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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

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. **001-34052**

DayStar Technologies, Inc.(Exact name of registrant as specified in its charter)

|Delaware                                 | 84-1390053         
|---------------------------------------- | -------------------
|(State or other jurisdiction of          | (I.R.S. Employer   
|incorporation or organization)           | Identification No.)
|                                         |                    
|33556 Alvarado Niles Road                |                    
|Union City, California                   | 94587              
|(Address of principal executive offices) | (Zip Code)         

(408) 582-7100(Registrants telephone
number, including area code)

Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to filing requirements for the past 90 days. Yesx
No ̈

Indicate by checkmark whether the
registrant has submitted electronically and posted on its corporate Web-site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yesx No ̈

Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]
    Accelerated filer [   ]Non-accelerated filer [   ](Do not check
      if a smaller reporting company)
    Smaller reporting company
[X]


Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ̈ Nox

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date.

|Title of Each Class                    | Outstanding- August 17, 2012
|-------------------------------------- | ----------------------------
|Common Stock par value $0.01 per share | 2,200,732                   

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DAYSTAR TECHNOLOGIES, INC.

Quarterly Report on Form 10-Q Quarterly Period Ended June
30, 2012

Table of Contents

|Part I  Financial Information                                                                                                                                                                                          |   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --
|Item 1. Financial Statements                                                                                                                                                                                            | 3 
|Balance SheetsAs of June 30, 2012
      (unaudited) and December 31, 2011                                                                                                                                              | 3 
|Statements of OperationsFor
      the Three Months and Six Months Ended June 30, 2012 and 2011 and
           For the Period From July 1, 2005
      (Inception of the Development Stage) to June 30, 2012 (unaudited) | 4 
|Statements of Changes in Stockholders
      EquityFor the Period From July 1,
      2005      (Inception of the Development
      Stage) to June 30, 2012 (unaudited)                                                 | 5 
|Statements of Cash Flows for
      the Six Months Ended June 30, 2012 and 2011 and For the
      Period      From July 1, 2005 (Inception
      of the Development Stage) to June 30, 2012 (unaudited)                  | 7 
|Notes to Financial Statements (unaudited)                                                                                                                                                                               | 8 
|Item 2. Managements
      Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                     | 16
|Item 3. Quantitative and Qualitative
      Disclosures About Market Risk                                                                                                                                                | 20
|Item 4. Controls and
      Procedures                                                                                                                                                                                   | 20
|PART II  Other Information                                                                                                                                                                                             |   
|Item 1. Legal Proceedings                                                                                                                                                                                               | 21
|Item 1A. Risk Factors                                                                                                                                                                                                   | 21
|Item 2. Unregistered Sales of
      Equity Securities and Use of Proceeds                                                                                                                                               | 21
|Item 3. Defaults Upon Senior Securities                                                                                                                                                                                 | 22
|Item 4. Mine Safety
      Disclosures                                                                                                                                                                                   | 22
|Item 5. Other Information                                                                                                                                                                                               | 22
|Item 6. Exhibits                                                                                                                                                                                                        | 23
|Signatures                                                                                                                                                                                                              | 24

2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DAYSTAR TECHNOLOGIES, INC.(A DEVELOPMENT STAGE
ENTERPRISE)BALANCE SHEETS(Unaudited)

|                                                                                                                                                                                                                       |   | June 30,     |   |   | December 31, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | -
|                                                                                                                                                                                                                       |   | 2012         |   |   | 2011         |  
|ASSETS                                                                                                                                                                                                                 |   |              |   |   |              |  
|Current Assets:                                                                                                                                                                                                        |   |              |   |   |              |  
|Cash and cash equivalents                                                                                                                                                                                              | $ | 42,063       |   | $ | 4,199        |  
|Other current
      assets                                                                                                                                                                                             |   | 298,231      |   |   | 222,770      |  
|Total current assets                                                                                                                                                                                                   |   | 340,294      |   |   | 226,969      |  
|Property and Equipment, at cost                                                                                                                                                                                        |   | 20,691,046   |   |   | 20,691,046   |  
|Less accumulated
      depreciation and amortization                                                                                                                                                                   |   | (7,702,370   | ) |   | (7,138,167   | )
|Net property and equipment                                                                                                                                                                                             |   | 12,988,676   |   |   | 13,552,879   |  
|                                                                                                                                                                                                                       |   |              |   |   |              |  
|Investment in nonconsolidated affiliate                                                                                                                                                                                |   | 294,285      |   |   |             |  
|Other assets                                                                                                                                                                                                           |   | 323,315      |   |   | 324,080      |  
|Total Assets                                                                                                                                                                                                           | $ | 13,946,570   |   | $ | 14,103,928   |  
|                                                                                                                                                                                                                       |   |              |   |   |              |  
|LIABILITIES AND STOCKHOLDERS
      EQUITY                                                                                                                                                                             |   |              |   |   |              |  
|                                                                                                                                                                                                                       |   |              |   |   |              |  
|Current Liabilities:                                                                                                                                                                                                   |   |              |   |   |              |  
|Accounts payable and accrued expenses                                                                                                                                                                                  | $ | 5,965,831    |   | $ | 5,162,228    |  
|Notes
      and capital leases payable, current portion, net of discount of $176,352
      and                  $9,338,
      respectively                                                                             |   | 4,623,648    |   |   | 4,920,662    |  
|Total current liabilities                                                                                                                                                                                              |   | 10,589,479   |   |   | 10,082,890   |  
|Long-Term Liabilities:                                                                                                                                                                                                 |   |              |   |   |              |  
|Conversion feature                                                                                                                                                                                                     |   |             |   |   | 33,541       |  
|Total long-term liabilities                                                                                                                                                                                            |   |             |   |   | 33,541       |  
|Commitments and Contingencies                                                                                                                                                                                          |   |             |   |   |             |  
|Stockholders Equity:                                                                                                                                                                                                  |   |              |   |   |              |  
|Preferred
      stock, $.01 par value; 3,000,000 shares authorized; 0 shares issued
      and 
                     outstanding                                                                                        |   |             |   |   |             |  
|Common
      stock, $.01 par value; 120,000,000 shares authorized; 2,200,732 and
      1,380,393
                       shares
      issued and outstanding at June 30, 2012 and December 31, 2011,
      respectively |   | 22,007       |   |   | 13,804       |  
|Additional paid-in
      capital                                                                                                                                                                                       |   | 159,158,824  |   |   | 157,501,134  |  
|Accumulated deficit                                                                                                                                                                                                    |   | (10,145,391  | ) |   | (10,145,391  | )
|Deficit
      accumulated during the development stage                                                                                                                                                                 |   | (145,678,349 | ) |   | (143,382,050 | )
|Total stockholders equity                                                                                                                                                                                             |   | 3,357,091    |   |   | 3,987,497    |  
|Total Liabilities and Stockholders
      Equity                                                                                                                                                                       | $ | 13,946,570   |   | $ | 14,103,928   |  

See accompanying notes to these financial statements.

3

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DAYSTAR TECHNOLOGIES, INC.(A DEVELOPMENT STAGE
ENTERPRISE)STATEMENTS OF OPERATIONS(Unaudited)

|                                                                     |   |                                  |   |   |                                |   |   |                    |   |   |            |   |   | For the Period    |  
|-------------------------------------------------------------------- | - | -------------------------------- | - | - | ------------------------------ | - | - | ------------------ | - | - | ---------- | - | - | ----------------- | -
|                                                                     |   |                                  |   |   |                                |   |   |                    |   |   |            |   |   | from July 1, 2005 |  
|                                                                     |   |                                  |   |   |                                |   |   |                    |   |   |            |   |   | (Inception of the |  
|                                                                     |   | For the Three Months
      Ended |   |   | For the Six Months
      Ended |   |   | Development Stage) |  
|                                                                     |   | June 30,                         |   |   | June 30,                       |   |   | to June 30,        |  
|                                                                     |   | 2012                             |   |   | 2011                           |   |   | 2012               |   |   | 2011       |   |   | 2012              |  
|Revenue:                                                             |   |                                  |   |   |                                |   |   |                    |   |   |            |   |   |                   |  
|Product revenue                                                      | $ |                                 |   | $ |                               |   | $ |                   |   | $ |           |   | $ | 3,528             |  
|Research and development contract revenue                            |   |                                 |   |   |                               |   |   |                   |   |   |           |   |   | 615,000           |  
|Total revenue                                                        |   |                                 |   |   |                               |   |   |                   |   |   |           |   |   | 618,528           |  
|Costs and Expenses:                                                  |   |                                  |   |   |                                |   |   |                    |   |   |            |   |   |                   |  
|Research and
      development                                       |   | 181,759                          |   |   | 233,206                        |   |   | 370,212            |   |   | 839,771    |   |   | 62,151,535        |  
|Selling, general and administrative                                  |   | 558,606                          |   |   | 459,357                        |   |   | 871,149            |   |   | 1,691,544  |   |   | 38,158,767        |  
|Restructuring                                                        |   |                                 |   |   |                               |   |   |                   |   |   | 850,000    |   |   | 13,777,336        |  
|Depreciation and amortization                                        |   | 265,303                          |   |   | 398,018                        |   |   | 564,968            |   |   | 802,804    |   |   | 16,117,866        |  
|Total costs and expenses                                             |   | 1,005,668                        |   |   | 1,090,581                      |   |   | 1,806,329          |   |   | 4,184,119  |   |   | 130,205,504       |  
|Other Income (Expense):                                              |   |                                  |   |   |                                |   |   |                    |   |   |            |   |   |                   |  
|Other income
      (expense)                                         |   |                                 |   |   |                               |   |   |                   |   |   |           |   |   | 2,263,332         |  
|Interest expense                                                     |   | (117,882                         | ) |   | (111,782                       | ) |   | (235,365           | ) |   | (345,569   | ) |   | (4,008,404        | )
|Amortization of
      note discount and financing costs              |   | (247,529                         | ) |   | (106,250                       | ) |   | (288,146           | ) |   | (812,062   | ) |   | (17,431,546       | )
|(Loss) gain on derivative liabilities                                |   |                                 |   |   | 245,898                        |   |   | 33,541             |   |   | 3,896,066  |   |   | 14,075,981        |  
|Loss on
      extinguishment of debt                                 |   |                                 |   |   |                               |   |   |                   |   |   |           |   |   | (10,990,736       | )
|Total other income
      (expense)                                   |   | (365,411                         | ) |   | 27,866                         |   |   | (489,970           | ) |   | 2,738,435  |   |   | (16,091,373       | )
|Net Loss                                                             | $ | (1,371,079                       | ) | $ | (1,062,715                     | ) | $ | (2,296,299         | ) | $ | (1,445,684 | ) | $ | (145,678,349      | )
|                                                                     |   |                                  |   |   |                                |   |   |                    |   |   |            |   |   |                   |  
|Weighted Average Common Shares Outstanding (Basic And
      Diluted) |   | 1,714,389                        |   |   | 1,272,093                      |   |   | 1,714,389          |   |   | 1,195,558  |   |   |                   |  
|Net Loss Per Share (Basic and Diluted)                               | $ | (0.80                            | ) | $ | (0.84                          | ) | $ | (1.34              | ) | $ | (1.21      | ) |   |                   |  

See accompanying notes to these financial statements.

4

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DAYSTAR TECHNOLOGIES, INC.(A DEVELOPMENT STAGE
ENTERPRISE)STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITYFOR THE PERIOD FROM JULY 1, 2005 (INCEPTION OF THE DEVELOPMENT STAGE)
TO JUNE 30, 2012(Unaudited)

|                                                                                                                                           |  |              |  |   |              |  |  | Class B |   |   |        |   |   |            |   |   |              |   |   | Deficit     |   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ |  | - | ------------ |  |  | ------- | - | - | ------ | - | - | ---------- | - | - | ------------ | - | - | ----------- | - | - | ----------- | -
|                                                                                                                                           |  | Common Stock |  |   | Common Stock |  |  |         |   |   |        |   |   |            |   |   | Accumulated  |   |   |             |  
|                                                                                                                                           |  |              |  |   |              |  |  |         |   |   |        |   |   | Additional |   |   | Deferred     |   |   |             |   |   | During the  |  
|                                                                                                                                           |  |              |  |   |              |  |  |         |   |   |        |   |   | Paid-In    |   |   | Equity Based |   |   | Accumulated |   |   | Development |  
|                                                                                                                                           |  | Shares       |  |   | Amount       |  |  | Shares  |   |   | Amount |   |   | Capital    |   |   | Compensation |   |   | Deficit     |   |   | Stage       |  
|BALANCES, July 1, 2005                                                                                                                     |  | 80,686       |  | $ | 807          |  |  | 3,222   |   | $ | 32     |   | $ | 22,493,465 |   | $ | (110,770     | ) | $ | (10,145,391 | ) | $ |            |  
|Exercise of warrants and stock options, 7/05 -12/05 at
      $378.00 - $518.00 per share                                                   |  | 18,901       |  |   | 189          |  |  |        |   |   |       |   |   | 7,220,013  |   |   |             |   |   |            |   |   |            |  
|Conversion of Class B common stock                                                                                                         |  | 921          |  |   | 9            |  |  | (3,222  | ) |   | (32    | ) |   | 23         |   |   |             |   |   |            |   |   |            |  
|Share-based compensation                                                                                                                   |  | 615          |  |   | 6            |  |  |        |   |   |       |   |   | 412,294    |   |   | (292,940     | ) |   |            |   |   |            |  
|Net loss                                                                                                                                   |  |             |  |   |             |  |  |        |   |   |       |   |   |           |   |   |             |   |   |            |   |   | (3,904,151  | )
|BALANCES, December 31, 2005                                                                                                                |  | 101,123      |  | $ | 1,011        |  |  |        |   | $ |       |   | $ | 30,125,795 |   | $ | (403,710     | ) | $ | (10,145,391 | ) | $ | (3,904,151  | )
|Reclassification upon adoption of SFAS
      123(R)                                                                                        |  |             |  |   |             |  |  |        |   |   |       |   |   | (403,710   | ) |   | 403,710      |   |   |            |   |   |            |  
|Exercise of warrants and stock options, 1/06, 3/06 &
      9/06 at $129.78 - $472.50 per share                                             |  | 2,108        |  |   | 21           |  |  |        |   |   |       |   |   | 671,852    |   |   |             |   |   |            |   |   |            |  
|Share-based compensation                                                                                                                   |  | 2,811        |  |   | 28           |  |  |        |   |   |       |   |   | 1,322,692  |   |   |             |   |   |            |   |   |            |  
|Beneficial conversion feature on convertible note                                                                                          |  |             |  |   |             |  |  |        |   |   |       |   |   | 1,223,842  |   |   |             |   |   |            |   |   |            |  
|Shares issued in payment of principal and
      interest on convertible note, 8/06 - 12/06                                                 |  | 18,143       |  |   | 181          |  |  |        |   |   |       |   |   | 7,377,978  |   |   |             |   |   |            |   |   |            |  
|Warrants issued for placement of convertible note at
      $338.94 per share                                                               |  |             |  |   |             |  |  |        |   |   |       |   |   | 140,419    |   |   |             |   |   |            |   |   |            |  
|Net loss                                                                                                                                   |  |             |  |   |             |  |  |        |   |   |       |   |   |           |   |   |             |   |   |            |   |   | (20,441,201 | )
|BALANCES, December 31, 2006                                                                                                                |  | 124,185      |  | $ | 1,241        |  |  |        |   | $ |       |   | $ | 40,458,868 |   | $ |             |   | $ | (10,145,391 | ) | $ | (24,345,352 | )
|Exercise of warrants and stock options,
      1/07, 3/07, 6/07, 9/07 & 11/07 at $126.00 - $217.35 per share                                |  | 8,225        |  |   | 82           |  |  |        |   |   |       |   |   | 3,174,235  |   |   |             |   |   |            |   |   |            |  
|Share-based compensation                                                                                                                   |  | 3,118        |  |   | 31           |  |  |        |   |   |       |   |   | 4,090,013  |   |   |             |   |   |            |   |   |            |  
|Issuance of shares pursuant to offering,
      2/07 at $126.00 per share                                                                   |  | 39,682       |  |   | 397          |  |  |        |   |   |       |   |   | 4,999,603  |   |   |             |   |   |            |   |   |            |  
|Issuance of shares pursuant to secondary offering, 10/07 at
      $267.75 per share, net of offering costs                                 |  | 273,810      |  |   | 2,738        |  |  |        |   |   |       |   |   | 67,892,180 |   |   |             |   |   |            |   |   |            |  
|Shares issued in payment of principal and
      interest on convertible note, 1/07 at $93.87 per share and 2/07 at $126.00
      per share |  | 61,514       |  |   | 615          |  |  |        |   |   |       |   |   | 7,326,310  |   |   |             |   |   |            |   |   |            |  
|Loss on extinguishment due to excess of fair market value
      of shares issued over issuance price                                       |  |             |  |   |             |  |  |        |   |   |       |   |   | 5,369,278  |   |   |             |   |   |            |   |   |            |  
|Shares issued for placement of note and
      offering 3/07 at $126.00 per share                                                           |  | 7,263        |  |   | 73           |  |  |        |   |   |       |   |   | 2,397,598  |   |   |             |   |   |            |   |   |            |  
|Net loss                                                                                                                                   |  |             |  |   |             |  |  |        |   |   |       |   |   |           |   |   |             |   |   |            |   |   | (36,142,861 | )

5

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|                                                                                                |  |              |  |   |              |  |  | Class B |  |   |            |  |   |             |   |   |              |  |   | Deficit     |   |   |              |  
|----------------------------------------------------------------------------------------------- |  | ------------ |  | - | ------------ |  |  | ------- |  | - | ---------- |  | - | ----------- | - | - | ------------ |  | - | ----------- | - | - | ------------ | -
|                                                                                                |  | Common Stock |  |   | Common Stock |  |  |         |  |   |            |  |   |             |   |   | Accumulated  |  |   |             |  
|                                                                                                |  |              |  |   |              |  |  |         |  |   |            |  |   | Additional  |   |   | Deferred     |  |   |             |   |   | During the   |  
|                                                                                                |  |              |  |   |              |  |  |         |  |   |            |  |   | Paid-In     |   |   | Equity Based |  |   | Accumulated |   |   | Development  |  
|                                                                                                |  | Shares       |  |   | Amount       |  |  | Shares  |  |   | **Amount** |  |   | Capital     |   |   | Compensation |  |   | Deficit     |   |   | Stage        |  
|BALANCES, December 31, 2007 .                                                                   |  | 517,797      |  | $ | 5,177        |  |  |        |  | $ |           |  | $ | 135,708,085 |   | $ |             |  | $ | (10,145,391 | ) | $ | (60,488,213  | )
|Exercise of stock options, 6/08 at $197.82 per share                                            |  | 25           |  |   |             |  |  |        |  |   |           |  |   | 5,024       |   |   |             |  |   |            |   |   |             |  
|Share-based compensation                                                                        |  | 12,952       |  |   | 130          |  |  |        |  |   |           |  |   | 4,794,998   |   |   |             |  |   |            |   |   |             |  
|Net loss                                                                                        |  |             |  |   |             |  |  |        |  |   |           |  |   |            |   |   |             |  |   |            |   |   | (26,330,271  | )
|BALANCES, December 31, 2008                                                                     |  | 530,774      |  | $ | 5,307        |  |  |        |  | $ |           |  | $ | 140,508,107 |   | $ |             |  | $ | (10,145,391 | ) | $ | (86,818,484  | )
|Share-based compensation                                                                        |  | 7,409        |  |   | 74           |  |  |        |  |   |           |  |   | 4,133,457   |   |   |             |  |   |            |   |   |             |  
|Warrants issued in connection with
      convertible note at $31.50 per share                   |  |             |  |   |             |  |  |        |  |   |           |  |   | 497,578     |   |   |             |  |   |            |   |   |             |  
|Net loss                                                                                        |  |             |  |   |             |  |  |        |  |   |           |  |   |            |   |   |             |  |   |            |   |   | (25,040,028  | )
|BALANCES, December 31, 2009                                                                     |  | 538,183      |  | $ | 5,381        |  |  |        |  | $ |           |  | $ | 145,139,142 |   | $ |             |  | $ | (10,145,391 | ) | $ | (111,858,512 | )
|Exercise of warrants, 7/10 & 10/10 at $6.30 per share                                           |  | 9,524        |  |   | 95           |  |  |        |  |   |           |  |   | 60,334      |   |   |             |  |   |            |   |   |             |  
|Share-based compensation                                                                        |  | 99,077       |  |   | 991          |  |  |        |  |   |           |  |   | 4,668,085   |   |   |             |  |   |            |   |   |             |  
|Warrants issued in connection with convertible note at
      $18.90 - $31.50 per share          |  |             |  |   |             |  |  |        |  |   |           |  |   | 704,481     |   |   |             |  |   |            |   |   |             |  
|Shares issued in settlement of liabilities
      at $10.78 - $12.95 per share                   |  | 275,319      |  |   | 2,753        |  |  |        |  |   |           |  |   | 2,755,909   |   |   |             |  |   |            |   |   |             |  
|Reverse split adjustment                                                                        |  | 4,255        |  |   | 43           |  |  |        |  |   |           |  |   | 257         |   |   |             |  |   |            |   |   |             |  
|Net loss                                                                                        |  |             |  |   |             |  |  |        |  |   |           |  |   |            |   |   |             |  |   |            |   |   | (28,081,673  | )
|BALANCES, December 31, 2010                                                                     |  | 926,358      |  | $ | 9,263        |  |  |        |  | $ |           |  | $ | 153,328,208 |   | $ |             |  | $ | (10,145,391 | ) | $ | (139,940,185 | )
|Cashless exercise of warrants, 11/11 at
      $1.61 per share                                   |  | 16,531       |  |   | 165          |  |  |        |  |   |           |  |   | (165        | ) |   |             |  |   |            |   |   |             |  
|Share-based compensation                                                                        |  | 44,585       |  |   | 446          |  |  |        |  |   |           |  |   | 1,224,841   |   |   |             |  |   |            |   |   |             |  
|Warrants issued in connection with notes at
      $3.64 - $10.85 per share                      |  |             |  |   |             |  |  |        |  |   |           |  |   | 293,826     |   |   |             |  |   |            |   |   |             |  
|Shares issued in settlement of liabilities at $6.30 -
      $14.13 per share                    |  | 110,857      |  |   | 1,109        |  |  |        |  |   |           |  |   | 1,115,331   |   |   |             |  |   |            |   |   |             |  
|Conversion of notes payable and accrued
      interest at $6.30 per share                       |  | 198,063      |  |   | 1,981        |  |  |        |  |   |           |  |   | 1,245,813   |   |   |             |  |   |            |   |   |             |  
|Financing Costs                                                                                 |  | 83,999       |  |   | 840          |  |  |        |  |   |           |  |   | 293,280     |   |   |             |  |   |            |   |   |             |  
|Net loss                                                                                        |  |             |  |   |             |  |  |        |  |   |           |  |   |            |   |   |             |  |   |            |   |   | (3,441,865   | )
|BALANCES, December 31, 2011                                                                     |  | 1,380,393    |  | $ | 13,804       |  |  |        |  | $ |           |  | $ | 157,501,134 |   | $ |             |  | $ | (10,145,391 | ) | $ | (143,382,050 | )
|Share-based compensation                                                                        |  | 62,303       |  |   | 623          |  |  |        |  |   |           |  |   | 138,456     |   |   |             |  |   |            |   |   |             |  
|Beneficial conversion feature on convertible notes issued
      1/12 and 3/12                   |  |             |  |   |             |  |  |        |  |   |           |  |   | 455,011     |   |   |             |  |   |            |   |   |             |  
|Warrants issued in connection with notes
      1/12 at $2.80 - $3.50 per share                  |  |             |  |   |             |  |  |        |  |   |           |  |   | 149         |   |   |             |  |   |            |   |   |             |  
|Shares issued in acquiring interest in non-consolidating
      affiliate                        |  | 285,714      |  |   | 2,857        |  |  |        |  |   |           |  |   | 291,428     |   |   |             |  |   |            |   |   |             |  
|Conversion of notes payable and accrued
      interest 2/12 and 3/12 at $1.61 - $1.68 per share |  | 472,322      |  |   | 4,723        |  |  |        |  |   |           |  |   | 772,646     |   |   |             |  |   |            |   |   |             |  
|Net loss                                                                                        |  |             |  |   |             |  |  |        |  |   |           |  |   |            |   |   |             |  |   |            |   |   | (2,296,299   | )
|BALANCES, June 30, 2012                                                                         |  | 2,200,732    |  | $ | 22,007       |  |  |        |  | $ |           |  | $ | 159,158,824 |   | $ |             |  | $ | (10,145,391 | ) | $ | (145,678,349 | )

See accompanying notes to these financial statements.

6

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DAYSTAR TECHNOLOGIES, INC.(A DEVELOPMENT STAGE
ENTERPRISE)STATEMENTS OF CASH FLOWS(Unaudited)

|                                                                                                                      |   |                          |   |   |                    |   |   | For the Period    |  
|--------------------------------------------------------------------------------------------------------------------- | - | ------------------------ | - | - | ------------------ | - | - | ----------------- | -
|                                                                                                                      |   |                          |   |   |                    |   |   | from July 1, 2005 |  
|                                                                                                                      |   |                          |   |   |                    |   |   | (Inception of the |  
|                                                                                                                      |   | For the Six Months Ended |   |   | Development Stage) |  
|                                                                                                                      |   | June 30,                 |   |   | to June 30,        |  
|                                                                                                                      |   | 2012                     |   |   | 2011               |   |   | 2012              |  
|Cash Flows from Operating Activities:                                                                                 |   |                          |   |   |                    |   |   |                   |  
|Net loss                                                                                                              | $ | (2,296,299               | ) | $ | (1,445,684         | ) | $ | (145,678,349      | )
|Adjustments to reconcile net loss to cash used in operating
      activities:                                         |   |                          |   |   |                    |   |   |                   |  
|Depreciation and amortization                                                                                         |   | 564,968                  |   |   | 802,804            |   |   | 16,117,866        |  
|Share-based compensation                                                                                              |   | 139,079                  |   |   | 1,110,368          |   |   | 20,632,280        |  
|Non-cash interest                                                                                                     |   | 235,365                  |   |   | 345,569            |   |   | 3,248,005         |  
|Amortization of note
      discount and non-cash financing costs                                                      |   | 288,146                  |   |   | 812,062            |   |   | 16,854,847        |  
|Gain on derivative liabilities                                                                                        |   | (33,541                  | ) |   | (3,896,066         | ) |   | (14,075,981       | )
|Non-cash restructuring                                                                                                |   |                         |   |   | 850,000            |   |   | 11,775,538        |  
|Loss on sale of fixed assets                                                                                          |   |                         |   |   |                   |   |   | 389,784           |  
|Loss on extinguishment of
      debt                                                                                  |   |                         |   |   |                   |   |   | 10,990,736        |  
|Changes in operating assets and
      liabilities:                                                                    |   |                          |   |   |                    |   |   |                   |  
|Other assets                                                                                                          |   | (75,461                  | ) |   | 143,824            |   |   | (366,753          | )
|Accounts payable and accrued expenses                                                                                 |   | 615,607                  |   |   | 784,884            |   |   | 8,774,151         |  
|Deferred rent                                                                                                         |   |                         |   |   |                   |   |   | 1,595,239         |  
|Deferred revenue                                                                                                      |   |                         |   |   |                   |   |   | 217,618           |  
|Net cash used in operating activities                                                                                 |   | (562,136                 | ) |   | (492,239           | ) |   | (69,525,019       | )
|Cash Flows from Investing Activities:                                                                                 |   |                          |   |   |                    |   |   |                   |  
|Purchase of investment                                                                                                |   |                         |   |   |                   |   |   | (71,957,732       | )
|Proceeds from sale
      of investments                                                                               |   |                         |   |   |                   |   |   | 72,662,973        |  
|Purchase of equipment and improvements                                                                                |   |                         |   |   |                   |   |   | (42,570,127       | )
|Proceeds from sale
      of assets                                                                                    |   |                         |   |   |                   |   |   | 2,035,280         |  
|Net cash used in investing activities                                                                                 |   |                         |   |   |                   |   |   | (39,829,606       | )
|Cash Flows from Financing Activities:                                                                                 |   |                          |   |   |                    |   |   |                   |  
|Proceeds from sale of stock                                                                                           |   |                         |   |   |                   |   |   | 78,312,500        |  
|Proceeds from
      issuance of notes                                                                                 |   | 600,000                  |   |   | 450,000            |   |   | 30,730,000        |  
|Payments on notes and capital leases                                                                                  |   |                         |   |   | (50,000            | ) |   | (11,545,310       | )
|Cost of financing                                                                                                     |   |                         |   |   |                   |   |   | (6,342,379        | )
|Proceeds from exercise of warrants and stock options                                                                  |   |                         |   |   |                   |   |   | 8,870,549         |  
|Net cash provided by (used in) financing activities                                                                   |   | 600,000                  |   |   | 400,000            |   |   | 100,025,360       |  
|Increase (decrease) in cash and cash
      equivalents                                                                |   | 37,864                   |   |   | (92,239            | ) |   | (9,329,265        | )
|Cash and cash equivalents, beginning of period                                                                        |   | 4,199                    |   |   | 97,058             |   |   | 9,371,328         |  
|Cash and cash equivalents, end of period                                                                              | $ | 42,063                   |   | $ | 4,819              |   | $ | 42,063            |  
|Supplemental Cash Flow Information:                                                                                   |   |                          |   |   |                    |   |   |                   |  
|Cash paid for interest                                                                                                | $ |                         |   | $ |                   |   |   |                   |  
|Non-Cash Transactions:                                                                                                |   |                          |   |   |                    |   |   |                   |  
|Investment in nonconsolidated affiliate                                                                               | $ | (294,285                 | ) | $ |                   |   |   |                   |  
|Shares issued in common stock for investment in 
             
              
     nonconsolidated affiliate          | $ | 294,285                  |   | $ |                   |   |   |                   |  
|Shares issued in common stock reducing principal 
             
              
     and interest on convertible notes | $ | 777,369                  |   | $ | 1,247,794          |   |   |                   |  
|Beneficial conversion feature on convertible note                                                                     | $ | 455,011                  |   | $ | 41,794             |   |   |                   |  
|Shares issued for settlement of liabilities                                                                           | $ |                         |   | $ | 1,116,440          |   |   |                   |  

See accompanying notes to these financial statements.

7

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DAYSTAR TECHNOLOGIES, INC.(A DEVELOPMENT STAGE
ENTERPRISE)NOTES TO FINANCIAL STATEMENTS(Unaudited)

1. Organization and Nature of Operations

DayStar Technologies, Inc.
(DayStar or the Company) is a development stage enterprise that was formed
in 1997 for the purpose of developing, manufacturing and marketing innovative
products to the solar photovoltaic (PV) industry. From its inception, the
Company has focused primarily on thin film copper indium gallium di-selenide
(CIGS) solar products. The Company has developed a proprietary one-step
sputter deposition process and manufactured a commercial scale deposition tool
to apply high efficiency CIGS material over large area glass substrates in a
continuous fashion. This tool in one step completes the critical process of
applying the CIGS material to the substrate and when integrated with
commercially available thin film manufacturing equipment for the remaining
steps, the Company believes it can provide a critically differentiated
manufacturing process to produce low-cost monolithically integrated,
CIGS-on-glass modules that address the grid-tied, ground-based PV market.

Given the changes in the economy
and in the industry in recent years, the Company has significantly scaled back
its development and manufacturing efforts and embarked on a strategy in which it
is seeking strategic partnerships to advance its technology and enter new
markets within the global renewal energy industry.

In March 2012, Sunlogics Power
Fund Management, Inc., a subsidiary of Salamon Group, Inc., made an initial loan
to DayStar. Sunlogics Power Fund Management (Sunlogics) is a fund that
provides investments to companies in the solar industry and is a
project-acquiring partner of Sunlogics PLC and its subsidiary, as well as other
third party project developers, specializing in the design, development and
operation of solar energy solutions, including rooftop and ground mount solar
power systems. Simultaneous with the initial loan, Sunlogics entered into a
consulting arrangement with DayStar to assist the management of the Company with
business development and also with exploring and evaluating strategic
opportunities. DayStar and Sunlogics plan to pursue opportunities that will be
mutually beneficial in achieving the goals of both companies.

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 condensed unaudited financial statements.
These condensed unaudited financial statements should be read in conjunction
with the financial statements and notes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2011. The condensed balance
sheet as of December 31, 2011 has been derived from audited financial
statements. The results of operations for the six months ended June 30, 2012 and
2011 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 June 30, 2012 and the results
of its operations and its cash flows for the six months ended June 30, 2012 and
2011 and for the period from July 1, 2005 (Inception of the Development Stage)
to June 30, 2012.

Reverse Stock SplitOn
March 27, 2012, the Companys shareholders approved a 1-for-7 reverse stock
split of its issued and outstanding common shares with the total authorized
shares of common stock remaining unchanged at 120,000,000. Trading of the
Companys common stock on the NASDAQ Capital Market on a split-adjusted basis
began at the open of trading on April 9, 2012. The reverse stock split affected
all shares of the Companys common stock, as well as options to purchase the
Companys common stock and other equity incentive awards, as well as convertible
debt instruments and warrants that were outstanding immediately prior to the
effective date of the reverse stock split. All references to common shares and
per-share data for prior periods have been retroactively restated to reflect the
reverse stock split as if it had occurred at the beginning of the earliest
period presented.

2. Liquidity and Future Operations

The Companys financial
statements for the year ended December 31, 2011 and the six months ended June
30, 2012 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. The Company is in the development stage, and as such,
has historically reported net losses, including a net loss of $2.3 million for
the six months ended June 30, 2012. The Company anticipates it will continue to
incur losses as it seeks strategic partnerships and investments. As noted
herein, as a result of the Companys current liquidity, there is substantial
doubt as to its ability to continue as a going concern.

8

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In order to continue operations
and pursue strategic partnerships, the Company requires immediate and
substantial additional capital beyond its current cash on hand.

In order to address its current
financial requirements on February 2, 2011, the Company entered into a
Securities Purchase Agreement (the Purchase Agreement) with Socius CG II, Ltd.
(the Investor or Socius). Pursuant to the terms of the Purchase Agreement,
the Company has the right over a term of two years, subject to certain
conditions, to demand through separate tranche notices that the Investor
purchase up to a total of $5.0 million of Series B preferred stock.

The Company is pursuing long-term
strategic partnerships and investments to advance its technology and enter new
markets within the global renewal energy industry. Those potential partnerships,
if consummated, could include joint ventures, licensing agreements, contract
manufacturing agreements, a merger with or an acquisition of DayStar. Although
the Company continues to seek strategic investors or partners, in light of its
current cash position, the Company may in the near term be forced to cease
operations. The Company has implemented cost savings measures to limit its cash
outflows while pursuing strategic investments and partnerships.

An inability to raise additional
funding in the very near term may cause the Company to file a voluntary petition
for reorganization under the United States Bankruptcy Code, liquidate assets,
and/or pursue other such actions that could adversely affect future operations.
Given current market conditions and available opportunities, there is
substantial doubt as to the Companys ability to complete a financing in the
time frame required to remain in operation. A wide variety of factors relating
to the Company and external conditions could adversely affect its ability to
secure additional funding and the terms of any funding that it secures.

3. Significant Accounting Policies

Cash EquivalentsThe
Company considers all highly liquid debt securities purchased with an original
maturity of three months or less to be cash equivalents. The Companys cash and
cash equivalents are maintained with major financial institutions within the
United States and at times the balances with these institutions exceed the
amount of federal insurance coverage on such deposits.

Property and
EquipmentProperty and equipment is stated at cost. Depreciation is computed
using straight-line and an accelerated method over estimated useful lives of 3
to 10 years. Expenditures for maintenance and repairs, which do not materially
extend the useful lives of property and equipment, are charged to operations as
incurred. When property or equipment is retired or otherwise disposed of, the
property accounts are relieved of costs and accumulated depreciation and any
resulting gain or loss is recognized.

Cost-Basis Method ValuationThe
Companys non-marketable equity investment is recorded using the cost-basis
method of accounting, and is classified within other long-term assets on the
accompanying balance sheet as permitted by FASB ASC 325, Cost Method
Investments, as the Company owns less than 20% of the voting securities and
does not have the ability to exercise significant influence over operating and
financial policies of the entity. See Note 4 Investment in Non-Consolidating
Affiliate  for more information.

Revenue RecognitionThe
Company recognizes revenue in accordance with the FASB ASC 605 Revenue
Recognition and Securities and Exchange Commission (the SEC)s Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104) which require
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) collectability is reasonably assured. Since inception of
the development stage on July 1, 2005, the Company has earned minimal amounts of
product revenue.

Since inception of the
development stage on July 1, 2005, the principal source of revenue for the
Company has been from government funded research and development contracts and
grants. Grant revenue is recognized when the Company fulfills obligations as set
forth under the grant. Terms of the grant reflected in the accompanying
financial statements require the Company to maintain specified employment
criteria over a five year period. If the Company fails to meet the specified
criteria, it must repay the unearned portion of the grant. As a result, the
Company reported a liability of $520,000 at June 30, 2012 and December 31, 2011,
respectively.

Research and development contract
revenue is recognized as the Company meets milestones as set forth under the
contract. The Company recognized no revenue for the six months ended June 30,
2012 and 2011, respectively.

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.

Use of EstimatesThe
preparation of the Companys financial statements in conformity with generally
accepted accounting principles requires the Companys management to make
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Significant estimates include the useful
lives of the Companys property and equipment, the life and realization of the
Companys capitalized costs associated with its patents and the Companys
valuation allowance associated with its deferred tax asset. Actual results could
differ from those estimates.

9

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Share-Based
CompensationThe Company follows the provisions of FASB ASC 718
CompensationStock Compensation, 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
SECs Staff Accounting Bulletin No. 107 Share-Based Payment (SAB 107), as
amended by Staff Accounting Bulletin No. 110 (SAB 110), which provides
supplemental application guidance based on the views of the SEC. The Company
estimates the expected term, which represents the period of time from the grant
date that the Company expects its stock options to remain outstanding, using the
simplified method as permitted by SAB 107 and SAB 110. Under this method, the
expected term is estimated as the mid-point between the time the options vest
and their contractual terms. The Company continues to apply the simplified
method because it does not have sufficient historical exercise data to provide a
reasonable basis upon which to estimate the expected terms due to the limited
period of time its equity shares have been publicly traded and the limited
number of its options which have so far vested and become eligible for exercise.

Share-based compensation expense
for the three months and six months ended June 30, 2012 and 2011 was as follows:

|                                          |   | For the Three Months |  |   | For the Six Months | 
|----------------------------------------- | - | -------------------- |  | - | ------------------ | 
|                                          |   | Ended June 30,       |  |   | Ended June 30,     | 
|                                          |   | 2012                 |  |   | 2011               | 
|Share-based compensation:                 |   |                      |  |   |                    | 
|Selling, general
      and administrative | $ | 19,891               |  | $ | 128,686            | 
|Research and development                  |   | 49,570               |  |   | 48,929             | 
|Total share-based compensation            | $ | 69,461               |  | $ | 177,615            | 

During the six months ended June
30, 2012, the Company granted 57,144 restricted stock awards. There were no
restricted stock units or options to purchase common stock granted, and no
restricted stock awards, restricted stock units or options to purchase common
stock were forfeited during the six months ended June 30, 2012.

Subsequent to June 30, 2012 and
through the date of this filing, the Company issued as an inducement to new
officers' a start bonus award of 200,000 shares of Company stock that will be
paid upon commencement of employment with vesting over 12 equal installments.
The Company has already issued one award to the CFO and is expected in the near
term to offer three to four other awards as the Company builds the team to
implement the new platform and direction the Company is embarking on. The
Company has added 4 new Board Members and have granted 3 each a 25,000 award of
Company stock upon acceptance of the Directors Letter of Indemnification.

ReclassificationsCertain
reclassifications have been made to the 2011 financial statements to conform to
the 2012 presentation. Such reclassifications had no impact on net loss.

***Impact of Recently Issued Accounting
Pronouncements***

In April 2011, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.
This ASU amends current fair value measurement and disclosure guidance to
include increased transparency around valuation input and investment
categorization. ASU 2011-04 is effective for fiscal years and interim periods
beginning after December 15, 2011, with early adoption not permitted. The
adoption of ASU 2011-04 in the first quarter of 2012 did not have an impact on
the Companys financial position, results of operations, or cash flows.

In June 2011, the FASB issued ASU
2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income. ASU 2011-05 allows an entity to present components of net income and
other comprehensive income in one continuous statement, referred to as the
statement of comprehensive income, or in two separate, but consecutive
statements. ASU 2011-05 eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders
equity. While the new guidance changes the presentation of comprehensive income,
there are no changes to the components that are recognized in net income or
other comprehensive income under current accounting guidance. ASU 2011-05 is
effective for fiscal years and interim periods beginning after December 15, 2011
and must be applied retrospectively. The Company did not have any other
comprehensive income during the three months ended March 31, 2012 and the
adoption of ASU 2011-05 in the first quarter of 2012 did not have an impact on
the Companys financial position, results of operations, or cash flows.

In December 2011, the FASB issued
ASU 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets
and Liabilities, which requires companies to disclose information about
financial instruments that have been offset and related arrangements to enable
users of their financial statements to understand the effect of those
arrangements on their financial position. Companies will be required to provide
both net (offset amounts) and gross information in the notes to the financial
statements for relevant assets and liabilities that are offset. ASU 2011-11 is
effective for fiscal years, and interim periods within those years, beginning on
or after January 1, 2013. The Company is evaluating the effect the adoption of
ASU 2011-11 in the first quarter of 2013 may have on its financial position,
results of operations, or cash flows.

10

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4. Investment in Non-Consolidating Affiliate

Investment in unconsolidated affiliate is a long term,
strategic equity investment in Eco Energy Solutions (Australia) Pty. Ltd.
("Eco") that will help to enable the Company implement its new strategy in
energy projects construction, ownership and solutions business. On May 31, 2012
the Company entered into a purchase agreement to acquire a 10% interest in Eco
for 285,714 shares of its common stock that had a closing market stock price of
$1.03. The total value of Eco is carried under the cost method of accounting at
$294,285.

This investment has been accounted for
as a cost-basis investment as the Company owns less than 20% of the voting
securities and does not have the ability to exercise significant influence over
operating and financial policies of the entity. The Companys investment is in
an entity that is not publicly traded and, therefore, no established market for
the securities exists. The fair value of a cost-method investment is not
estimated if there is no identified event or change in circumstances that would
have a significant adverse effect on the fair value of the investment. The
Companys cost-method investment is carried at historical cost in its financial
statements and measured at fair value on a nonrecurring basis. If the Company
believes that the carrying value of the cost basis investment is in excess of
estimated fair value, the Companys policy is to record an impairment charge in
Other income (expense) in the accompanying statements of operations. The
Company regularly evaluates the carrying value of this cost-method investment
for impairment. As of June 30, 2012, the Company believes that no event had
occurred that would adversely affect the carrying value of this investment, and
accordingly, the Company did not record any impairment charges relating to this
investment during the three and six months ended June 30, 2012.

5. Notes Payable and Warrants

Between September 2009 and
December 2011, the Company entered into a series of agreements with various
lenders (the Lenders) to provide bridge financing to the Company in exchange
for notes and warrants. With the exception of the traditional loans indicated in
the table below, these notes (the Notes) are convertible into shares of the
Companys common stock, and each contain terms of six months, are secured by all
assets of the Company, and accrue interest at rates of between 8  10% per
annum. The Lenders may, at their option at any time prior to payment in full of
the Notes, elect to convert all or any part of the entire outstanding principal
amount of the Notes plus the accrued interest on the then outstanding balance
into shares of the Companys common stock at the conversion price specified in
each of the Notes (subject to adjustment in the event of any stock splits, stock
dividends or other recapitalization of common stock subsequent to the date of
such sale or issuance). If between the date of the Notes and such conversion,
the Company issues or sells any shares of capital stock, other than certain
excluded securities (a Future Issuance), at a per share price below the
original conversion price specified in the Notes, then the conversion price of
the Notes will be reduced to the price of such Future Issuance.

On January 25, 2012, the Company
and Michael Moretti entered into a securities purchase agreement. Pursuant to
the securities purchase agreement, Mr. Moretti agreed to loan the Company
$225,000 (including $125,000 advanced prior to December 31, 2011) and the
Company issued Mr. Moretti (a) a secured convertible promissory note and (b) a
warrant to purchase 192,858 shares of the Companys common stock (subject to
adjustment for certain corporate transactions). The note carries an interest
rate of 10% per annum and is convertible into shares of the Companys common
stock based on a $1.75 conversion price (subject to adjustment for certain
corporate transactions), contains a term of two years and is secured by all the
assets of the Company. The warrant is immediately exercisable, expires on
January 24, 2014, and has an exercise price of $2.80 per share if exercised
prior to July 25, 2012, $3.15 if exercised during the period July 25, 2012
through January 24, 2013, and $3.50 if exercised after January 24, 2013 and
through the expiration of the warrant. Additionally, the securities purchase
agreement contains a provision that if and only if, the Company consummates a
fundamental transaction that results in a change in control, the Company will
use its commercially reasonable best efforts to cause the Company or other
parties to the fundamental transaction to issue securities (be it common stock,
other securities of the Company, or securities of another party to the
fundamental transaction) equal to the original principal amount of the note
divided by $1.75.

On March 14, 2012, the Company
and Sunlogics entered into a securities purchase agreement. Pursuant to the
purchase agreement, Sunlogics agreed to loan the Company $500,000. On March 14,
2012, and March 16, 2012, the Company issued Sunlogics two senior convertible
promissory notes, representing the Companys Senior Debt, in the principal
amounts of $400,000 and $100,000, respectively. The notes carry an interest rate
of 6% per annum, a term of one year, and each note is convertible into shares of
the Companys common stock at a conversion price equal to the consolidated
closing bid price of the Companys common stock on the last business day prior
to the issuance of the note (subject to adjustment for certain corporate
transactions). As of June 20, 2012, the company converted these notes and issued
305,023 shares of common stock

As of June 30, 2012, the
aggregate principal balance of all outstanding Notes was $4,800,000 and the
Notes were convertible into 2,814,908 shares of common stock.

The conversion features on the
notes issued prior to 2012 were determined to be embedded derivative liabilities
and therefore were bifurcated from the notes and recorded as a discount to the
notes at their fair value at issuance and are required to be adjusted to fair
value at the end of each reporting period. The change in fair value of the
conversion features, calculated using the Black Scholes model, is recorded as a
gain or loss on derivative liabilities. The conversion feature fair values at
June 30, 2012 and December 31, 2011 were $0 and $33,541, respectively. The
change in fair value of the conversion features during the three months ended
June 30, 2012 and 2011 resulted in a gain on derivative liabilities of $0 and
$245,898, respectively. The change in fair value of the conversion features
during the six months ended June 30, 2012 and 2011 resulted in a gain on
derivative liabilities of $33,541 and $3,896,066, respectively.

The conversion features on the
notes issued in 2012 were determined to be beneficial conversion features and
were recorded as additional paid-in capital and as a discount to the notes at
their fair value at issuance of $455,011, calculated using the Black Scholes
model.

11

---

The proceeds remaining, if any,
after allocation to the conversion features are allocated on a relative fair
value basis between the Notes and the warrants and the amounts allocated to the
warrants, calculated using the Black Scholes model, are recorded as additional
note discount. The discount attributable to the issuance date aggregate fair
value of the conversion features and warrants, is being amortized using the
effective interest method over the terms of the Notes. During the three months
ended June 30, 2012 and 2011, $247,529 and $106,250, respectively, of this discount was amortized to expense. During
the six months ended June 30, 2012 and 2011, $288,146 and $812,062,
respectively, of this discount was amortized to expense.

The warrants issued in connection
with these Notes are exercisable upon issuance (with the exception of the
warrants issued to Dynamic Worldwide Solar Energy, LLC) and entitle the Lenders
to purchase up to 1,136,530 shares of common stock at exercise prices ranging
from $2.80  $11.90 per share, as adjusted for standard anti-dilution provisions
and are exercisable for a period of 2  7 years from their respective issuance
dates.

12

---

The following table summarizes
the pertinent details of the outstanding notes and warrants as of June 30, 2012.

|                                     |  |   |                  |  |   |          |  |   |                   |  |  |                 |  |   |            |  |  |           |  |   | Warrant     | 
|------------------------------------ |  | - | ---------------- |  | - | -------- |  | - | ----------------- |  |  | --------------- |  | - | ---------- |  |  | --------- |  | - | ----------- | 
|                                     |  |   |                  |  |   |          |  |   | Note Payable      |  |  | Note Conversion |  |   | Conversion |  |  |           |  |   | Exercise    | 
|Lender                               |  |   | Principal Amount |  |   | Discount |  |   | (net of discount) |  |  | Shares Issuable |  |   | Price      |  |  | Warrants  |  |   | Price       | 
|Peter Lacey(1)                       |  | $ | 3,075,000*       |  | $ |         |  | $ | 3,075,000         |  |  | 1,909,938       |  | $ | 1.61       |  |  | 103,440   |  | $ | 8.75        | 
|Peter Lacey(1)                       |  |   |                  |  |   |          |  |   |                   |  |  |                 |  |   |            |  |  | 384,657   |  | $ | 11.90       | 
|Peter Lacey(1)                       |  |   | 125,000*         |  |   |         |  |   | 125,000           |  |  | N/A             |  |   | N/A        |  |  | 35,715    |  | $ | 7.00        | 
|Peter Lacey(1)                       |  |   | 150,000*         |  |   |         |  |   | 150,000           |  |  | 93,168          |  | $ | 1.61       |  |  | 41,209    |  | $ | 3.64        | 
|Michael Moretti                      |  |   | 750,000*         |  |   |         |  |   | 750,000           |  |  | 465,839         |  | $ | 1.61       |  |  | 119,048   |  | $ | 8.75        | 
|Michael Moretti                      |  |   | 150,000*         |  |   |         |  |   | 150,000           |  |  | 93,168          |  | $ | 1.61       |  |  | 27,650    |  | $ | 10.85       | 
|Michael Moretti                      |  |   | 125,000*         |  |   |         |  |   | 125,000           |  |  | N/A             |  |   | N/A        |  |  | 35,715    |  | $ | 7.00        | 
|Michael Moretti                      |  |   | 150,000*         |  |   |         |  |   | 150,000           |  |  | 93,168          |  | $ | 1.61       |  |  | 41,209    |  | $ | 3.64        | 
|Michael Moretti                      |  |   | 225,000          |  |   | 176,352  |  |   | 48,648            |  |  | 128,571         |  | $ | 1.75       |  |  | 192,858   |  | $ | 2.80  3.50 | 
|John Gorman                          |  |   |                 |  |   |         |  |   |                  |  |  |                |  |   |           |  |  | 95,239    |  | $ | 8.75        | 
|Richard Schottenfeld                 |  |   |                 |  |   |         |  |   |                  |  |  |                |  |   |           |  |  | 15,873    |  | $ | 8.75        | 
|William Steckel(2)                   |  |   |                 |  |   |         |  |   |                  |  |  |                |  |   |           |  |  | 1,588     |  | $ | 8.75        | 
|Robert Weiss(3)                      |  |   | 50,000*          |  |   |         |  |   | 50,000            |  |  | 31,056          |  | $ | 1.61       |  |  | 7,937     |  | $ | 8.75        | 
|Dynamic Worldwide Solar Energy, LLC. |  |   |                 |  |   |         |  |   |                  |  |  |                |  |   |           |  |  | 34,392    |  | $ | 8.75        | 
|                                     |  | $ | 4,800,000        |  | $ | 176,352  |  | $ | 4,623,648         |  |  | 2,814,908       |  |   |            |  |  | 1,136,530 |  |   |             | 

|* | As of the date of filing of this report, these notes have
      matured and the Company is in the process of extending the maturity date
      with the Lenders.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

In February 2012, John Gorman converted his entire outstanding
principal balance of $100,000 as well as the accrued interest thereon into
shares of the Companys common stock. In March 2012, Richard Schottenfeld
converted his entire outstanding principal balance of $100,000 as well as the
accrued interest thereon into shares of the Companys common stock. In June
2012, William Steckel converted his entire outstanding principal balance of
$30,000 as well as the accrued interest thereon into shares of the Company's
common stock. In March 2012, Sunlogics was issued $500,000 of convertible notes
for cash advanced to the Company. In June 2012, Sunlogics converted their entire
outstanding principal balance of $500,000 as well as the accrued interest
thereon into shares of the Company's common stock.

The following table summarizes
the pertinent details of the outstanding notes and warrants as of December 31,
2011.

|                                     |  |   |                  |  |   |          |  |   |                   |  |  |                 |  |   |            |  |  |          |  |   | Warrant  | 
|------------------------------------ |  | - | ---------------- |  | - | -------- |  | - | ----------------- |  |  | --------------- |  | - | ---------- |  |  | -------- |  | - | -------- | 
|                                     |  |   |                  |  |   |          |  |   | Note Payable      |  |  | Note Conversion |  |   | Conversion |  |  |          |  |   | Exercise | 
|Lender                               |  |   | Principal Amount |  |   | Discount |  |   | (net of discount) |  |  | Shares Issuable |  |   | Price      |  |  | Warrants |  |   | Price    | 
|Peter Lacey(1)                       |  | $ | 3,075,000        |  | $ |         |  | $ | 3,075,000         |  |  | 1,909,938       |  | $ | 1.61       |  |  | 103,440  |  | $ | 8.75     | 
|Peter Lacey(1)                       |  |   |                  |  |   |          |  |   |                   |  |  |                 |  |   |            |  |  | 384,657  |  | $ | 11.90    | 
|Peter Lacey(1)                       |  |   | 125,000          |  |   |         |  |   | 125,000           |  |  | N/A             |  |   | N/A        |  |  | 35,715   |  | $ | 7.00     | 
|Peter Lacey(1)                       |  |   | 150,000          |  |   | 4,669    |  |   | 145,331           |  |  | 93,168          |  | $ | 1.61       |  |  | 41,209   |  | $ | 3.64     | 
|Michael Moretti                      |  |   | 750,000          |  |   |         |  |   | 750,000           |  |  | 465,839         |  | $ | 1.61       |  |  | 119,048  |  | $ | 8.75     | 
|Michael Moretti                      |  |   | 150,000          |  |   |         |  |   | 150,000           |  |  | 93,168          |  | $ | 1.61       |  |  | 27,650   |  | $ | 10.85    | 
|Michael Moretti                      |  |   | 125,000          |  |   |         |  |   | 125,000           |  |  | N/A             |  |   | N/A        |  |  | 35,715   |  | $ | 7.00     | 
|Michael Moretti                      |  |   | 150,000          |  |   | 4,669    |  |   | 145,331           |  |  | 93,168          |  | $ | 1.61       |  |  | 41,209   |  | $ | 3.64     | 
|Michael Moretti                      |  |   | 125,000          |  |   |         |  |   | 125,000           |  |  | N/A             |  |   | N/A        |  |  | N/A      |  |   | N/A      | 
|John Gorman                          |  |   | 100,000          |  |   |         |  |   | 100,000           |  |  | 62,112          |  | $ | 1.61       |  |  | 95,239   |  | $ | 8.75     | 
|Richard Schottenfeld                 |  |   | 100,000          |  |   |         |  |   | 100,000           |  |  | 62,112          |  | $ | 1.61       |  |  | 15,873   |  | $ | 8.75     | 
|William Steckel(2)                   |  |   | 30,000           |  |   |         |  |   | 30,000            |  |  | 18,634          |  | $ | 1.61       |  |  | 1,588    |  | $ | 8.75     | 
|Robert Weiss(3)                      |  |   | 50,000           |  |   |         |  |   | 50,000            |  |  | 31,056          |  | $ | 1.61       |  |  | 7,937    |  | $ | 8.75     | 
|Dynamic Worldwide Solar Energy, LLC. |  |   |                 |  |   |         |  |   |                  |  |  |                |  |   |           |  |  | 34,392   |  | $ | 8.75     | 
|                                     |  | $ | 4,930,000        |  | $ | 9,338    |  | $ | 4,920,662         |  |  | 2,829,195       |  |   |            |  |  | 943,672  |  |   |          | 

|(1) | Mr. Lacey is Chairman of the Board of Directors for the
      Company and currently serving as the Companys Interim President and Chief
      Executive Officer.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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|(2) | Mr. Steckel is a Director of the Company and the former
      Chief Executive Officer and Chief Financial Officer.
|--- | ------------------------------------------------------------------------------------------------------------------
|(3) | Mr. Weiss is the Companys Chief Technology
    Officer.                                                          

6. Derivative Liabilities

As described in Note 4 Notes
Payable and Warrants, the Company is accounting for the conversion features in
certain of its convertible notes as embedded derivative liabilities. The Company
currently does not use hedging contracts to manage the risk of its overall
exposure to interest rate and foreign currency changes. The conversion features
are not considered hedging instruments.

The conversion feature liability
on the balance sheet at June 30, 2012 and 2011, and the change in the liability
for the six months ended June 30, 2012 and 2011 is summarized as follows:

ConversionFeatureLiabilityBalance, December 31, 2010
    $
    3,854,272New debt issuances
    
    41,794Change in fair value
    
    (3,896,066
    )Balance, June 30, 2011
    $
    Balance, December 31, 2011
    $
    33,541Change in fair value
    
    (33,541
    )Balance, June 30, 2012
    $
    


In accordance with ASC 820, the
following table represents the Companys fair value hierarchy for its financial
liabilities measured at fair value on a recurring basis as of June 30, 2012 and
December 31, 2011. There were no financial assets subject to the provisions of
ASC 820 as of June 30, 2012 and December 31, 2011.

Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalFinancial liabilities at June
      30, 2012:Conversion feature
    $
    
    
    $
    
    
    $
    
    
    $
    $
    
    
    $
    
    
    $
    
    
    $
    Financial liabilities at December 31, 2011:Conversion feature
    $
    
    
    $
    
    
    $
    33,541
    
    $
    33,541$
    
    
    $
    
    
    $
    33,541
    
    $
    33,541


7. Subsequent Events

In August 2012, the Company is
intending to commence with a tender offer to the shareholders of Salamon Group,
Inc. to acquire at least 50.1% of Salamon's outstanding shares of common stock.
The Company intends to offer one (1) share of DayStar for each six (6) shares of
common stock of the Salamon Group. The closing of any transaction would be
contingent upon other things, final due diligence, continued listing of the
combined company on the NASDAQ Capital Market and compliance with all applicable
judicial and other regulatory requirements. This acquisition would extend the
Company's presence in the energy project business solutions business, further
building out its reach and functional expertise in the area of engineering,
construction, and ownership of solar power generation projects in the attractive
and growing Caribbean, South America, Australian and South Pacific renewable
markets. Salamon Group, Inc., through its Sunlogics Power Fund Management Inc.
division, is a solar energy project company specializing in the construction
management and acquisition of renewable energy power projects. The management of
DayStar intends, upon completion of the planned acquisition, to continue to
pursue strategic opportunities that will be beneficial to the shareholders of
both DayStar and Salamon Group/Sunlogics. Sunlogics Power also looks to acquire
assets and other companies in the solar and renewable energy space that are a
strategic fit. Sunlogics Power is also a project-acquiring partner of Sunlogics
Plc and its Subsidiary as well as other third party developers.

In August 2012, the Company is
intending to file a S-3 Registration Statement registering two shareholders, Mr.
Peter Lacey and Mr. Michael Moretti, who are converting debt for shares from the
convertible debt that is on the books as of June 30, 2012. In addition, there
are two shareholders who are owed money for work performed while employed by the
Company. The Company is in the process of finalizing an Employment and
Separation Release of Robert Weiss and Christopher Lail for shares of Company
stock as full payment for the monies owed them while employed. The amount
accrued in liabilities as of June 30, 2012 was $703,477. The amount owed Robert
Weiss totaled $477,562 made up of $428,235 in accrued salaries and $49,327 in
accrued vacation and the amount owed Chris Lail totaled $225,915 made up of
$201,684 in accrued salaries and $24,231 in accrued vacation.

14

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In August 2012, the Company has
elected to increase the number of Board Members from five to nine and has
elected four new members who along with the existing Members will have
experience in helping implement the new strategy and direction of the Company.
The Company, as an inducement to joining the Board, has offered three Board
Members a grant of 25,000 shares each with these grants vesting ratably over
twelve months. The inducement grants will be issued upon acceptance of an
executed Director Letter of Indemnification.

In August 2012, the Company has
offered stock awards to Highlands Pacific Management for consulting services
rendered in connection helping the CEO run the business for more than the last
year. The award was for 200,000 shares of Company stock valued at a closing
market price of $1.45 per share. The accrued value reported in the liabilities
is $290,000.

In August 2012, the Company has
offered as an inducement to new officers' a start bonus award of up to 200,000 shares
of Company stock that will be paid upon commencement of employment with vesting
over 12 equal installments. The Company has already issued one award to the CFO
and is expected in the near term to offer three to four other awards as the
Company builds to implement the new platform described earlier.

In July 2012, the Company has
proposed a Debt Swap deal relating to a July 2012 resolution proposing to issue
debt to Mr. Michael Matvieshen in return for him transferring a portion of his
debt held in Salamon Group, Inc in the amount of $15 million per the proposed
Secured Promissory Note dated July 10, 2012. This swap has been agreed to in
principal but has not been finalized yet even though the Company expects this
deal to be consummated in August 2012.

15

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Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations

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 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 our Annual Report on
Form 10-K filed on March 30, 2012 as well as Part II, Item 1A below.

Overview

We are a development stage
enterprise that was formed in 1997 for the purpose of developing, manufacturing
and marketing innovative products to the solar photovoltaic (PV) industry.
From our inception, we have focused primarily on thin film copper indium gallium
di-selenide (CIGS) solar products. We have developed a proprietary one-step
sputter deposition process and manufactured a commercial scale deposition tool
to apply high efficiency CIGS material over large area glass substrates in a
continuous fashion. This tool in one step completes the critical process of
applying the CIGS material to the substrate and when integrated with
commercially available thin film manufacturing equipment for the remaining
steps, we believe it can provide a critically differentiated manufacturing
process to produce low-cost monolithically integrated, CIGS-on-glass modules
that address the grid-tied, ground-based PV market.

Given the changes in the economy
and in the industry in recent years, we have significantly scaled back our
development and manufacturing efforts and embarked on a strategy in which we are
seeking strategic partnerships to advance our technology and enter new markets
within the global renewal energy industry. The Company is expected to announce
strategic partnerships in the near term to own and construct solar and renewable
power plants.

In August 2012, the Company is
intending to commence with a tender offer to the shareholders of Salamon Group,
Inc. to acquire at least 50.1% of Salamon's outstanding shares of common stock.
The Company intends to offer one (1) share of DayStar for each six (6) shares of
common stock of the Salamon Group. The closing of any transaction would be
contingent upon other things, final due diligence, continued listing of the
combined company on the NASDAQ Capital Market and compliance with all applicable
judicial and other regulatory requirements. This acquisition would extend the
Company's presence in the energy project business solutions business, further
building out its reach and functional expertise in the area of engineering,
construction, and ownership of solar power generation projects in the attractive
and growing Caribbean, South America, Australian and South Pacific renewable
markets. Salamon Group, Inc., through its Sunlogics Power Fund Management Inc.
division, is a solar energy project company specializing in the construction
management and acquisition of renewable energy power projects. The management of
DayStar intends, upon completion of the planned acquisition, to continue to
pursue strategic opportunities that will be beneficial to the shareholders of
both DayStar and Salamon Group/Sunlogics. Sunlogics Power also looks to acquire
assets and other companies in the solar and renewable energy space that are a
strategic fit. Sunlogics Power is also a project-acquiring partner of Sunlogics
Plc and its Subsidiary as well as other third party developers.

In August 2012, the Company is
intending to file a S-3 Registration Statement registering two shareholders, Mr.
Peter Lacey and Mr. Michael Moretti, who are converting debt for shares from the
convertible debt that is on the books as of June 30, 2012. In addition, there
are two shareholders who are owed money for work performed while employed by the
Company. The Company is in the process of finalizing an Employment and
Separation Release of Robert Weiss and Christopher Lail for shares of Company
stock as full payment for the monies owed them while employed.

In August 2012, the Company has
elected to increase the number of Board Members from five to nine and has
elected four new Members who along with the existing Members will have
experience in helping implement the new strategy and direction of the
Company.

In August 2012, the Company has
offered as an inducement to new officers' a start bonus award of up to 200,000 shares
of Company stock that will be paid upon commencement of employment with vesting
over 12 equal installments. The Company has already issued one award to the CFO
and is expected in the near term to offer three to four other awards as the
Company builds to implement the new platform described earlier.

In July 2012, the Company has
proposed a Debt Swap deal relating to a July 2012 resolution proposing to issue
debt to Mr. Michael Matvieshen in return for him transferring a portion of his
debt held in Salamon Group, Inc in the amount of $15 million per the proposed
Secured Promissory Note dated July 10, 2012. This swap has been agreed to in principal but has not been finalized
yet even though the Company expects this deal to be consummated in August 2012.

In March 2012, Sunlogics Power
Fund Management, Inc., a subsidiary of Salamon Group, Inc., made an initial loan
to DayStar. Sunlogics Power Fund Management (Sunlogics) is a fund that
provides investments to companies in the solar industry and is a
project-acquiring partner of Sunlogics PLC and its subsidiary, as well as other
third party project developers, specializing in the design, development and
operation of solar energy solutions, including rooftop and ground mount solar
power systems. Simultaneous with the initial loan, Sunlogics entered into a
consulting arrangement with us to assist our management team with business
development and also with exploring and evaluating strategic opportunities. We plan to pursue
opportunities with Sunlogics that will be mutually beneficial in achieving the
goals of both companies.

16

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Critical Accounting Policies and Estimates

The preparation of our financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and the related
disclosures. A summary of those accounting policies can be found in the notes to
our financial statements. 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.

Property and Equipment.Property and equipment is stated at cost. Depreciation is computed using
straight-line and an accelerated method over estimated useful lives of three to
ten years. Expenditures for maintenance and repairs, which do not materially
extend the useful lives of property and equipment, are charged to operations as
incurred. When property or equipment is retired or otherwise disposed of, the
property accounts are relieved of costs and accumulated depreciation and any
resulting gain or loss is recognized.

Share-Based Compensation.We follow the provisions of FASB ASC 718 CompensationStock Compensation,
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 SECs SAB No. 107, Share-Based Payment
(SAB 107), as amended by SAB No. 110, which provides supplemental application
guidance based on the views of the SEC.

Results of Operations

Comparison of the Three Months Ended June 30, 2012 and 2011

Certain reclassifications have
been made to the 2011 financial information to conform to the 2012 presentation.
Such reclassifications had no impact on net loss.

17

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Research and development
expenses.Research and development expenses were $181,759 for the three
months ended June 30, 2012 compared to $233,206 for the three months ended June
30, 2011, a decrease of $51,447 or 22%. The decrease was primarily related to a
reduction in share based compensation as well as a decrease in certain personnel
and facilities related costs.

Selling, general and
administrative expenses.Selling, general and administrative expenses were
$558,606 for the three months ended June 30, 2012 compared to $459,357 for the
three months ended June 30, 2011, an increase of $99,249 or 22%. The increase
was related to an accrual for consulting fees earned of $290,000 and decreases
primarily related to a reduction in share based compensation as well as a
decrease in certain personnel costs and professional fees.

*Restructuring.*There
were no restructuring expenses for the three months ended June 30, 2012 and June
30, 2011.

Depreciation and amortization
expense.Depreciation and amortization expense was $265,303 for the three
months ended June 30, 2012 compared to $398,018 for the three months ended June
30, 2011, a decrease of $132,715 or 33%. The decrease in depreciation reflects
the reduction in certain depreciable equipment.

Interest expense.Interest
expense was $117,882 for the three months ended June 30, 2012 compared to
$111,782 for the three months ended June 30, 2011, an increase of $6,100 or 5%.
Due to the larger loan balance throughout the second quarter primarily relating
to the outstanding notes issued in connection with our bridge financing in 2012,
there was a slight increase in expenses from the same quarter in 2011.

Amortization of note discount
and financing costs.Amortization of note discount and financing costs was
$247,529 for the three months ended June 30, 2012 compared to $106,250 for the
three months ended June 30, 2011, an increase of $141,279 or 133%. The
convertible notes issued in connection with our debt financing contain
conversion features as well as warrants which result in discounts to the
principal amount of the notes payable reflected on our balance sheet, based on
the fair value of the warrants and conversion features. The discounts on the
convertible notes are amortized using the effective interest method over the
terms of the notes. In the third quarter of 2010, we restructured all of our
existing convertible notes which resulted in the recording of new notes and
corresponding discounts. The expense for the three months ended June 30, 2011
includes amortization of the discount on the original notes as well as a portion
of the discount on the restructured notes. The expense for the three months
ended June 30, 2012 primarily reflects amortization of the discount on the notes
issued in 2012 plus the exercise of the convertible feature resulting in a
one-time charge of $168,603. The majority of the notes issued in 2012 were
issued toward the end of the quarter and all 2012 notes contained terms longer
than the notes issued in prior years. This factor resulted in a higher discount
amortization in the second quarter of 2012 as compared with the same period in
2011.

Gain on derivative
liabilities.Gain on derivative liabilities was $0 for the three months
ended June 30, 2012 compared to $245,898 for the three months ended June 30,
2011, a decrease of $245,898 or 100%. The conversion features on certain
convertible notes issued in conjunction with our debt financing are considered
derivative liabilities and are therefore required to be adjusted to fair value
each quarter. A decrease in our stock price during the period results in a
decrease in the liabilities and a gain on derivative liabilities. Conversely, an
increase in our stock price during the period would result in an increase in the
liabilities and a loss on derivative liabilities. During the three months ended
June 30, 2011, our common stock price significantly decreased resulting in a
significant gain on derivative liabilities for the quarter. The gain on
derivative liabilities for the three months ended June 30, 2012 reflects the
change in fair value of the outstanding conversion feature liability on the
notes issued prior to 2012.

Comparison of the Six Months Ended June 30, 2012 and 2011

Certain reclassifications have
been made to the 2011 financial information to conform to the 2012 presentation.
Such reclassifications had no impact on net loss.

18

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Research and development
expenses.Research and development expenses were $370,212 for the six months
ended June 30, 2012 compared to $839,771 for the six months ended June 30, 2011,
a decrease of $469,559 or 56%. The decrease was primarily related to a reduction
in share based compensation as well as a decrease in certain personnel and
facilities related costs.

Selling, general and
administrative expenses.Selling, general and administrative expenses were
$871,149 for the six months ended June 30, 2012 compared to $1,691,544 for the
six months ended June 30, 2011, a decrease of $820,395 or 48%. The decrease was
primarily related to a reduction in share based compensation as well as a
decrease in certain personnel costs and professional fees.

Restructuring.There were
no restructuring expenses for the six months ended June 30, 2012. Restructuring
expenses were $850,000 for the six months ended June 30, 2011. The restructuring
expenses in 2011 resulted from impairment charges on certain equipment, as we
cancelled orders for such equipment and settled the outstanding obligations with
the vendors. The settlement amounts of $850,000 which were paid in shares of our
common stock were recorded as restructuring expense during the six months ended
June 30, 2011.

Depreciation and amortization
expense.Depreciation and amortization expense was $564,968 for the six
months ended June 30, 2012 compared to $802,804 for the six months ended June
30, 2011, a decrease of $237,836 or 30%. The decrease in depreciation reflects
the reduction in certain depreciable equipment.

Interest expense.Interest
expense was $235,365 for the six months ended June 30, 2012 compared to $345,569
for the six months ended June 30, 2011, a decrease of $110,204 or 32%. Interest
expense relates primarily to the outstanding notes issued in connection with our
bridge financing. During the first quarter of 2011, we recorded interest on
certain outstanding payables which resulted in a larger expense in the first
quarter of 2011 as compared to the same period in 2012.

Amortization of note discount
and financing costs.Amortization of note discount and financing costs was
$288,146 for the six months ended June 30, 2012 compared to $812,062 for the six
months ended June 30, 2011, a decrease of $523,916 or 65%. The convertible notes
issued in connection with our debt financing contain conversion features as well
as warrants which result in discounts to the principal amount of the notes
payable reflected on our balance sheet, based on the fair value of the warrants
and conversion features. The discounts on the convertible notes are amortized
using the effective interest method over the terms of the notes. In the third
quarter of 2010, we restructured all of our existing convertible notes which
resulted in the recording of new notes and corresponding discounts. The expense
for the six months ended June 30, 2011 includes amortization of the discount on
the original notes as well as a portion of the discount on the restructured
notes. The expense for the six months ended June 30, 2012 primarily reflects
amortization of the discount on the notes issued in 2012. The majority of the
notes issued in 2012 were issued toward the end of the quarter and all 2012
notes contained terms longer than the notes issued in prior years. These factors
resulted in a lower discount amortization in the first quarter of 2012 as
compared with the same period in 2011.

Gain on derivative
liabilities.Gain on derivative liabilities was $33,541 for the six months
ended June 30, 2012 compared to $3,896,066 for the six months ended June 30,
2011, a decrease of $3,862,525 or 99%. The conversion features on certain
convertible notes issued in conjunction with our debt financing are considered
derivative liabilities and are therefore required to be adjusted to fair value
each quarter. A decrease in our stock price during the period results in a
decrease in the liabilities and a gain on derivative liabilities. Conversely, an
increase in our stock price during the period would result in an increase in the
liabilities and a loss on derivative liabilities. During the six months ended
June 30, 2011, our common stock price significantly decreased resulting in a
significant gain on derivative liabilities for the quarter. The gain on
derivative liabilities for the six months ended June 30, 2012 reflects the
change in fair value of the outstanding conversion feature liability on the
notes issued prior to 2012.

Liquidity and Capital Resources

At June 30, 2012, our cash and
cash equivalents totaled $42,063 compared to $4,199 at December 31, 2011.

We are in the development stage,
and as such, have historically reported net losses, including a net loss of $2.3
million for the six months ended June 30, 2012. We anticipate incurring losses
in the future, as we seek long-term strategic partnerships and investments to
advance our technology and enter new markets within the global renewal energy
industry.

Our financial statements for the
year ended December 31, 2011 and the six months ended June 30, 2012 have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. As noted herein, as a result of our current liquidity, there is
substantial doubt as to our ability to continue as a going concern.

19

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We have historically financed our
operations primarily from proceeds of the sale of equity securities and the
issuance of convertible notes. We presently do not have any bank lines of credit
that provide us with an additional source of debt financing.

Beginning in September 2009, we
have funded our operations through a series of debt financing transactions in
which we have issued convertible and traditional notes with an aggregate
principal amount of $6.7 million and also issued warrants exercisable for shares
of our common stock. Currently, $4.8 million of these notes remains outstanding.

Also, in order to help address
our capital requirements, in February 2011, we entered into a Securities
Purchase Agreement with Socius CG II, Ltd. (the Investor or Socius).
Pursuant to the terms of the Purchase Agreement, we have the right over a term
of two years, subject to certain conditions, to demand through separate tranche
notices that the Investor purchase up to a total of $5.0 million of Series B
preferred stock. However, we will require additional capital beyond these
funding sources in order to implement our business plans.

We have implemented cost savings
measures to limit our cash outflows and although we continue to seek strategic
investors or partners, in light of our current cash position, we may in the near
term be forced to cease operations. An inability to raise additional funding in
the very near term may cause us to file a voluntary petition for reorganization
under the United States Bankruptcy Code, liquidate assets, and/or pursue other
such actions that could adversely affect future operations. A wide variety of
factors relating to the Company including those described in the section
entitled Risk Factors in Part I Item 1A of our Annual Report on Form 10-K, as
well as external conditions, could adversely affect our ability to secure
additional funding necessary to continue operations and the terms of any funding
that we secure.

Commitments.At June 30,
2012, we had no outstanding purchase orders for equipment and improvements.
Other 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 financial statements in our
Annual Report on Form 10-K.

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

We lease 33,000 square feet of
warehouse and office space in Union City, California under a lease which expires
in December 2012. This facility is the location of our corporate headquarters as
well as our development and proprietary deposition equipment.

Item 3. Quantitative and Qualitative Disclosures about
Market Risk

Our exposure to market risk for a
change in interest rates relates primarily to interest earned on our cash and
cash equivalents balance. We maintain our portfolio in high credit quality cash
deposits and money market funds that invest in Treasury instruments with
carrying values that approximate market value. Due to the short duration of our
investment portfolio, we do not expect that a 10% change in interest rates would
have a material effect on the fair market value of our cash and cash
equivalents.

We also have market risk arising
from changes in foreign currency exchange rates related to expenses and/or
equipment we purchase from foreign businesses. Our payments related to these
purchases may be denominated in foreign currency. We believe that such exposure
does not present a significant risk due to the limited number of transactions
and/or accounts payable denominated in foreign currency. Consequently, we do not
believe that a 10% change in foreign currency exchange rates would have a
significant effect on our future net income or cash flows.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

We maintain disclosure controls
and procedures that are designed to ensure that information required to be
disclosed in our reports pursuant to the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions
rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and utilized, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily is required to apply its
judgment in evaluating disclosure controls and procedures.

As required by Rule 13a-15(b) or
Rule 15d-15(b) under the Exchange Act, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures,
as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act, as of the
end of the period covered by this report. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of June 30, 2012.

20

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Changes in Internal Control Over Financial
Reporting

There were no changes in our
internal control over financial reporting during the quarter ended June 30, 2012
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary conduct of our
business, we are subject to periodic lawsuits, investigations and claims,
including routine employment matters. The following is a summary of the material
legal proceedings to which we are a party at this time.

On January 6, 2010, New York
State Urban Development, d/b/a/ Empire State Development Corporation (ESDC),
filed a breach of contract action against us. This action stems from the Grant
Disbursement Award we entered into with ESDC when we relocated our headquarters
to New York in 2004. ESDC has been awarded a judgment of approximately $520,000
and is currently in the process of enforcing its judgment to recover such
damages.

Item 1A. Risk Factors

Item 1A (Risk Factors) of our
annual report on Form 10-K for our fiscal year ended December 31, 2011 (Annual
Report) sets forth information relating to important risks and uncertainties
that could materially adversely affect our business, financial condition or
operating results. The risks and uncertainties described in our Annual Report do
not constitute all the risk factors that pertain to our business but we do
believe that they reflect the more important ones. Accordingly, you should
review and consider such Risk Factors in making any investment decision with
respect to our securities. An investment in our securities continues to involve
a high degree of risk. There has been no material changes in the Risk Factors
contained in our Annual Report.

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

On January 25, 2012, we entered
into a securities purchase agreement with Michael Moretti. Pursuant to the
securities purchase agreement, Mr. Moretti agreed to loan us $225,000 to fund
operating capital and general corporate purposes. On January 25, 2012, we issued
Mr. Moretti (a) a secured convertible promissory note and (b) a warrant to
purchase 192,858 shares of our common stock (subject to adjustment for certain
corporate transactions). The note carries an interest rate of 10% per annum and
is convertible into shares of our common stock based on a $1.75 conversion price
(subject to adjustment for certain corporate transactions). The note, to the
extent that any part of the outstanding principal amount is not converted into
shares of common stock, matures on the second anniversary of the date of the
note, is secured by all of our assets, and includes customary provisions
concerning events of default. The warrant is immediately exercisable, expires on
January 24, 2014, and has an exercise price of $2.80 per share if exercised
prior to July 25, 2012, $3.15 if exercised during the period July 25, 2012
through January 24, 2013, and $3.50 if exercised after January 24, 2013 and
through the expiration of the warrant. Additionally, the securities purchase
agreement contains a provision that if and only if, we consummate a fundamental
transaction that results in a change in control, we will use our commercially
reasonable best efforts to issue or to cause the other parties to the
fundamental transaction to issue securities (be it Common Stock, other
securities of DayStar, or securities of another party to the fundamental
transaction) equal to the original principal amount of the note divided by
$1.75.

On March 14, 2012, we entered
into a securities purchase agreement with Sunlogics Power Fund Management Inc.
Pursuant to the purchase agreement, Sunlogics Power Fund Management agreed to
loan us $500,000 for payment of outstanding liabilities and other working
capital purposes. On March 14, 2012, and March 16, 2012, we issued Sunlogics
Power Fund Management two senior convertible promissory notes, representing our
Senior Debt, in the principal amounts of $400,000 and $100,000, respectively.
The notes carry an interest rate of 6% per annum and each note is convertible
into shares of our common stock at a conversion price equal to the consolidated
closing bid price of our common stock on the last business day prior to the
issuance of the note (subject to adjustment for certain corporate transactions).
Each of the notes, to the extent that any part of the outstanding principal
amount is not converted into shares of common stock, matures on the first
anniversary of the date of the issuance of the note, and includes customary
provisions concerning events of default.

The agreements for each of the
transactions described above provide that in no event will we issue any common
stock or securities convertible into common stock in connection with the
conversion of the notes or exercise of the warrant without first obtaining
stockholder approval if such issuance would result in us breaching our
obligations under the applicable listing rules of The Nasdaq Stock Market.

21

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Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

(a) None.

(b) None.

22

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Item 6. Exhibits

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

|Exhibit   |                                                                                                                                                         
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|No.       | Description                                                                                                                                             
|3.1(1)    | Amended and Restated Certificate of Incorporation.                                                                                                      
|3.2(2)    | Certificate of Amendment of Amended and Restated
      Certificate of Incorporation.                                                                    
|3.3(3)    | Amended and Restated Bylaws.                                                                                                                            
|3.4(4)    | Text of Amendment of Amended and Restated Bylaws                                                                                                        
|3.5(5)    | Certificate of Designations, Preferences and Rights of a
      Series of Preferred Stock classifying and designating the Series B
      Preferred Stock.
|4.1(6)    | Form of Common Stock Certificate.                                                                                                                       
|4.2(6)    | Form of Class A Public Warrant.                                                                                                                         
|4.3(6)    | Form of Class B Public Warrant.                                                                                                                         
|4.4(6)    | Form of Unit Certificate.                                                                                                                               
|4.5(6)    | Form of Warrant Agent Agreement.                                                                                                                        
|4.6(6)    | Form of Representatives Warrant.                                                                                                                       
|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.  
|101.INS** | XBRL Instance Document                                                                                                                                  
|101.SCH** | XBRL Taxonomy Extension Schema Document                                                                                                                 
|101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document                                                                                                   
|101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document                                                                                                    
|101.LAB** | XBRL Taxonomy Extension Label Linkbase Document                                                                                                         
|101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document                                                                                                  

|**  | Submitted herewith. Users of this data are advised that,
      pursuant to Rule 406T of Regulation S-T, these interactive data files are
      deemed not filed or part of a registration statement or prospectus for
      purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed
      not filed for purposes of Section 18 of the Securities Exchange Act of
      1934, and otherwise are not subject to liability under those
    sections.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Quarterly Report on Form
      10-QSB filed with the SEC on August 11, 2006.                                                                                                                                                                                                                                                                                                                                                    
|(2) | Incorporated by reference to our Quarterly Reports on
      Form 10-Q filed with the SEC on November 14, 2008 and April 9,
  2012.                                                                                                                                                                                                                                                                                                                               
|(3) | Incorporated by reference to our Quarterly Report on Form
      10-Q filed with the SEC on August 7, 2008.                                                                                                                                                                                                                                                                                                                                                       
|(4) | Incorporated by reference to our Current Report on Form
      8-K filed with the SEC on January 25, 2010.                                                                                                                                                                                                                                                                                                                                                        
|(5) | Incorporated by reference to our Current Report on Form
      8-K filed with the SEC on February 3, 2011.                                                                                                                                                                                                                                                                                                                                                        
|(6) | Incorporated by reference to our Registration Statement
      on Form SB-2 filed with the SEC on November 7,
2003.                                                                                                                                                                                                                                                                                                                                               

23

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SIGNATURES

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

|                      | DAYSTAR TECHNOLOGIES, INC.
|--------------------- | --------------------------
|                      |                           
|                      |                           
|Date: August 17, 2012 | By:                       
|                      |                           
|                      |                           
|                      |                           
|                      |                           
|Date: August 17, 2012 | By:                       
|                      |                           
|                      |                           

24

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EXHIBIT INDEX

|Exhibit   |                                                                                                                                                         
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|No.       | Description                                                                                                                                             
|3.1(1)    | Amended and Restated
      Certificate of Incorporation.                                                                                                
|3.2(2)    | Certificate of Amendment of Amended and Restated
      Certificate of Incorporation.                                                                    
|3.3(3)    | Amended and Restated Bylaws.                                                                                                                            
|3.4(4)    | Text of Amendment of Amended and Restated Bylaws                                                                                                        
|3.5(5)    | Certificate of Designations, Preferences and Rights of a
      Series of Preferred Stock classifying and designating the Series B
      Preferred Stock.
|4.1(6)    | Form of Common Stock Certificate.                                                                                                                       
|4.2(6)    | Form of Class A Public Warrant.                                                                                                                         
|4.3(6)    | Form of Class B Public Warrant.                                                                                                                         
|4.4(6)    | Form of Unit Certificate.                                                                                                                               
|4.5(6)    | Form of Warrant Agent Agreement.                                                                                                                        
|4.6(6)    | Form of Representatives Warrant.                                                                                                                       
|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.  
|101.INS** | XBRL Instance Document                                                                                                                                  
|101.SCH** | XBRL Taxonomy Extension Schema Document                                                                                                                 
|101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document                                                                                                   
|101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document                                                                                                    
|101.LAB** | XBRL Taxonomy Extension Label Linkbase Document                                                                                                         
|101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document                                                                                                  

|**  | Submitted herewith. Users of this data are advised that,
      pursuant to Rule 406T of Regulation S-T, these interactive data files are
      deemed not filed or part of a registration statement or prospectus for
      purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed
      not filed for purposes of Section 18 of the Securities Exchange Act of
      1934, and otherwise are not subject to liability under those
    sections.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Quarterly Report on Form
      10-QSB filed with the SEC on August 11, 2006.                                                                                                                                                                                                                                                                                                                                                    
|(2) | Incorporated by reference to our Quarterly Reports on
      Form 10-Q filed with the SEC on November 14, 2008 and April 9,
  2012.                                                                                                                                                                                                                                                                                                                               
|(3) | Incorporated by reference to our Quarterly Report on Form
      10-Q filed with the SEC on August 7, 2008.                                                                                                                                                                                                                                                                                                                                                       
|(4) | Incorporated by reference to our Current Report on Form
      8-K filed with the SEC on January 25, 2010.                                                                                                                                                                                                                                                                                                                                                        
|(5) | Incorporated by reference to our Current Report on Form
      8-K filed with the SEC on February 3, 2011.                                                                                                                                                                                                                                                                                                                                                        
|(6) | Incorporated by reference to our Registration Statement
      on Form SB-2 filed with the SEC on November 7,
2003.                                                                                                                                                                                                                                                                                                                                               

25

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