Overview

DayStar Technologies, Inc. is engaged in the development, manufacturing, and marketing of photovoltaic (“PV”) products that convert sunlight directly into electricity (the “PV effect”). Specifically, we have developed a thin-film solar cell based upon the copper-indium-gallium-selenide semiconductor material system, commonly known as CIGS. DayStar’s CIGS solar cell is differentiated from a majority of the competition by its mechanical flexibility and durability. Our intellectual property, including issued patents, patent applications, and trade secrets, resides in both the solar cell design and the method and equipment for its manufacture.

We have installed a pilot line (“Gen-II”) for solar cell production at our Halfmoon, New York facility. This Gen-II production line employs both batch and in-line continuous (“batch-continuous”) processing methodologies. The solar cells produced on this line are being used for product qualification with our customers and other partners.

Contingent upon additional financing, we intend to evolve these production processes into fully continuous manufacturing processes; our Gen-III line (“Gen-III”). The Gen-III manufacturing process will be designed to use raw materials that do not suffer from the same supply constraints as silicon and use volume manufacturing equipment and procedures already proven in other industries, such as the magnetic disc drive industry. Successful implementation of our continuous manufacturing process could enable us to produce thin-film CIGS solar cells with the efficiency and functionality that will allow us to sell into the wafer-Si markets that now dominate the PV industry.

Financing History

Principally all of our revenue in 2006 and 2005 was generated from contracts with a New York State government agency for development of equipment capability and demonstrating manufacturing capability.

In 2004, we closed an initial public offering (“IPO”) of Common Stock, selling 2,118,500 units. A unit consisted of one share of $0.01 par value per share Common Stock (the “Common Stock”), one Class A redeemable public warrant and two Class B non-redeemable public warrants. All of the units were sold at an initial public offering price of $5.00 per unit, resulting in an aggregate gross offering amount of $10.6 million. After deducting offering expenses and underwriting discounts, we received approximately $8.4 million of net proceeds from the offerings.

We publicly announced our intent to redeem the outstanding Class A redeemable public warrants at $0.25 per warrant in June 2005. Prior to the redemption date, most holders exercised their right to purchase one share of Common Stock for $6.00. We received $14.5 million in proceeds from the exercise.

We entered into a series of agreements on May 25, 2006 with Castlerigg Master Investments, Ltd. (the “Original Note Holder”), for a senior convertible note (the “Note”) for aggregate gross proceeds of $15.0 million and warrants for 782,609 shares of Common Stock. The agreements include a Securities Purchase Agreement, a Senior Convertible Note, a Class A and a Class B Warrant to Purchase Common Stock.

On January 19, 2007, we entered into a series of agreements with the Original Note Holder, LC Capital Master Fund, Ltd. (the “Buyer”), Millennium Partners, L.P., Phoenix Partners, LP, Phoenix Partners II, LP, Phaeton International (BVI), Ltd. and PreX Capital Partners, LLC (collectively, the “New Investors”). The Original Note Holder sold our Note to the Buyer for approximately $7.5 million. The Buyer provided approximately $6.0 million and DayStar provided $1.5 million from restricted cash escrows, additional Class A Warrants to purchase 317,394 shares of our Common Stock, and 825,181 shares of Common Stock in full payment of the outstanding principal and interest. On February 16, 2007, we received $5,000,000 gross proceeds

from the issuance of 2,500,000 shares of Common Stock at $2.00 per share to the New Investors. Concurrently, we converted the entire principal balance and any accrued interest on the Note into Common Stock by issuing 3,050,203 shares at $2.00 per share to the Buyer. The proceeds received on February 16, 2007 along with cash currently on hand, will be used to fund business operations until additional financing can be obtained.

Demand For Solar Electricity

Worldwide demand for electricity is expected to significantly increase over the next 20 years. The Energy Information Administration of the U.S. Department of Energy estimates that world net electricity consumption will nearly double to reach a level of 26,018 billion kilowatt hours by 2025. Worldwide installed electrical generating capacity is expected to grow from 3,315 gigawatts (one gigawatt is equal to one billion watts) in 2002 to 5,495 gigawatts (“GW”) in 2025 to meet the projected increase in electricity demand. This represents an increase of approximately 65% over present generation capacity.

The overwhelming majority of electricity is currently produced using hydrocarbon sources (natural gas, coal, petroleum). However, the total resource base for these fuels is limited, and there is increasing concern about the effect on the ecosystem of fossil fuel extraction and emissions. Volatile prices and environmental and political concerns pertaining to fossil fuels have increased interest in electricity created using renewable, clean energy sources such as solar. In contrast to hydrocarbon energy resources that, once used, cannot be quickly replaced, renewable energy that flows from natural sources (such as sunlight, wind, and water sources) quickly and continuously replaces itself.

Although presently representing less than 1% of world energy production, PV solar systems are being widely adopted as means to address both rural electrification in remote areas, and as supplemental energy sources in grid-connected areas of the world. Production of solar PV cells increased from 280 megawatts (“MW”) in 2000 to 1,246 MW in 2004, or a compound annual growth rate of 45.2%, according to Solarbuzz. Growth continues to be driven by major market incentive programs in Germany, Japan and the United States, although there is some recent speculation about adjusting the current PV incentives, which are part of the German Renewable Energy Law (“EEG”). According to a survey by Michael Rogol, Managing Director of PHOTON Consulting and author of the Solar Annual 2006 Report, the global market for solar modules generated revenues of $12.4 billion in 2005, totaling 1.8 GW, and exceeded his normally optimistic forecast by some 20%. By 2010, Rogol expects production of 10.4 GW with a turnover of $72 billion.

The Solar Cell Industry

Solar cells work by absorbing light and converting it to electrical power. The great majority of commercial solar cells in use today are made of silicon, the same semiconductor material used in the microelectronics industry. In addition to the semiconductor materials, solar cells consist of a top and bottom electrical contact to move the electricity out of the solar cell. The performance of a solar cell is measured in terms of its efficiency in converting sunlight into electricity. Typical commercial solar cells have an efficiency ranging between 8% and 18%, meaning that for every 1,000 watts of sunlight striking a solar module, 80 to 180 watts of electricity will be produced.

The typical solar module consists of 36 to 200 solar cells connected together (depending on end-use application), a sealant to keep moisture and other environmental factors out, and a sheet of glass and frame to provide structural integrity to the package. Several modules are then connected together to form an array, which determines the total power output of the system. When the sun shines on a PV module, the energy is converted into direct-current (“DC”) electricity. The DC electricity may be routed directly to power a DC load or charge a battery bank. Alternatively, an inverter (external to the array) can be used to convert the DC electricity from the array into alternating current (“AC”) electricity, where it can be interconnected directly to the electric utility grid to power AC appliances.

Solar cells, packaged into solar modules, have no moving parts that require ongoing maintenance and have shown good reliability, typically lasting for more than 20 years in the field. The solar electricity industry

currently supplies solar modules used in solar systems for both on-grid electricity consumers and for electrical applications off the electricity grid, such as remote areas or villages in developing nations. In these remote locations, solar electricity can be more cost-effective than running a utility grid connection or using generators requiring fuel delivery and costly maintenance.

Interest in on-grid solar electricity systems is growing because of government subsidies and incentive programs; increased prices for oil and gas; political instability in oil producing regions; increased demand for scarce energy resources from developing nations; adoption of renewable portfolio standards and other policy initiatives; and due to the increasing efficiency and reductions in the cost of systems. “Net-metering” laws (requiring utilities to purchase excess electricity produced by on-grid solar systems) and solar system rebates are some examples of government incentives aimed at grid-connected consumers in parts of the United States, Japan, Europe and elsewhere.

According to Solarbuzz LLC approximately 94% of the world’s annual PV production uses crystalline silicon as its base material. Wafer-Si solar cells are relatively efficient (12-18% conversion efficiency), but require significant electrical energy and bulk material to manufacture. Modules created from these fragile cells are likewise, rigid and fragile. Silicon feedstock supplies have not, in the last 2 to 3 years, been able to keep up with the demand created by both the semiconductor and the PV industries. The PV industry is now demanding nearly half of all available feedstock. The shortage has increased the price of raw silicon by more than 100% in the last three years, and is projected to continue to 2008. Some estimates suggest continuation until 2010 and beyond.

Michael Rogol, Managing Director of PHOTON Consulting and author of the Solar Annual 2006 Report, reports that based on the supply limitations of raw silicon, the industry will only be able to produce up to 8.4 GW of silicon-based solar cells. The remaining 2 GW will be supplied by a variety of emerging thin-film PV products. Solar cells and solar modules made from thin-films require far less raw material to create than a wafer-Si cell. Thin-film solar cells and modules, however, require a structural “substrate” to support them, such as glass, plastic or metal sheets or foils.

Alternative modules based upon thin-film semiconductors have been under development for approximately 20 years and are now being commercialized. The three primary thin-film semiconductor materials currently being commercialized are amorphous silicon, cadmium telluride, and copper indium gallium diselinide or CIGS. The CIGS technology presently under development by DayStar and others has demonstrated over 19% conversion efficiency in the laboratory, the highest among all thin-film technologies. Modules made from the CIGS technology have more than 15 years of field history and became commercially viable in part due to the research efforts of the U.S. Department of Energy’s National Renewable Energy Laboratory. Most thin-film manufacturers produce modules that are monolithically integrated solar cell circuits deposited directly on module sized substrates. The deposition results in the final module form factor (usually on glass plates). These films are then packaged into the final modules.

Daystar’s unique focus is on producing discrete solar cells similar in size and shape to wafer-Si cells, externally interconnected and then packaged into the final modules. This product approach could enable modules made from Daystar cells to compete with other thin-film module manufacturers on the open market, but also enable an alternative source of solar cells into the existing silicon module manufacturing infrastructure, presently in demand of more solar cells than supply allows.

DayStar’s solar cells have not been extensively field tested in the packaged module form, although prototype cells have previously been tested by the United States Air Force Research Laboratory and Dutch Space B.V. for performance, reliability, radiation hardness, and related issues pertaining to possible future use in satellite or lighter than air vehicle power applications. In conjunction with our customers and module manufacturing partners, we are planning to initiate a comprehensive solar cell and module testing program to further qualify our products for existing and new markets.

Development of Business

DayStar’s core technology is embedded in our Photovoltaic Foil solar cell, which is the sunlight-to-electricity conversion engine at the heart of a solar module. The solar cell comprises roughly 50 to 75% of the cost of a solar module. By lowering the cost of the solar cell, DayStar’s CIGS Photovoltaic Foil solar cell technology is expected to enable PV products that are much less expensive as well as form factor flexible and lightweight. This could allow for the production of high performance, low cost solar modules that could enable pervasive solar power generation.

The manufacture of our solar cell involves deposition of materials on a substrate in a vacuum, thermal treatment of the material, the addition of an electrical conductive layer, creation of a discharge grid, and protective coatings. We operate two solar cell production lines at the Halfmoon, New York facility. Each line employs different thin-film deposition methods. The first generation (“Gen-I”) line incorporates a co-evaporation batch process used for process development of our high efficiency cells or specialty products. This line is also used for production process development and parameter benchmarking. The second generation or Gen-II line uses a combination of physical vapor deposition and thermal processing to form the CIGS solar cell. One aspect of the process employs a sputter-coating process, where multi-layered coatings are deposited as the substrates move through the vacuum chamber. This manufacturing methodology incorporates off-the-shelf manufacturing equipment and proven manufacturing methods employed in various high-tech industries, such as the magnetic disc drive industry.

As currently configured, this Gen-II line could produce a maximum of 0.5 MW of solar cells per year. The Gen-II manufacturing line is presently being operated as a low volume pilot line, producing sufficient quantities of solar cells for downstream module product qualification testing. This testing is being conducted both internally at Daystar and in conjunction with both our current customers and several strategic development and potential business partners.

The next generation manufacturing process, Gen-III, will be characterized by a fully continuous manufacturing process. Several components of the process, previously accomplished in a batch fashion, will then be integrated to form the continuous manufacturing equipment. Implementation of this new manufacturing process requires additional development, significant capital expenditures and 12 to 15 months to implement.

We have assembled an experienced equipment development and manufacturing team to further refine the manufacturing yield from our Gen-II process and to ensure that best practices transfer to the Gen-III production resulting in best-in-class thin film PV cell yield and performance. The necessary continuous deposition equipment is unique, not off-the-shelf and will require that we design and manufacture much of our own deposition equipment. On March 10, 2006, we entered into a lease for approximately 50,000 square feet of factory and office space in Santa Clara, California to house our equipment development group, responsible for this next generation deposition equipment. We will require additional financing to begin implementation of this production process.

This continuous processing system will be modular in nature, allowing construction to be completed in sections. With sufficient follow-on financing, our goal is to first implement pilot manufacturing using this new platform, prove our capability to generate positive gross margins, and then expand our capacity by replicating the Gen-III manufacturing platform one or more times to achieve a desired level of production capacity.

Markets and Customers

The sale of grid-interconnected PV systems, currently the largest market for PV is subject to direct and indirect regulation by state, federal and foreign governments. These regulations include rules governing energy transmission, safety, reliability, quality and incentives aimed at reducing carbon emissions or increasing renewable sources of energy. Off-grid PV systems are typically only subject to local code inspection as per any

other electrical system build out. We are not directly impacted by these regulations at this point as we are focused on the sales of solar cells to OEM manufacturers rather than solar systems for end use applications.

We are currently focused on the development of CIGS solar cell manufacturing methods to increase energy conversion efficiency, reliability and throughput, while decreasing cost. We do not plan to sell significant volumes of our solar cells manufactured from our Gen-II pilot production line. Accordingly, sales and marketing activities are limited to managing development activities with our existing customers and the identification of new target customers or partners to further our mission of mass-market introduction of Gen-III product, and business development activities to open niche markets for other PV foil products.

Our target markets and customer base will evolve with the maturity of our manufacturing operations. Initially we are focusing our sales and marketing efforts in North America, Europe and Asia. Our current product roadmap includes product lines called TerraFoil , TerraFoil SP and LightFoil , which address three distinct markets.

TerraFoil

TerraFoil is a metal foil solar cell designed to be an alternative to silicon wafer solar cells currently used in flat plate PV modules (modules made with a glass cover plated and rigid frame). TerraFoil consists of a high performance CIGS solar film deposited on thin stainless steel foil or other metallic substrates, depending on application. DayStar’s thin-film CIGS solar cell can be made structurally (shape, size, weight, etc.) and functionally equivalent to silicon wafer cells. The resulting solar cell has grid patterns and buss bars that closely resemble a similar sized silicon solar cell.

It is expected that TerraFoil cells can be assembled into conventional flat plate PV modules with automated machinery used commonly by module manufacturing companies in the PV supply chain without the need for significant modification to existing machinery. DayStar’s TerraFoil product will offer module manufacturing companies an alternative, lower-cost solar cell that has comparable efficiencies, function, shape, and size as the silicon wafer cells they now use in manufacturing. However, unlike silicon wafers, DayStar’s products made on specialty foil are not breakable and will allow module manufacturers greater processing yields. Product qualification testing on modules made from TerraFoil cells is underway and will continue to be a major activity throughout 2007.

Our initial customer in this product family is Blitzstrom GmbH (“Blitzstrom”), of Germany, a PV system integrator of megawatt-scale PV power plants and a distributor of PV systems and components in Germany and the European Union. On June 9, 2005, we entered into an agreement with Blitzstrom for the purchase of our TerraFoil solar cells. The agreement calls for a variable monthly delivery based on estimated annual production volumes and requirements associated with product qualification escalating in volume through the end of 2008, with price based on a variable pricing mechanism. Under the agreement, Blitzstrom will purchase up to 50% of the TerraFoil solar cells produced by us at threshold solar cell efficiencies. On October 6, 2006 we amended the original agreement to extend the term of sale through the end of 2010 and to include up to 130 MW of available product subject to annual volume caps. The amended contract retained price and delivery schedule determinations, which will be based on a percentage of the fair market value of comparable volumes of commercially available silicon solar cells.

Although we have secured sales contracts for 50% of the Gen-II manufacturing capacity, we do not plan to sell significant volumes from the Gen-II production in 2007. Instead, the Gen-II product and subsequent sales will be used primarily for continued product qualification testing as well as the development of new OEM module customers, referred to as MODCOs.

TerraFoil SP Specialty Products

TerraFoil SP cells are similar to regular TerraFoil cells, but can be configured in shape and function for use in a wide range of emerging market products. TerraFoil SP is expected to be a key enabling product for unique non-flat plate form factor modules, such as those required for the Building Integrated Photovoltaic (“BIPV”) market. Used in this manner, PV can be incorporated into traditional building envelope materials and serve dual purposes. PV products of this type are receiving premium incentives over traditional flat-plate modules in France’s emerging PV markets. The rapidly growing BIPV market is currently dependent on alternatives to the rigid and breakable silicon based solar cells.

TerraFoil SP offers a thin, flexible stainless steel base and can be used to provide aesthetically pleasing solar modules which could be made flexible, non-breakable and therefore, integrated into common building construction materials such as roofing, siding and facades. A variety of cell sizes and foil thickness can provide a broad range of string voltage and total power combinations for BIPV applications as well as other small area module applications and specialty lighting and remote power products. We are actively engaged with several companies in exploring these new product opportunities. We believe the emergence of these new markets will provide both near-term and long-term secondary market paths for our solar cell products that could mitigate market fluctuations in the larger existing market for our standard TerraFoil .

Our initial customer in this product family is Micro Energy Group, Inc. (“MEG”) of Zhuhai, China. MEG designs, manufactures and sells solar cell raw materials, finished solar cells, solar modules and power components for consumer electronics and terrestrial solar electrification. On June 20, 2005, we entered into an agreement with MEG for the purchase of our TerraFoil-SP and TerraFoil solar cells. The agreement called for a graduated delivery, contingent upon our ramp-up of production capacity, through the end of 2006. This agreement was amended in December 2006 and extends through the end of 2008. Prices are based on a variable market-competitive pricing mechanism to be negotiated quarterly. The agreement provides estimates of the volume of solar cells at threshold solar cell efficiencies. Product provided to MEG in 2007, will be for continued product design and qualification testing.

LightFoil

LightFoil is a DayStar solar cell product that has potential applications where high specific power (power to weight ratio expressed in Watts/kg) and form factor flexibility are key requirements. LightFoil’s lightweight, high performance and form factor flexibility is derived from a unique design, which consists of CIGS solar cells, deposited on ultra-thin titanium foil. The flexibility is both physical and in a form factor which enables molding to curved surfaces and which can be cut to shape to conform to complex geometries. Such applications include satellite, high altitude airship for near space deployment, unmanned aerial vehicles, and mobile terrestrial power systems. The pricing of cells for this application is expected to demand a premium relative to traditional markets due to their highly specialized application in military and high-value commercial applications. The target customer base for this product line is primarily and initially military in nature, although there are also commercial ventures interested in each of these technology platforms. To date, we have not undergone significant development efforts for this product line due to the lack of any immediate market in this segment and instead have remained more focused on the TerraFoil product family.

In October of 2006, we were named in a $1.0 million Department of Defense appropriation for advancing LightFoil technology. During the first half of 2007 we plan to participate in the proposal and contracting process with the Department of Defense Air Force Research Labs (AFRL) at Kirtland Air Force Base in Albuquerque, New Mexico. If funding is awarded, we will continue the technology development and product definition of the LightFoil product line under the funding of this appropriation.

We have been awarded certain other research and development contracts and grants by two New York State government agencies, New York State Energy Research and Development Authority (“NYSERDA”) and

Empire State Development Corporation (“ESDC”). These contracts and grants have been provided as an incentive for us to increase employment in the state and further advance research and technology in the solar energy industry.

Intellectual Property; Research and Development

Our future in the solar cell industry and in the CIGS market in particular, depends, in part, upon our ability to innovate solar cell processing methodologies that create enhanced product characteristics. Therefore, we believe it is crucial to develop a robust intellectual property portfolio, including patents, know how, trade secrets, and copyrights. Beyond the technological advancements, we are also actively building a trademark portfolio that distinguishes our products from our competitors.

We rely on a combination of patent (both national and international), trade secret, trademark and copyright protection to protect our intellectual property. Our strategy is to apply for patent protection for all necessary design and manufacturing requirements. Additionally, we systematically analyze the existing intellectual property landscape to determine where the greatest opportunities for development exist.

In 2006, we continued to build our technical portfolio by: (i) filing six patent applications in the U.S. and abroad, (ii) preparing an additional seven patent applications, (iii) continuing key licensing agreements with the National Renewable Energy Laboratory, and (iv) implementing enhanced product know-how into our trade secrets. We make no claims that any of these patent applications will result in a grant of patent. DayStar will explore other opportunities to expand its technology portfolio as the business advances into Gen-III and/or as market opportunities present added benefits to our overall strategy.

Additionally, we have retained ownership to intellectual property rights in technologies relating to concentrating PV optics and packaging design. This includes two US patents and pending international applications. These patents will become useful as we execute our manufacturing strategy into Gen-III and become involved in large-scale electricity projects. If we exploit these concentrator patents, we will owe certain royalty payments to our co-founder, Dr. Eric Cole, under a contractual agreement.

In addition, the following trademarks in our portfolio are registered with the USPTO: LightFoil, Aloft, TerraFoil, TerraFoil-SP, Integrate, PowerFoil, PV Foil, and LighTIR. We also have the registration of the following marks pending: ConcentraTIR, Pervasive.Solar.Energy., Gen-III, TerraFoil-FP, Photovoltaic Foil, LightPak, Enabling Affordable Electricity from the Sun, and Making Free Energy Affordable. We also secure and maintain copyright protection for our publications.

Despite these precautions, it may be possible for a third party to use our proprietary information without authorization or to develop similar technologies independently.

We continue to devote significant efforts into the development of our products and concepts, as well as the processes used to manufacture our products. We incurred research and development expenses of $9,960,568 in 2006 and $3,513,860 in 2005, representing a significant investment in the development of our products and manufacturing processes. We expect to incur similar research and development expenses in 2007 as we continue development of the Gen-II process, develop LightFoil product plans and begin Gen-III development.

Competition

Despite increased interest in the solar cell industry, there have been limited technological breakthroughs that enable solar-generated electricity to compete with hydrocarbon-generated electricity on a cost basis. Although the cost of a solar cell has decreased over ten-fold during the past 20+ years, and cell conversion efficiency has increased, widespread use of solar cells has been hindered by costly manufacturing methods and materials, and low industry-wide production capacity.

The current high cost of solar cells is largely the result of costly and low volume manufacturing methodologies and high (and often volatile) silicon feedstock costs. The existing batch-type manufacturing methodologies used to produce silicon solar cells have limited scalability resulting in diminished economies of scale. In addition, the silicon supplied to the semiconductor industry is usually a higher grade than is needed in the PV industry and the cost of electronics-grade silicon is too high to be used as a substrate by the PV industry. In the past, this dynamic resulted in the PV industry primarily procuring Si material from the waste stream of the electronics industry. However, in recent years, the situation has evolved to where the solar industry now represents greater than 40% of the overall demand for feedstock Si and is therefore in direct competition with the electronics industry for existing feedstock production capacity. The result is insufficient and more expensive Si feedstock for the solar industry.

A lower cost alternative thin-film technology using a high throughput and low capital intensive manufacturing process could greatly improve the wide scale adoption of solar as an alternative to fossil fuel electricity generation. Our product, a flexible, efficient, inexpensive solar cell, will compete with current solar cell technologies (such as the conventional crystalline silicon solar cells and other thin-film cell and module technologies), other “clean” renewable energy technologies (for example, wind, ocean thermal, ocean tidal, and geo-thermal power sources), and conventional fossil fuel based technologies for the production of electricity.

We expect our primary competition will be within the solar cell marketplace. Within the PV industry, silicon cell manufacturers dominate the market and ultimately create the most competition for our products. According to several market analysts including Frost and Sullivan and Solarbuzz, thin-film PV technologies currently make up fewer than 10% of the supply of PV cells. As the overall PV market demand continues to grow from 1.8 GW in 2005 to a level of 10.4 GW in 2010 as forecasted by Michael Rogol, Managing Director of PHOTON Consulting, the shortage of silicon feedstock will cause a gap between silicon PV production and market demand of 2 GW. 10.4 GW of solar modules in 2010 is the highest prognosis in any study on the PV market throughout the world, but it has a solid foundation. The amount of cells and modules that will be produced over the next few years will almost solely depend on the amount of silicon available. This forecast by the authors of Solar Annual 2006 is calculated based on the assumption of 85,000 tons of high-purity silicon in 2010, of which 59,000 tons should be available to the solar industry. Using 7 g of silicon per W in solar cell power, this adds up to a total volume of 8.4 GW. The difference left over between 8.4 GW and the 10.4 GW forecast (2 GW) is accounted for by thin-film technology.

Barriers to entering the solar cell manufacturing industry include the technical know-how required to produce solar cells that maintain acceptable efficiency rates at competitive production costs. In addition, any new solar cell technology would likely require demonstration of successful reliability testing prior to widespread market acceptance. We believe the principal competitive factors in the market for solar electric power products are: price per watt, long-term stability and reliability, conversion efficiency and other inherent performance measures, ease of handling and installation, product quality, reputation, and environmental factors.

A number of large companies are actively engaged in the development, manufacturing and marketing of solar electric power products. The largest PV cell suppliers include Sharp Corporation, BP Solar, Q-Cells, Sanyo Corporation, and Kyocera Corporation, which together supply over half of the current PV cell market, and are focused almost exclusively on silicon products. A variety of competing solar cell technologies are being developed by a number of smaller companies. Such technologies include amorphous silicon, cadmium telluride and CIGS as well as advanced concepts for both bulk ingot-based and thin-film crystalline silicon. Any of these competing technologies may achieve manufacturing costs per watt lower than the cost per watt to manufacture our CIGS solar cells

In December 2005, Honda Motor Co., Ltd. announced plans to build in Japan a 27.5 MW CIGS solar cell facility to be operational in 2007. Shell Solar had also been working on a CIGS technology and recently divested itself of its wafer-Si operations in order to focus exclusively on CIGS-based products through a new company called Avancis GmbH & Co.KG (a joint venture between the former Shell Solar and St. Gobain, a manufacturer

of glass). Wurth Solar of Germany manufactures a monolithic (non-discrete solar cell) CIGS module similar to the work being done at Avancis. There are also several small companies working to manufacture CIGS solar cells. Global Solar, LLC in Tucson, Arizona is pursuing roll-to-roll non-continuous manufacturing of integrated panels on plastic substrates, and discrete solar cells on stainless steel. One emerging company, Miasolé, is considering a manufacturing approach somewhat similar to ours. Other emerging companies, such as Nanosolar, are devising radically new methods for producing thin-film using nano-scale technology films applied in a printing style application.

The largest emergence of new manufacturers in thin-films has been in new CIGS companies, however, we believe our competitive advantages will emerge due to our thin-film CIGS solar cell knowledge base, cell design, the efficiency and scale and methodology of our proposed manufacturing process, and our extensive experience and research regarding the properties of thin-film CIGS solar cells. Our incremental, multi-generational manufacturing strategy to build upon highly scalable production equipment that has been long proven in the computer peripheral market, will uniquely position us to be a worldwide cost leader in thin film PV cell manufacturing.

Employees

As of February 1, 2007, we had eighty-two full-time and three part-time employees. From time to time we employ people, primarily manufacturing personnel, through employment agencies. In most cases this is used as a test period prior to employment. As of February 1, 2007, we had thirteen individuals paid through employment agencies. None of our employees are covered by collective bargaining agreements, and we believe our relations with employees are good.

Corporate Information

DayStar Technologies, Inc., a Delaware corporation, was formed in February 1997. In June 1997, we acquired all the assets of CoGen Solar, LLC, an Arizona limited liability company organized in 1996 by Dr. John R. Tuttle and Dr. Eric Cole. We have one subsidiary, DayStar Solar LLC, a Colorado limited liability company, which discontinued operations in the second quarter of 2005. Our website is located at www.daystartech.com . The information available on or that can be accessed through our website is not incorporated by reference into and is not a part of this Annual Report on Form 10-KSB.

Availability of Information

We make available through our website (http://www.daystartech.com), free of charge, our Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Commission.

The public may read and copy any materials we file with the Commission at the Commission’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. DayStar files electronically with the Commission and the Commission maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.