     | ) |  |   |        |  |   |            |   |  |   |            |   |  |   |            |  
|Warrants issued for services at $11.09 per share                       |  |          |  |   |       |  |  |  |   |  |  |   | 18,291     |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 18,291      |  
|Compensatory stock options at $1.74 - $13.37 per share                 |  |          |  |   |       |  |  |  |   |  |  |   | 651,974    |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 651,974     |  
|Compensatory restricted stock at $8.77 - $14.00 per share              |  |          |  |   |       |  |  |  |   |  |  |   | 334,698    |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 334,698     |  
|Beneficial conversion feature on convertible note                      |  |          |  |   |       |  |  |  |   |  |  |   | 1,223,842  |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 1,223,842   |  
|Shares issued in payment of principal and interest on convertible note |  | 215,679   |  |   | 2,157  |  |  |  |   |  |  |   | 1,723,454  |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 1,725,611   |  
|Warrants issued for placement of convertible note at $5.38 per share   |  |          |  |   |       |  |  |  |   |  |  |   | 140,419    |   |  |   |        |  |   |            |   |  |   |            |   |  |   | 140,419     |  
|Net loss                                                               |  |          |  |   |       |  |  |  |   |  |  |   |           |   |  |   |        |  |   |            |   |  |   | (14,749,818 | ) |  |   | (14,749,818 | )
|                                                                       |  |           |  |   |        |  |   |  |   |   |  |   |            |   |  |   |         |  |   |             |   |  |   |             |   |  |   |             |  
|BALANCES, September 30, 2006                                           |  | 6,904,108 |  | $ | 69,041 |  |  |  | $ |  |  | $ | 34,396,078 |   |  | $ |        |  | $ | (10,145,391 | ) |  | $ | (18,653,969 | ) |  | $ | 5,665,759   |  
|                                                                       |  |           |  |   |        |  |   |  |   |   |  |   |            |   |  |   |         |  |   |             |   |  |   |             |   |  |   |             |  

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 Nine monthsEndedSeptember 30, |             |   | For the Periodfrom July 1,
2005(Inceptionof the DevelopmentStage) to September 30,2006 |  
|                                                                        |  | 2006                                  |             |   | 2005                                                                                   |   |           
|Cash Flows from Operating Activities:                                   |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Net loss                                                                |  | $                                     | (14,749,818 | ) |                                                                                        | $ | (4,384,124 | ) |  | $ | (18,653,969 | )
|Adjustments to reconcile net loss to cash used in operating activities: |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Depreciation and amortization                                           |  |                                       | 994,035     |   |                                                                                        |   | 477,999    |   |  |   | 1,361,913   |  
|Share-based compensation                                                |  |                                       | 986,672     |   |                                                                                        |   | 165,623    |   |  |   | 1,134,957   |  
|Warrants issued for services                                            |  |                                       | 18,291      |   |                                                                                        |   | 312,428    |   |  |   | 109,026     |  
|Non-cash interest                                                       |  |                                       | 578,642     |   |                                                                                        |   |           |   |  |   | 578,642     |  
|Amortization of note discount and deferred financing costs              |  |                                       | 3,599,895   |   |                                                                                        |   |           |   |  |   | 3,599,895   |  
|Gain on embedded derivative liabilities and warrants                    |  |                                       | (1,653,092  | ) |                                                                                        |   |           |   |  |   | (1,653,092  | )
|Gain on sale/leaseback                                                  |  |                                       | (5,250      | ) |                                                                                        |   | (5,250     | ) |  |   | (8,750      | )
|Gain on sale of assets                                                  |  |                                       |            |   |                                                                                        |   | (2,549     | ) |  |   | (2,549      | )
|Changes in operating assets and liabilities:                            |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|(Increase) decrease in:                                                 |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Receivables                                                             |  |                                       | 368,594     |   |                                                                                        |   | (90,000    | ) |  |   | (151,428    | )
|Other assets                                                            |  |                                       | (248,257    | ) |                                                                                        |   | (88,595    | ) |  |   | (400,750    | )
|Restricted cash                                                         |  |                                       | (3,111,172  | ) |                                                                                        |   |           |   |  |   | (3,111,172  | )
|Increase (decrease) in:                                                 |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Accounts payable                                                        |  |                                       | 1,527,582   |   |                                                                                        |   | (259,636   | ) |  |   | 2,205,066   |  
|Accrued expenses                                                        |  |                                       | 286,787     |   |                                                                                        |   | 48,472     |   |  |   | 470,299     |  
|Deferred revenue                                                        |  |                                       |            |   |                                                                                        |   |           |   |  |   | 300,000     |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Net cash used in operating activities                                   |  |                                       | (11,407,091 | ) |                                                                                        |   | (3,825,632 | ) |  |   | (14,221,912 | )
|Cash Flows from Investing Activities:                                   |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Purchase of investments                                                 |  |                                       | (10,189,094 | ) |                                                                                        |   | (6,591,746 | ) |  |   | (16,663,301 | )
|Proceeds from sale of investments                                       |  |                                       | 11,092,514  |   |                                                                                        |   | 5,483,442  |   |  |   | 13,190,947  |  
|Purchase of equipment                                                   |  |                                       | (7,208,723  | ) |                                                                                        |   | (1,927,586 | ) |  |   | (9,181,503  | )
|Proceeds from sale of assets                                            |  |                                       |            |   |                                                                                        |   | 3,120      |   |  |   | 3,120       |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Net cash used in investing activities                                   |  |                                       | (6,305,303  | ) |                                                                                        |   | (3,032,770 | ) |  |   | (12,650,737 | )
|Cash Flows from Financing Activities:                                   |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Payments on notes payable                                               |  |                                       | (2,350      | ) |                                                                                        |   | (2,030     | ) |  |   | (3,779      | )
|Proceeds from convertible note                                          |  |                                       | 15,000,000  |   |                                                                                        |   |           |   |  |   | 15,000,000  |  
|Payments on convertible note                                            |  |                                       | (200,000    | ) |                                                                                        |   |           |   |  |   | (200,000    | )
|Cost of financing                                                       |  |                                       | (924,797    | ) |                                                                                        |   |           |   |  |   | (924,797    | )
|Proceeds from Class A public warrant exercise                           |  |                                       |            |   |                                                                                        |   | 14,546,100 |   |  |   | 5,356,842   |  
|Proceeds from Consultant warrant exercise                               |  |                                       | 133,651     |   |                                                                                        |   | 670,579    |   |  |   | 700,951     |  
|Proceeds from Representative warrant exercise                           |  |                                       | 465,180     |   |                                                                                        |   | 809,934    |   |  |   | 1,575,654   |  
|Proceeds from Class B public warrant exercise                           |  |                                       | 18,000      |   |                                                                                        |   | 1,250      |   |  |   | 19,250      |  
|Proceeds from exercise of stock options                                 |  |                                       | 30,357      |   |                                                                                        |   | 64,677     |   |  |   | 95,034      |  
|Payments on capital leases                                              |  |                                       | (48,470     | ) |                                                                                        |   | (38,004    | ) |  |   | (75,363     | )
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Net cash provided by financing activities                               |  |                                       | 14,471,571  |   |                                                                                        |   | 16,052,506 |   |  |   | 21,543,792  |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Increase\(decrease) in cash and cash equivalents                        |  |                                       | (3,240,823  | ) |                                                                                        |   | 9,194,104  |   |  |   | (5,328,857  | )
|Cash and cash equivalents, beginning of period                          |  |                                       | 7,283,295   |   |                                                                                        |   | 316,041    |   |  |   | 9,371,329   |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Cash and cash equivalents, end of period                                |  | $                                     | 4,042,472   |   |                                                                                        | $ | 9,510,145  |   |  | $ | 4,042,472   |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Supplemental Cash Flow Information:                                     |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Cash paid for interest                                                  |  | $                                     | 152,773     |   |                                                                                        | $ | 47,619     |   |  |   |             |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Non-Cash Transactions:                                                  |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Equipment lease financing                                               |  | $                                     |            |   |                                                                                        | $ | 38,595     |   |  |   |             |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Equipment note payable                                                  |  | $                                     |            |   |                                                                                        | $ | 415,618    |   |  |   |             |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Beneficial conversion feature on convertible note                       |  | $                                     | 1,223,842   |   |                                                                                        | $ |           |   |  |   |             |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  
|Warrants issued for placement of convertible note                       |  | $                                     | 140,419     |   |                                                                                        | $ |           |   |  |   |             |  
|                                                                        |  |                                       |             |   |                                                                                        |   |            |   |  |   |             |  

See accompanying notes to these consolidated financial statements.



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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 researching, developing,
manufacturing and marketing innovative products to the renewable energy / photovoltaic industry. From its inception, the Company has focused primarily on thin-film 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 DayStar Technologies, Inc. and DayStar Solar, LLC (formerly International Energy Trading, LLC), a wholly-owned subsidiary of DayStar Technologies, Inc. All significant intercompany transactions have been
eliminated in consolidation. During the second quarter of 2005, DayStar Technologies, Inc. discontinued operations of DayStar Solar, LLC (See Note 7). 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, 2005. The results of operations for the nine months ended September 30, 2006 and 2005 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 September 30, 2006 and the results of its operations and its cash flows for the nine months ended September 30, 2006 and 2005 and for the period from July 1,
2005 (Inception of the Development Stage) to September 30, 2006.

2. Future Operations:

The Company has experienced losses from operations and anticipates incurring substantial losses in the future. The Companys current business plans
include significant expenditures to continue the development of the current manufacturing production capability and to expand development efforts for next generation production processes. These activities require the Company to add employees,
purchase production equipment, build-out additional manufacturing facilities, and design and manufacture prototype deposition equipment. The Company does not believe that it can achieve profitability until development, implementation and
commercialization of next generation processes are achieved.

Without significant additional financing, we would need to delay certain of
these activities and defer certain capital expenditures. Our financing plan includes (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 our stockholders.

3. Significant Accounting Policies:

Revenue Recognition  The Company recognizes 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.



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##### Table of Contents

Research and development contract revenue is recognized as the Company meets milestones as set forth
under the contract. During the nine months ended September 30, 2006, the Company recognized $180,000 of revenue from contracts with a New York State government agency.

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
 Prior to January 1, 2006, the Company accounted for stock option awards granted under the Companys Equity Incentive Plan in accordance with the recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, (APB 25) and related Interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123). Share-based employee compensation expense was not recognized in the Companys consolidated statements of operations prior to January 1, 2006, as all stock option awards granted had an
exercise price equal to or greater than the market value of the common stock on the date of the grant (other than for certain option modifications resulting in exercise prices below the fair market value at the date of modification). As permitted by
SFAS 123, the Company reported pro-forma disclosures presenting results and earnings per share as if the Company had used the fair value recognition provisions of SFAS 123 in the Notes to Consolidated Financial Statements. Share-based compensation
related to non-employees and modifications of options granted were accounted for based on the fair value of the related stock or options in accordance with SFAS 123 and its interpretations.

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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 during the nine months ended September 30, 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). In accordance with the modified prospective transition
method, the Companys consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS 123(R).

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 common stock were exercised or converted into common
stock. These common stock equivalents have been omitted from earnings per share because they are anti-dilutive. Basic and diluted EPS were the same for the nine months ended September 30, 2006 and 2005.

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.

Certain terms in the convertible 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.



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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 expense upon conversion of the
instrument.

Restricted Cash  Restricted cash at September 30, 2006 represents amounts held in escrow as required by the
terms of the convertible note agreement (See Note 5) and as collateral for a letter of credit with a financial institution in order to acquire certain equipment.

Discontinued Operations  In June 2005, the Company discontinued operations of DayStar Solar, LLC. The results of operations associated with this business, have been reported as discontinued operations in
the accompanying consolidated statements of operations. The accompanying consolidated statements of cash flows include the effects of both continuing and discontinued operations.

Reclassifications  Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 presentation.

Impact of Recently Issued Accounting Pronouncements 

SFAS No. 156, Accounting for Servicing of Financial AssetsAn Amendment to FASB Statement No. 140 In
March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan amendment to FASB Statement No. 140 (SFAS 156). SFAS 156 requires that all separately recognized servicing
rights be initially measured at fair value, if practicable. In addition, this statement permits an entity to choose between two measurement methods (amortization method or fair value measurement method) for each class of separately recognized
servicing assets and liabilities. SFAS 156 is effective for the Company January 1, 2007. The Company does not believe that the adoption of SFAS 156 will have a material impact on its consolidated financial statements.

SFAS No. 157, Fair Value Measurements In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which establishes a framework for reporting fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company January 1, 2008. The Company is currently evaluating the impact of
this new standard on its consolidated financial statements.

SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans- An Amendment of FASB Statements No. 87, 88, 106, and 132(R) In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans- an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan)
as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status
of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS 158 provides recognition and disclosure elements to be effective as of the end of the fiscal year after December 15, 2006 and measurement
elements to be effective for fiscal years ending after December 15, 2008. The Company does not believe that the adoption of SFAS 158 will have a material impact on its consolidated financial statements.

FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109In
July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48). This interpretation clarifies the application of SFAS 109
by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprises financial statements and also provides guidance on measurement, de-recognition, classification,
interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for the Company January 1, 2007. At this time, we have not completed our review and assessment of the impact of adoption of FIN 48.



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4. Share-Based Compensation

Equity Incentive Plan  On June 19, 2006, the Company adopted an Equity Incentive Plan (the 2006 Plan) to enable employees, outside directors and consultants to acquire an equity interest
in the Company. Issuances under the 2006 Plan may be in the form of incentive and non-qualified stock options, restricted stock, restricted stock units and stock appreciation rights. The 2006 Plan reserves 17.5% (10,500,000 shares) of the
Companys authorized common shares for issuance for these purposes; subject to the further restriction that the 2006 Plan Committee shall not award grants exceeding 17.5% (1,208,219 shares at September 30, 2006) of the Companys total
issued and outstanding common shares as of and including the grant. Under the 2006 Plan, the term of stock options shall not exceed ten years and incentive stock options shall not be granted with an exercise price of less than 100% of the fair
market value of the common stock, and non-qualified stock options shall not be granted with an exercise price of less than 85% of the fair market value of the common stock, both measured at the time of grant.

Grants of incentive and non-qualified stock options, and restricted stock prior to June 19, 2006 were made from the Companys original Equity
Incentive Plan adopted in 2003 (the 2003 Plan).

As discussed in Note 3, Significant Accounting Policies  Share-Based
Compensation, effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method. The adoption of SFAS 123(R) resulted in share-based compensation expense
for the three months ended September 30, 2006 of $333,226, of which $170,247 was recorded to research and development and $162,979 to selling, general and administrative expenses. The adoption of SFAS 123(R) resulted in share-based compensation
expense for the nine months ended September 30, 2006 of $986,672, of which $462,767 was recorded to research and development and $523,905 to selling, general and administrative expenses. These expenses increased basic and diluted loss per share
by $0.05 and $0.15, respectively, for the three months and nine months ended September 30, 2006.

For the nine months ended
September 30, 2005, the Company applied the intrinsic value method of accounting for stock options as prescribed by APB 25. Since all options granted during the nine months ended September 30, 2005 had an exercise price equal to the
closing market price of the underlying common stock on the grant date, no share-based compensation expense was recognized. If share-based compensation expense had been recognized based on the estimated fair value of each option granted in accordance
with the provisions of SFAS 123, as amended by SFAS 148, the Companys net loss and net loss per share would have been reduced to the following pro-forma amounts:



|                                                         |  |                                     |            |   |                                    |   |            |  
|-------------------------------------------------------- |  | ----------------------------------- | ---------- | - | ---------------------------------- | - | ---------- | -
|                                                         |  | Three MonthsEnded September 30,2005 |            |   | Nine MonthsEnded September 30,2005 |  
|Net loss, as reported                                    |  | $                                   | (1,525,116 | ) |                                    | $ | (4,384,124 | )
|Pro forma stock compensation expense, net of tax benefit |  |                                     | (115,593   | ) |                                    |   | (334,640   | )
|Employee stock compensation under the intrinsic method   |  |                                     |           |   |                                    |   |           |  
|                                                         |  |                                     |            |   |                                    |   |            |  
|Pro forma net loss                                       |  | $                                   | (1,640,709 | ) |                                    | $ | (4,718,764 | )
|                                                         |  |                                     |            |   |                                    |   |            |  
|Net loss per share, basic and diluted,                   |  |                                     |            |   |                                    |   |            |  
|As reported                                              |  | $                                   | (0.25      | ) |                                    | $ | (0.96      | )
|Pro forma stock compensation expense                     |  |                                     | (0.02      | ) |                                    |   | (0.07      | )
|Employee stock compensation under the intrinsic method   |  |                                     |           |   |                                    |   |           |  
|                                                         |  |                                     |            |   |                                    |   |            |  
|Pro forma                                                |  | $                                   | (0.27      | ) |                                    | $ | (1.03      | )
|                                                         |  |                                     |            |   |                                    |   |            |  



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Pro-forma compensation expense under SFAS 123, among other computational differences, does not consider
potential pre-vesting forfeitures. Because of these differences, the pro-forma share-based compensation expense presented above for the three months and nine months ended September 30, 2005 under SFAS 123 and the share-based compensation expense
recognized during the three months and nine months ended September 30, 2006 under SFAS 123(R) are not directly comparable. In accordance with the modified prospective transition method of SFAS 123(R), the prior comparative results have not been
restated.

The Black-Scholes option-pricing model was used to estimate the option fair values. This option-pricing model requires a number
of assumptions, of which the most significant are, expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term (the amount of time from the grant date until the options are exercised or expire). Expected
volatility was calculated based upon actual historical stock price movements over the period from the Companys initial public offering through September 30, 2006, and further reviewed against industry comparables. Expected pre-vesting
forfeitures were estimated based on actual historical pre-vesting forfeitures over the period from the Companys initial public offering through September 30, 2006. The expected option term was calculated using the simplified
method permitted by SAB 107.

The weighted average per share fair value of stock options granted during the three months ended
September 30, 2006 and 2005 was $6.70 and $12.33, respectively, and during the nine months ended September 30, 2006 and 2005 was $7.68 and $10.71, respectively. The fair value was estimated as of the grant date using the Black-Scholes
option pricing model with the following assumptions:



|                          |  |                                  |      |   |                                 |   |      |      |  |   |             |   |  |   |             |  
|------------------------- |  | -------------------------------- | ---- | - | ------------------------------- | - | ---- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                          |  | Three Months ended September 30, |      |   | Nine Months ended September 30, |  
|                          |  | 2006                             |      |   | 2005                            |   |      | 2006 |  |   | 2005        |  
|Expected volatility       |  |                                  | 84   | % |                                 |   | 89   | %    |  |   | 84  88     | % |  |   | 89  97     | %
|Risk-free interest rate   |  |                                  | 4.98 | % |                                 |   | 4.50 | %    |  |   | 4.65  5.06 | % |  |   | 4.13  4.50 | %
|Expected dividends        |  | $                                |     |   |                                 | $ |     |      |  | $ |            |   |  | $ |            |  
|Expected terms (in years) |  |                                  | 6.25 |   |                                 |   | 10   |      |  |   | 6.25        |   |  |   | 10          |  

The following table summarizes stock options outstanding and activity as of and for the nine
months ended September 30, 2006:



|                                  |  |         |   |  |                              |       |                                                    |      |                         |   |        
|--------------------------------- |  | ------- | - |  | ---------------------------- | ----- | -------------------------------------------------- | ---- | ----------------------- | - | -------
|                                  |  | Shares  |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm (in years) |      | AggregateIntrinsicValue
|Outstanding at January 1, 2006    |  | 293,375 |   |  | $                            | 8.04  |                                                    |      |                         |   |        
|Granted                           |  | 206,250 |   |  | $                            | 10.12 |                                                    |      |                         |   |        
|Forfeited                         |  | (14,432 | ) |  | $                            | 7.57  |                                                    |      |                         |   |        
|Exercised                         |  | (13,918 | ) |  | $                            | 2.12  |                                                    |      |                         |   |        
|                                  |  |         |   |  |                              |       |                                                    |      |                         |   |        
|Outstanding at September 30, 2006 |  | 471,275 |   |  | $                            | 9.13  |                                                    | 8.95 |                         | $ | 386,919
|                                  |  |         |   |  |                              |       |                                                    |      |                         |   |        
|Exercisable at September 30, 2006 |  | 134,686 |   |  | $                            | 8.25  |                                                    | 8.44 |                         | $ | 200,390
|                                  |  |         |   |  |                              |       |                                                    |      |                         |   |        

The total intrinsic value, or the difference between the exercise price and the market price on
the date of exercise, of all options exercised during the three months and nine months ended September 30, 2006, was $5,174 and $148,271, respectively. Cash received from stock options exercised during the three months and nine months ended
September 30, 2006 was $1,652 and $30,357, respectively. The Company did not realize any tax deductions related to the exercise of stock options during the three months and nine months ended September 30, 2006. The Company will record such
deductions to additional paid in capital when realized.



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The following table summarizes the Companys stock options outstanding and currently exercisable at
September 30, 2006:



|                         |  |                     |  |                                         |  |                              |       |        |         |                              |   |      
|------------------------ |  | ------------------- |  | --------------------------------------- |  | ---------------------------- | ----- | ------ | ------- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                    
|Range of Exercise Prices |  | Number              |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | Number |         | WeightedAverageExercisePrice
|3.45  4.00              |  | 20,000              |  | 7.4                                     |  | $                            | 3.62  |        | 13,667  |                              | $ | 3.69 
|2.06  2.54              |  | 77,025              |  | 7.9                                     |  | $                            | 2.42  |        | 33,886  |                              | $ | 2.43 
|2.59  6.83              |  | 38,400              |  | 8.4                                     |  | $                            | 4.98  |        | 21,767  |                              | $ | 4.13 
|8.77  15.03             |  | 335,850             |  | 9.4                                     |  | $                            | 11.82 |        | 65,367  |                              | $ | 13.60
|                         |  |                     |  |                                         |  |                              |       |        |         |                              |   |      
|                         |  | 471,275             |  | 8.9                                     |  | $                            | 9.13  |        | 134,687 |                              | $ | 8.25 
|                         |  |                     |  |                                         |  |                              |       |        |         |                              |   |      

Total unrecognized share-based compensation expense from unvested stock options as of
September 30, 2006 was $2,361,118, which is expected to be recognized over a weighted average period of approximately 3.2 years.

In
addition to the stock options discussed above, the Company recognized share-based compensation expense related to Restricted Stock grants, of $152,977 and $55,385 for the three months ended September 30, 2006 and 2005, respectively, and
$334,698 and $165,623 for the nine months ended September 30, 2006 and 2005, respectively. The following table summarizes Non-vested Restricted Stock and the related activity as of and for the nine months ended September 30, 2006:



|                                 |  |         |  |                                        |      
|-------------------------------- |  | ------- |  | -------------------------------------- | -----
|                                 |  | Shares  |  | Weighted Average Grant-Date Fair-Value
|Non-vested at January 1, 2006    |  | 38,750  |  | $                                      | 10.64
|Granted                          |  | 187,375 |  | $                                      | 10.86
|                                 |  |         |  |                                        |      
|Non-vested at September 30, 2006 |  | 226,125 |  | $                                      | 10.82
|                                 |  |         |  |                                        |      

5. 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 of a senior convertible note (Note) in the
aggregate principal amount of $15,000,000, warrants to purchase 782,609 shares of the Companys $.01 par value per share common stock and additional warrants in the event the Company causes a conversion of the note into shares of common stock.

The note is convertible into 1,304,348 shares of DayStars common stock at any time at the option of the holder at an initial
conversion price of $11.50 per share, subject to adjustment. The note is convertible at the Companys option if the closing price of the Companys common stock for each trading day of any twenty consecutive trading day period equals or
exceeds 150% of the conversion price and certain other criteria are satisfied.

The principal amount of the note is to be repaid in eight
equal installments of $1,875,000, beginning September 10, 2006 (the monthly anniversary from two weeks after the date on which the SEC declared effective the registration statement to register, among other things, the associated shares to be
used in payment or conversion of the note to common stock of the company). Such principal payments may be paid in cash or, at the option of the Company, if certain conditions are satisfied, in shares of the Companys common stock. Any shares of
common stock used to pay an installment of principal will be valued at the lower of the Conversion Price or 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.



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The discount attributable to the issuance date aggregate fair value of the conversion options and
warrants, totaling $5,259,960, is being 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 the Companys common stock issued to the placement agent. The total financing costs were capitalized and are being 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 as of and for the nine months ended
September 30, 2006:



|                                      |  |                  |             |   |                         |   |            |     |  |   |             |   |  |  |  |   |          
|------------------------------------- |  | ---------------- | ----------- | - | ----------------------- | - | ---------- | --- |  | - | ----------- | - |  |  |  | - | ---------
|                                      |  | Convertible Note |             |   | DeferredFinancing Costs
|                                      |  | Principal        |             |   | Discount                |   |            | Net |  |  
|At Issuance Date, May 25, 2006        |  | $                | 15,000,000  |   |                         | $ | 5,259,961  |     |  | $ | 9,740,039   |   |  |  |  | $ | 1,065,216
|Activity through September 30, 2006:  |  |                  |             |   |                         |   |            |     |  |   |             |   |  |  |  |   |          
|Payments                              |  |                  | (1,665,653  | ) |                         |   |           |     |  |   | (1,665,653  | ) |  |  |  |   |          
|Amortization                          |  |                  |            |   |                         |   | (3,001,669 | )   |  |   | 3,001,669   |   |  |  |  |   | 598,226  
|                                      |  |                  |             |   |                         |   |            |     |  |   |             |   |  |  |  |   |          
|Balance, September 30, 2006           |  |                  | 13,334,347  |   |                         |   | 2,258,292  |     |  |   | 11,076,055  |   |  |  |  | $ | 466,990  
|                                      |  |                  |             |   |                         |   |            |     |  |   |             |   |  |  |  |   |          
|Less current portion                  |  |                  | (12,725,000 | ) |                         |   | (1,834,864 | )   |  |   | (10,890,136 | ) |  |  |  |   |          
|                                      |  |                  |             |   |                         |   |            |     |  |   |             |   |  |  |  |   |          
|Long-term portion of convertible note |  | $                | 609,347     |   |                         | $ | 423,428    |     |  | $ | 185,919     |   |  |  |  |   |          
|                                      |  |                  |             |   |                         |   |            |     |  |   |             |   |  |  |  |   |          

The following summarizes the amortization of the note discount and deferred financing costs for
the three months and nine months ended September 30, 2006.



|                                         |  |                                     |           |                                    |   |          
|---------------------------------------- |  | ----------------------------------- | --------- | ---------------------------------- | - | ---------
|                                         |  | Three MonthsEnded September 30,2006 |           | Nine MonthsEnded September 30,2006
|Amortization of Note discount            |  | $                                   | 2,097,518 |                                    | $ | 3,001,669
|Amortization of Deferred financing costs |  |                                     | 419,564   |                                    |   | 598,226  
|                                         |  |                                     |           |                                    |   |          
|                                         |  | $                                   | 2,517,082 |                                    | $ | 3,599,895
|                                         |  |                                     |           |                                    |   |          

Payments

The note contains a holders optional redemption clause which states that, at any time, the holder of the note has the right to require that the Company redeem up to an amount equal to the product of the number of
shares of common stock that is 20% of the aggregate trading volume of the Companys common stock over the prior twenty day trading period multiplied by the holder optional conversion price. On August 10, 2006, the holder exercised this
right and on August 25, 2006 the Company issued 52,636 shares of its common stock to redeem $400,000 in principal on the note.

On
September 10, 2006, the Company began its scheduled principal payments by paying $200,000 in cash and $1,065,653 in shares of its common stock (163,043 shares). The holder of the note deferred $609,347 of the $1,875,000 principal payment for a
period of up to two years from its original due date.



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On October 10, 2006, the Company made its second scheduled principal payment by paying $200,000 in
cash and $811,791 in shares of its common stock (163,043 shares). The holder of the note deferred $863,209 of the $1,875,000 principal payment for a period of up to two years from its original due date.

On October 19, 2006, the holder issued a holders optional redemption notice, and on November 2, 2006 the Company issued 71,478 shares of
its common stock to redeem $400,000 in principal on the note.

On November 10, 2006, the Company made its third scheduled principal
payment by paying $1,000,000 in shares of its common stock (202,594 shares). The holder of the note deferred $875,000 of the $1,875,000 principal payment for a period of up to two years from its original due date.

Interest

Interest is due quarterly, beginning
July 1, 2006 at 7.5% per annum. All or a portion of the accrued and unpaid interest may be paid in cash or, at the option of the Company, if certain conditions are satisfied, in shares of the Companys common stock. Any shares of
common stock used to make an interest payment will be valued at the lower of the Conversion Price or a 13.5% discount to the volume weighted average price of the Companys common stock for the five days preceding the payment date, provided,
further, that specific stockholder approval must have been obtained providing for the Companys issuance of all of the common stock contemplated under the note, warrants and interest. During the three months and nine months ended
September 30, 2006, the Company recorded interest expense related to the note of $578,642 and $692,683, respectively, including a discount of $302,980. As of September 30, 2006, $318,684 in interest, including a discount of $43,022, was
accrued. This amount was paid on October 1, 2006 in 54,913 shares of the Companys common stock.

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,
Accounting for Derivative Instruments and Hedging Activities, 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 then current exercise price. The warrants are exercisable at any time through May 26, 2011. No warrants had been exercised as of
September 30, 2006.

The stock warrant liability is summarized as follows:



|                               |  |                       |            |  
|------------------------------ |  | --------------------- | ---------- | -
|                               |  | StockWarrantLiability |           
|At Issuance Date, May 25, 2006 |  | $                     | 4,036,118  |  
|Change in fair value           |  |                       | (1,653,092 | )
|                               |  |                       |            |  
|Balance, September 30, 2006    |  | $                     | 2,383,026  |  
|                               |  |                       |            |  

Gain on derivative liabilities for the three months and nine months ended September 30, 2006
was $1,738,622 and $1,653,092, respectively.

As a result of a free-standing registration rights agreement, the Company had an obligation
to register the shares underlying the note and related warrants (the registration statement became effective on July 27, 2006) and has a continuing obligation to keep the registration statement effective. Failure to meet this obligation, as
defined, will result in liquidated damages in an amount equal to 2% per month of the outstanding principal amount of the note up to a maximum of 10% of the average total amount of the notes outstanding in any 12 month period.

In the event of a fundamental change as defined in the note, the holder will be entitled to require the Company to redeem the outstanding note balance
and any warrants then outstanding. The note holders will have the right to require the Company to redeem the outstanding note balance at the greater of (i) the product of (x) 125% of the sum of the amount of principal and interest to be



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redeemed and (y) the quotient determined by dividing (A) the closing sale price of the Companys Common Stock after the announcement of a
change of control by (B) the conversion price, and (ii) 125% of the sum of the principal and interest. The warrant holders will have the right, among others, to have the warrants repurchased for a purchase price in cash equal to the
Black-Scholes value of the then unexercised portion of the warrants.

Escrow

Under the terms of the note, on August 9, 2006, the Company deposited $3,000,000 into escrow. At September 30, 2006, the amount held in escrow
remained $3,000,000. The amounts held in escrow are reflected as restricted cash in the Companys consolidated balance sheet at September 30, 2006. The terms of the note require that in the event the Companys common stock closes
below $9.00 for ten consecutive trading days, the Company is required to deposit an amount of cash equal to 30% of the then outstanding principal amount of the note into escrow up to a maximum of $3,000,000. In the event that the Companys
common stock closes at $10.00 per share or above for 10 consecutive trading days following the escrow deposit, the escrowed funds may be released. In addition, once the balance of the note falls below $10,000,000, 30% of all subsequent principal
payments will be released from escrow.

6. Warrants

Class A public warrants  As of September 30, 2006, there were no Class A public warrants outstanding. On August 11, 2005, the Company redeemed all then outstanding Class A public
warrants.

Class B public warrants  As of September 30, 2006, 5,113,453 Class B public warrants were outstanding. The
Class B public warrants became exercisable on March 22, 2004. 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
September 30, 2006, 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 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. During the nine months ended September 30,
2006, 38,765 Representative warrants were exercised which included the exercise of the Class A warrants to common stock. Accordingly, 77,530 shares of common stock and 77,530 Class B non-redeemable public warrants were issued, resulting in
proceeds to the Company of $465,180.

Class A warrants  As of September 30, 2006, 782,609 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 Companys common stock. 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 then current exercise price. The fair value of the 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.

Consultant warrants As of September 30, 2006, 65,487 Consultant warrants were outstanding. Under contracts with three of the
Companys consultants, monthly grants, through January 31, 2006, of 1,650 warrants to purchase one share of the Companys common stock at a price of $3.00 were issued based on service rendered. Accordingly 1,650 warrants have been
issued during the nine months ended September 30, 2006, under these arrangements. During the nine months ended September 30, 2006, 37,050 Consultant warrants were exercised for common stock.

The fair value of the Consultant warrants charged to expense during the three months ended September 30, 2006 and 2005 was $0 and $52,945
respectively, and $18,291 and $306,047, for the nine months ended September 30, 2006 and 2005, respectively. The fair value of the Consultant warrants issued during the three months and nine months ended September 30, 2006 and 2005 was
calculated using the Black-Scholes pricing model.

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 is being amortized using the effective interest method over the life of the related note.



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7. Discontinued Operations

During the second quarter of 2005, the Company discontinued operations of its subsidiary, DayStar Solar, LLC. This entity was in the business of reselling and installing solar electricity systems for residential
customers in northern California. The discontinuance of this business operation coincided with the closure of the facility in Grass Valley, California. There were no results of operation from DayStar Solar, LLC for the nine months ended
September 30, 2006. Results of operations from DayStar Solar, LLC, for the three months and nine months ended September 30, 2005 were as follows:



|                         |  |                                     |        |   |                                    |   |        |  
|------------------------ |  | ----------------------------------- | ------ | - | ---------------------------------- | - | ------ | -
|                         |  | Three MonthsEnded September 30,2005 |        |   | Nine MonthsEnded September 30,2005 |  
|Revenue                  |  | $                                   |       |   |                                    | $ | 65,189 |  
|Cost of revenue          |  |                                     | 74     |   |                                    |   | 58,538 |  
|Operating expenses       |  |                                     | 2,014  |   |                                    |   | 9,198  |  
|                         |  |                                     |        |   |                                    |   |        |  
|Total costs and expenses |  |                                     | 2,088  |   |                                    |   | 67,736 |  
|                         |  |                                     |        |   |                                    |   |        |  
|Net loss                 |  | $                                   | (2,088 | ) |                                    | $ | (2,547 | )
|                         |  |                                     |        |   |                                    |   |        |  

Revenue from the sale and installation of solar electricity systems is recognized when
installation is complete and collectibility is reasonably assured.

8. Commitments and Contingencies

Operating Lease -On March 10, 2006, the Company entered into a fifty-one month lease for approximately 50,000 square feet of factory and
office space in Santa Clara, California. The lease expires in August of 2010. The space will be the location of the Companys equipment development group, responsible for the development of certain next generation manufacturing equipment.
Monthly payments under the lease are $18,144 per month during the first twelve months, and increase by $1,008 per month during each twelve month period thereafter. The terms of the lease allow for early termination by the landlord effective at the
thirty-sixth month of the lease term.

In addition to the minimum payments under operating leases disclosed in the Companys Annual
Report on Form 10-KSB for the year ended December 31, 2005, future minimum lease payments under this new lease as of September 30, 2006, are as follows:



|                         |  |        |        
|------------------------ |  | ------ | -------
|Year Ending December 31, |  | Amount
|2006                     |  | $      | 54,432 
|2007                     |  |        | 224,784
|2008                     |  |        | 236,880
|2009                     |  |        | 248,976
|2010                     |  |        | 172,368
|                         |  |        |        
|Total                    |  | $      | 937,440
|                         |  |        |        



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Employment Agreements -In April 2006, the Company entered into employment agreements with all
eight of its executive officers. Annual base salaries under these agreements total $1,374,500. Each agreement is for an initial three-year term. The agreements are automatically extended for a one year period on the anniversary date and annually
thereafter unless either party gives the other 90 days written notice prior to the anniversary date of the intent not to extend the agreement. The agreements contain provisions for both the Company and the executive officers, which allow either
party to terminate prior to the expiration of the agreements.

Under each employment agreement, the executive officer is entitled to
participate in an annual bonus and management incentive program, as currently offered or subsequently modified by the Board. Each executive officers incentive compensation program is within the sole discretion of the board of directors, and
the Company has the right to alter, amend or eliminate all or any part of any incentive program at any time, without compensation. Each executive officer is also entitled to participate in all of the Companys employee benefit plans.



|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 thin-film,
copper-indium-gallium-selenide solar cells, known as 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.

On February 11, 2004, we successfully completed an initial public offering of
2.1 million units. A unit consisted of one share of common stock, one Class A redeemable public warrant and two Class B non-redeemable public warrants. Each warrant gave the holder the right to purchase one share of common stock. The net
proceeds from the offering, after deducting underwriting fees and offering expenses, were $8.3 million. The proceeds were used to fund (1) research and development expenses to further develop and refine our proprietary thin-film solar cell
fabrication processes, (2) purchase capital equipment to create development-scale vacuum deposition hardware, measurement and test equipment, and solar cell packaging hardware, (3) fund general, sales and corporate expenses, and
(4) pay outstanding obligations.

On June 21, 2005, we publicly announced that we intended to redeem our outstanding Class A
public warrants at $.25 per warrant. The warrant holders had the ability to exercise each warrant for one common share at $6.00 per share. There were 2,371,830 Class A public warrants issued in conjunction with the initial public offering and a
subsequent financing. In addition, the exercise of Representative warrants, issued in conjunction with the initial public offering, added 70,324 Class A public warrants subject to redemption. The exercise period ended August 11, 2005.
During the exercise period, 2,425,062 of the Class A public warrants (99.3% of the total outstanding) were exercised for an equal number of shares of common stock and we received $14.5 million in proceeds from the warrant exercises.
Additionally, the exercise of other equity instruments, primarily Representative and Consultant warrants, generated proceeds of approximately $2.4 million. The proceeds from all such exercises will be used to complete the build-out of the facility
in Halfmoon, New York; fund costs related to ramping up production, accelerating development of and transitioning to our next generation of production (Gen III); and for general operating costs and corporate purposes.



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On May 25, 2006, we completed a private placement transaction with the issuance of a $15 million
senior convertible note (Note) and warrants to purchase 782,609 shares of our common stock. The net proceeds from the transaction after deducting financing expenses were $14.1 million. These funds are being used to complete the
enhancements to and development of our Gen II processes, continue the development of and transitioning to our next generation of production (Gen III); and for general operating costs and corporate purposes.

The Note contains a variety of covenants, which are typical for transactions of this type, as well as the covenant in the event that our common stock closes below $9.00 for ten consecutive trading days, we will
deposit an amount of cash equal to 30% of the then outstanding principal amount of the note into escrow, provided that in no event shall the total amount of escrowed funds exceed $3.0 million. In the event that DayStars common stock closes at
$10.00 per share or above for 10 consecutive trading days following the escrow deposit, the escrowed funds will be released. This process will continue until the note is repaid. On August 8, 2006, DayStars share price closed below $9.00
for ten consecutive trading days, and on August 9, 2006, we deposited $3.0 million into escrow, as required by the terms of the note.

During the remainder of 2006, we expect to continue the development of the Gen II process and production capability, development of the Gen III process and equipment design, and product planning efforts for LightFoil. The development of the Gen II process includes producing and selling limited amounts
of solar cells. We will require additional financing to implement the above programs beyond the first quarter of 2007. In order to conserve cash and extend operations, we are reducing cash outlays by reducing operating expenses and ceasing new
equipment purchases.

In addition to anticipated cash receipts from existing contracts with a New York State government agency and New York
State tax credits, we are investigating the viability of obtaining lease financing for certain capital assets we currently own. Also, we currently maintain $3,000,000 in escrow as required under the terms of our current convertible note agreement.
The escrow balance required to be maintained, is the lesser of 30% of the outstanding principal balance on the note, or $3,000,000. As of November 10, 2006, our principal balance on the note is $10,922,556. We are currently making scheduled
payments on the note using common stock and expect the principal balance to be reduced below $10,000,000 during the latter part of the fourth quarter of 2006. Once below a principal balance of $10,000,000, 30% of all subsequent principal payments
will be released from escrow, and available for use in operations. However, we will need significant additional capital infusions to execute our business plan beyond the first quarter of 2007, and will require additional capital 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.

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



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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Prior to January 1, 2006, we
accounted for stock option awards granted under the Companys Equity Incentive Plan in accordance with the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, (APB 25) and related Interpretations, as permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123). Share-based employee
compensation expense was not recognized in our consolidated statements of operations prior to January 1, 2006, as all stock option awards granted had an exercise price equal to or greater than the market value of the common stock on the date of
the grant (other than for certain option modifications resulting in exercise prices below the fair market value at the date of modification). As permitted by SFAS 123, we reported pro-forma disclosures presenting results and earnings per share as if
we had used the fair value recognition provisions of SFAS 123 in the Notes to Consolidated Financial Statements. Share-based compensation related to non-employees and modifications of options granted were accounted for based on the fair value of the
related stock or options in accordance with SFAS 123 and its interpretations.

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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 during the nine
months ended September 30, 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). In accordance with the
modified prospective transition method, our consolidated financial statements for prior periods have not been restated to reflect the impact 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.

Certain terms in the convertible 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 September 30, 2006 and 2005

Certain reclassifications have been made to the 2005 financial information to conform to the 2006 presentation.



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Product Revenue.Product revenue was $1,050 for the three months ended September 30, 2006.
During the quarter we began shipment of product in fulfillment of our contract with Blitzstrom. We are currently shipping low volumes of cells to Blitzstrom for module development and performance evaluations.

Research and development contract revenue.Research and development contract revenue was $150,000 for the three months ended September 30,
2006 compared to $115,000 for the three months ended September 30, 2005. 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.
The three months ended September 30, 2006 revenue relates to meeting production volumes and solar cell conversion efficiencies.

Research and development expenses. Research and development expenses were $3,275,243 for the three months ended September 30, 2006 compared to $824,467 for the three months ended September 30, 2005, an increase of
$2,450,776 or 297%. These expenses have increased significantly due to the increases in the number of personnel and related activities during the past year as we established Gen II production capabilities to manufacture photovoltaic cells and
increased activities in research and development of our next generation capabilities in both New York and California. We are designing, with the intent to manufacture, prototype deposition equipment while procuring automated cell processing
equipment for our next generation production line. Additionally, the implementation of SFAS No. 123(R), effective January 1, 2006, added $170,247 in share-based compensation expense for research and development personnel during the three
months ended September 30, 2006.

Selling, general and administrative expenses. Selling, general and administrative expenses
were $1,490,177 for the three months ended September 30, 2006 compared to $714,487 for the three months ended September 30, 2005, an increase of $775,690 or 109%. The increase in selling, general and administrative expenses corresponded
with our increase in headcount and overall increase in activity over the comparative period. As a result, salaries, consulting and other administrative costs increased during the three months ended September 30, 2006 as compared to the three
months ended September 30, 2005. Additionally the implementation of SFAS No. 123(R), effective January 1, 2006, added $162,979 in share-based compensation expense for selling, general and administrative personnel during the three
months ended September 30, 2006. We expect selling, general and administrative expenses to continue to increase in support of our anticipated continued growth in the manufacturing and engineering areas of our business.

Depreciation and amortization expenses. Depreciation and amortization expenses were $502,315 for the three months ended September 30, 2006
compared to $178,677 for the three months ended September 30, 2005, an increase of $323,638. Depreciation and amortization expenses increased primarily as a result of the acquisition of and utilization of significant amounts of capital
equipment as we continued to develop our manufacturing technologies and began the production of photovoltaic cells.

Other income.Other income was $206,506 for the three months ended September 30, 2006 compared to $102,416 for the three months ended September 30, 2005, an increase of $104,090. Other income primarily represents interest on investments.

Interest expense. Interest expense was $600,314 for the three months ended September 30, 2006 compared to $22,813 for the three months
ended September 30, 2005, an increase of $317,543. The increase in interest expense was due primarily to the issuance in May 2006 of a $15 million convertible 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 $2,517,082 for the three months ended September 30, 2006. There was no amortization of note discount and deferred financing costs for the three months ended September 30, 2005. The convertible note issued in
May 2006 contained a beneficial conversion feature as well as warrants issued to the holder of the note. The aggregate fair value of the conversion feature and warrants, represented a discount to the note, totaling $5.3 million and is being
amortized using the effective interest method over the life of the note. In addition we incurred financing costs of $1.0 million related to this transaction. The financing costs were capitalized and are also being amortized over the life of the
note. At September 30, 2006, the unamortized note discount and deferred financing costs were $2.8 million and $.6 million, respectively.



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Gain on derivative liabilities.Gain on derivative liabilities was $1,738,622 for the three months
ended September 30, 2006. There was no gain on derivative liabilities for the three months ended September 30, 2005. The warrants issued in conjunction with the convertible note are considered derivative liabilities and are therefore
required to be adjusted to fair value each quarter. From June 30, 2006 to September 30, 2006 our common stock price declined which caused a reduction in the fair value of the warrant liability. This resulted in a gain on derivative
liabilities of $1,738,622 for the three months ended September 30, 2006.

Net loss.Our net loss was $6,288,953 for the three
months ended September 30, 2006 compared to a loss of $1,525,116 for the three months ended September 30, 2005. The increase in net loss was due primarily to investing in engineering and manufacturing activities as we established Gen II
production capabilities to manufacture photovoltaic cells and increased activities in designing, with the intent to manufacture, prototype deposition equipment, for our next generation production line; as well as a corresponding increase in selling,
general and administrative personnel and activities to support the engineering and manufacturing efforts. Throughout the remainder of 2006 and into 2007, we expect to continue to incur significant expenses related to (1) manufacturing in our
Gen II manufacturing facility, (2) development efforts and implementation of the next generation Gen III manufacturing processes, and (3) expanding operations to include our next generation manufacturing facility. We also anticipate
significant non-cash charges related to the $15,000,000 financing transaction. We also anticipate additional share-based compensation expense as a result of the implementation of SFAS No. 123(R), effective January 1, 2006. Without
significant product revenue anticipated, we also expect to experience significant net losses throughout the remainder of 2006 and throughout 2007 until our next generation production is realized.

Comparison of the Nine months Ended September 30, 2006 and 2005

Certain reclassifications have been made to the 2005 financial information to conform to the 2006 presentation.

Product Revenue.Product revenue was $1,050 for the nine months ended September 30, 2006. During the quarter we began shipment of product in fulfillment of our contract with Blitzstrom. We are currently shipping low volumes of
cells to Blitzstrom for module development and performance evaluations.

Research and development contract revenue.Our research and
development contract revenue was $180,000 for the nine months ended September 30, 2006 compared to $365,000 for the nine months ended September 30, 2005. Our research and development contract revenue was primarily earned as a result of
achieving various milestones related to meeting production volumes and solar cell conversion efficiencies under agreements with a New York State government agency.

Research and development expenses. Research and development expenses were $7,641,507 for the nine months ended September 30, 2006 compared to $2,139,731 for the nine months ended September 30, 2005,
an increase of $5,501,776 or 257%. These expenses have increased significantly due to the increases in the number of personnel and related activities during the past year as we established Gen II production capabilities to manufacture photovoltaic
cells and increased activities in research and development of our next generation capabilities in both New York and California. We are designing, with the intent to manufacture, prototype deposition equipment while procuring automated cell
processing equipment for our next generation production line. Additionally, the implementation of SFAS No. 123(R), effective January 1, 2006, added $462,767 in share-based compensation expense for research and development personnel during
the nine months ended September 30, 2006.

Selling, general and administrative expenses. Selling, general and administrative
expenses were $4,056,378 for the nine months ended September 30, 2006 compared to $2,198,681 for the nine months ended September 30, 2005, an increase of $1,857,697 or 84%. The increase in selling, general and administrative expenses
corresponded with our increase in headcount and overall increase in activity over the comparative period. As a result, salaries, consulting and other administrative costs increased during the nine months ended September 30, 2006 as compared to
the nine months ended September 30, 2005. Additionally the implementation of SFAS No. 123(R), effective January 1, 2006, added $523,905 in share-based compensation expense for selling, general and administrative personnel during the
nine months ended September 30, 2006. We expect selling, general and administrative expenses to continue to increase in support of our anticipated continued growth in the manufacturing and engineering areas of our business.



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Depreciation and amortization expense. Depreciation and amortization expenses were $994,035 for
the nine months ended September 30, 2006 compared to $477,999 for the nine months ended September 30, 2005, an increase of $516,036. Depreciation and amortization expense increased primarily as a result of the acquisition of and
utilization of significant amounts of capital equipment as we continued to develop our manufacturing technologies and began the production of photovoltaic cells.

Other income.Other income was $464,921 for the nine months ended September 30, 2006 compared to $139,607 for the nine months ended September 30, 2005, an increase of $325,314. Other income primarily
represents interest on investments.

Interest expense.Interest expense was $757,066 for the nine months ended September 30,
2006 compared to $69,773 for the nine months ended September 30, 2005, an increase of $687,293. The increase in interest expense was due primarily to the issuance in May 2006 of a $15 million convertible 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 $3,599,895 for the nine months ended September 30, 2006. There was no amortization of note discount and deferred financing costs for the nine months ended
September 30, 2005. The convertible note issued in May 2006 contained a beneficial conversion feature as well as warrants issued to the holder of the note. The aggregate fair value of the conversion feature and warrants, represented a discount
to the note, totaling $5.3 million and is being amortized using the effective interest method over the life of the note. In addition we incurred financing costs of $1.0 million related to this transaction. The financing costs were capitalized and
are also being amortized over the life of the note. At September 30, 2006, the unamortized note discount and deferred financing costs were $2.8 million and $.6 million, respectively.

Gain on derivative liabilities. Gain on derivative liabilities was $1,653,092 for the nine months ended September 30, 2006. There was no gain
on derivative liabilities for the nine months ended September 30, 2005. The warrants issued in conjunction with the convertible note are considered derivative liabilities and are therefore required to be adjusted to fair value each quarter.
From May 25, 2006 (the closing date of the convertible note) to September 30, 2006 our common stock price declined which caused a reduction in the fair value of the warrant liability. This resulted in a gain on derivative liabilities of
$1,653,092 for the nine months ended September 30, 2006.

Net loss.Our net loss was $14,749,818 for the nine months ended
September 30, 2006 compared to a loss of $4,384,124 for the nine months ended September 30, 2005. The increase in net loss was due primarily to investing in engineering and manufacturing activities as we established Gen II production
capabilities to manufacture photovoltaic cells and increased activities in designing, with the intent to manufacture, prototype deposition equipment, for our next generation production line; as well as a corresponding increase in selling, general
and administrative personnel and activities to support the engineering and manufacturing efforts. Throughout the remainder of 2006 and into 2007, we expect to continue to incur significant expenses related to (1) manufacturing in our Gen II
manufacturing facility, (2) development efforts and implementation of the next generation Gen III manufacturing processes, and (3) expanding operations to include our next generation manufacturing facility. We also anticipate significant
non-cash charges related to the $15,000,000 financing transaction. We also anticipate additional share-based compensation expense as a result of the implementation of SFAS No. 123(R), effective January 1, 2006. Without significant product
revenue anticipated, we also expect to experience significant net losses throughout the remainder of 2006 and throughout 2007 until our next generation production is realized.

Liquidity and Capital Resources

Liquidity. At September 30, 2006, our cash and cash
equivalents and investments totaled $8,220,066. In May 2006, we completed a private placement offering which generated net proceeds of $14.1 million. Net cash used in operating activities was $11,407,092. This activity was primarily the result of
establishing the Gen II production capabilities to manufacture photovoltaic cells, and engineering activities in designing our next generation manufacturing equipment; as well as the selling, general and



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administrative expenses required to support these efforts. The development of the Gen II process includes producing and selling limited amounts of solar
cells. During 2005 and 2006, we have been increasingly investing in our operations in Halfmoon, New York and more recently in Santa Clara, California, and hiring personnel to begin production of our thin-film solar cells, while developing our next
generation manufacturing equipment.

Expenditures for equipment purchases for the nine months ended September 30, 2006 were
$7,208,723. We continue to purchase equipment and adapt the Halfmoon facility to establish our initial production lines in New York. We have nearly completed modification of our Santa Clara, California facility to support building of our next
generation manufacturing equipment.

Capital Resources.We have historically financed our operations primarily from proceeds of the
sale of equity securities, revenues received under research and development contracts and grants, non-cash compensation arrangements and equipment lease financing.

On May 25, 2006, we entered into a series of agreements with Castlerigg Master Investments, Ltd., pursuant to a private placement transaction providing for, among other things, the issuance of a $15.0 million
senior convertible note (Note) for aggregate net proceeds of $14.1 million and warrants for 782,609 shares of DayStars $.01 par value per share common stock (Common Stock). The principal on the note is to be paid in
cash or stock, in eight equal monthly installments of $1,875,000, commencing on September 10, 2006. The Note contains a holders optional redemption clause which states that, at any time, the holder of the note has the right to require that the
Company redeem up to an amount equal to the product of the number of shares of common stock that is 20% of the aggregate trading volume of the Companys common stock over the prior twenty day trading period multiplied by the holder optional
conversion price. At September 30, 2006 $1,665,653 has been paid on the Note in a combination of stock and cash, and $609,347 was deferred for payment until September 2008 (two years from the original due date). From October 1, 2006 to November
10, 2006, we have made additional principal payments of $2,411,791 ($2,211,791 in 437,115 shares of our Common Stock and $200,000 in cash). At November 13, 2006 the principal balance on the Note was $10,922,556.

In addition, in August 2006 our Common Stock closed below $9.00 for ten consecutive trading days and we were required under terms of the Note to escrow
funds of $3.0 million. If our Common Stock closes above $10.00 for ten consecutive trading days, all escrow funds will be released. When the principal balance of the Note falls below $10.0 million, 30% of all subsequent principal payments will be
released from escrow.

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.

Existing sources of cash include obtaining the use of the $3.0 million in
restricted cash (escrowed funds under the Note), receiving the cash from existing development contracts with a New York State government agency, and collecting certain 2005 New York State refundable tax credits. We are also investigating the
viability of obtaining lease financing for certain capital assets we currently own.



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Our financing plan includes (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 our stockholders. If adequate capital resources are not available to us, we will be forced to curtail or terminate operations.

Commitments.At September 30, 2006, we had outstanding approximately $1,400,000 of purchase orders for equipment and improvements. The
equipment is expected to be received and the improvements are expected to be completed during the remainder of 2006. 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. We also maintain two leases for
certain office equipment.



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

The Companys
President and Chief Executive Officer and the Companys Chief Financial Officer have reviewed the disclosure controls and procedures relating to the Company at September 30, 2006 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 2. | Unregistered Sales of Equity Securities
|------- | ---------------------------------------

On
May 25, 2006, the Company issued a senior convertible note (Note) and warrants to Castlerigg Master Investments, Ltd. (Castlerigg) in exchange for an aggregate amount of $15 million. The note is convertible into
1,304,348 shares of the Companys common stock, based upon an initial conversion price of $11.50 per share, which is subject to adjustment. Class A Warrants to purchase up to 782,609 shares of the Companys common stock with an
exercise price of $12.65 per share, subject to adjustment, were also issued to the Investor as part of the transaction. In the event that the Company exercises its right to require the Investor to convert all or a portion of the note, the Class B
warrants (which are different from the Companys currently outstanding Class B public warrants) issued in connection with the transaction will become exercisable. The exercise price of the Class B warrants will be equal to $17.25 per share.



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On July 27, 2006, the Registration Statement filed to register the common stock underlying the
conversion right in the note and the common stock underlying the warrants was declared effective. The $15 million received at the closing of the note and funds that may be received upon exercise of the warrants will be used to complete the
enhancements to and development of our Gen II processes, continue the development of and transitioning to our next generation of production (Gen IIITM); and for general operating costs and corporate purposes. There have been no conversions of stock pursuant to the note because no payments have been due on the note since the registration statement
was declared effective.

On June 19, 2006, the Company issued a total of 92,375 shares of restricted stock to officers and employees
of the Company pursuant to the Companys 2006 Equity Incentive Plan. The shares were issued to employees as a part of their compensation, accordingly the Company did not receive any cash proceeds from the distribution of shares. The sales were
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 because the shares were issued only to officers and employees of the Company, therefore there was no public offering. The Company filed a registration statement on
Form S-8 on August 29, 2006 to register the restricted stock and other securities issuable pursuant to the Companys 2006 Equity Incentive Plan.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

On October 30, 2006, the Company adjourned a Special Meeting of Shareholders until November 9, 2006 because it did not have a quorum to hold the meeting. A quorum was obtained and the meeting reconvened on November 9, 2006.
The Special Meeting of Shareholders, was held to approve the issuance and sale, to an institutional investor (the Investor), pursuant to the terms of a convertible promissory note (the Note) issued to the Investor on
May 25, 2006 of (1) up to 1,968,217 shares of the Companys Common Stock (Shares) issuable as payment of principal and penalties (if any) on the Note; (2) up to 74,815 Shares issuable as payment of interest on the
Note (assuming all interest is paid in Shares except for the first payment of $114,041 which was paid in cash), (3) 782,609 Shares issuable upon exercise of the Class A Warrant and, (4) if the Company requires the Investor to convert
the Note in certain circumstances as described below, 550,725 Shares issuable upon exercise of the Class B Warrant. The voting common stockholders approved the transaction by the affirmative vote of 2,871,837, with 448,729 shares voting against
ratification and 55,991 shares abstaining. There were no broker non-votes with respect to this proposal.



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

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



|            |  |                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                           
|31.1        |  | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                        
|            | 
|31.2        |  | Certification of Chief Financial 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 Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

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



|                           |  |  |  |     |  |                         |  |                                                                                             
|-------------------------- |  |  |  | --- |  | ----------------------- |  | --------------------------------------------------------------------------------------------
|DAYSTAR TECHNOLOGIES, INC. |  |  |  |    
|                           |  |  | 
|Date: November 14, 2006    |  |  |  | By: |  | /s/ JOHN R. TUTTLE     
|                           |  |  |  |     |  |                         |  | John R. Tuttle Chairman, President and Chief
Executive Officer (Principal Executive Officer)
|                           |  |  | 
|Date: November 14, 2006    |  |  |  | By: |  | /s/ STEPHEN A. AANDERUD
|                           |  |  |  |     |  |                         |  | Stephen A. Aanderud Chief Financial Officer (Principal Financial and Accounting Officer)    



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