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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, 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 September 30, 2009

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 incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|2972 Stender Way Santa Clara, California |  | 95054     
|(Address of principal executive offices) |  | (Zip Code)

(408) 907-4600

(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 such filing requirements for the past 90 days.    Yes  x    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).    Yes   ̈    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         |  | x
|                        |  |                                                 | 
|Non-accelerated filer   |  |  ̈ (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

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 at November 5,
2009
|Common Stock par value $0.01 per share |  | 33,538,112                     









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DAYSTAR TECHNOLOGIES, INC.

Quarterly Report on Form 10-Q

Quarterly Period Ended September 30, 2009

Table of Contents



|                                                                                                                                                                                                      |  |   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Part I  Financial Information                                                                                                                                                                        |  |   
|                                                                                                                                                                                                      | 
|Item 1. Financial Statements                                                                                                                                                                          |  |   
|                                                                                                                                                                                                      | 
|Balance SheetsAs of September 30, 2009 (unaudited) and December 31, 2008                                                                                                                             |  | 3 
|                                                                                                                                                                                                      | 
|Statements of OperationsFor the Three and Nine Months Ended September 
30, 2009 and 2008 and For the Period From July 1, 2005 (Inception of the Development Stage) to September 30, 2009 (unaudited) |  | 4 
|                                                                                                                                                                                                      | 
|Statement of Changes in Stockholders EquityFor the Period From July 
1, 2005 (Inception of the Development Stage) to September 30, 2009 (unaudited)                                                 |  | 5 
|                                                                                                                                                                                                      | 
|Statements of Cash Flows for the Nine Months Ended September 
30, 2009 and 2008 and For the Period From July 1, 2005 (Inception of the Development Stage) to September 30, 2009 (unaudited)           |  | 7 
|                                                                                                                                                                                                      | 
|Notes to Financial Statements (unaudited)                                                                                                                                                             |  | 8 
|                                                                                                                                                                                                      | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                         |  | 14
|                                                                                                                                                                                                      | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                    |  | 19
|                                                                                                                                                                                                      | 
|Item 4. Controls and Procedures                                                                                                                                                                       |  | 19
|                                                                                                                                                                                                      | 
|PART II  Other Information                                                                                                                                                                           |  |   
|                                                                                                                                                                                                      | 
|Item 1. Legal Proceedings                                                                                                                                                                             |  | 19
|                                                                                                                                                                                                      | 
|Item 1A. Risk Factors                                                                                                                                                                                 |  | 20
|                                                                                                                                                                                                      | 
|Item 2. Recent Sales of Unregistered Securities and Use of Proceeds                                                                                                                                   |  | 21
|                                                                                                                                                                                                      | 
|Item 3. Defaults Upon Senior Securities                                                                                                                                                               |  | 21
|                                                                                                                                                                                                      | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                                                                           |  | 21
|                                                                                                                                                                                                      | 
|Item 5. Other Information                                                                                                                                                                             |  | 21
|                                                                                                                                                                                                      | 
|Item 6. Exhibits                                                                                                                                                                                      |  | 22
|                                                                                                                                                                                                      | 
|Signatures                                                                                                                                                                                            |  | 23



2



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PART I. FINANCIAL INFORMATION



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

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS



|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------------ | - | ---------------- | - | ----------- | -
|                                                                                                                                                                               |  | September 30,2009 |              |   | December 31,2008 |  
|                                                                                                                                                                               |  | (Unaudited)       |              |   |                  |  
|ASSETS                                                                                                                                                                         |  |                   |              |   |                  |   |             |  
|Current Assets:                                                                                                                                                                |  |                   |              |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                      |  | $                 | 1,675,931    |   |                  | $ | 17,120,401  |  
|Other current assets                                                                                                                                                           |  |                   | 377,084      |   |                  |   | 543,357     |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Total current assets                                                                                                                                                           |  |                   | 2,053,015    |   |                  |   | 17,663,758  |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Property and Equipment, at cost                                                                                                                                                |  |                   | 53,262,329   |   |                  |   | 46,022,825  |  
|Less accumulated depreciation and amortization                                                                                                                                 |  |                   | (5,650,243   | ) |                  |   | (8,942,105  | )
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Net property and equipment                                                                                                                                                     |  |                   | 47,612,086   |   |                  |   | 37,080,720  |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Other Assets:                                                                                                                                                                  |  |                   |              |   |                  |   |             |  
|Other assets                                                                                                                                                                   |  |                   | 309,321      |   |                  |   | 204,108     |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Total Assets                                                                                                                                                                   |  | $                 | 49,974,422   |   |                  | $ | 54,948,586  |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  |                   |              |   |                  |   |             |  
|Current Liabilities:                                                                                                                                                           |  |                   |              |   |                  |   |             |  
|Accounts payable and accrued expenses                                                                                                                                          |  | $                 | 18,184,380   |   |                  | $ | 7,554,814   |  
|Notes and capital leases payable, current portion, net of discount of $1,721,718 and $0, respectively                                                                          |  |                   | 278,282      |   |                  |   | 171,983     |  
|Stock warrants                                                                                                                                                                 |  |                   | 416,667      |   |                  |   |            |  
|Deferred rent, current portion                                                                                                                                                 |  |                   | 136,769      |   |                  |   | 175,212     |  
|Deferred revenue                                                                                                                                                               |  |                   |             |   |                  |   | 420,000     |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Total current liabilities                                                                                                                                                      |  |                   | 19,016,098   |   |                  |   | 8,322,009   |  
|Long-Term Liabilities:                                                                                                                                                         |  |                   |              |   |                  |   |             |  
|Deferred rent                                                                                                                                                                  |  |                   | 3,375,917    |   |                  |   | 2,951,557   |  
|Conversion feature                                                                                                                                                             |  |                   | 1,128,066    |   |                  |   |            |  
|Stock warrants                                                                                                                                                                 |  |                   | 293,898      |   |                  |   | 125,481     |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Total long-term liabilities                                                                                                                                                    |  |                   | 4,797,881    |   |                  |   | 3,077,038   |  
|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; 33,538,112 and 33,438,862 shares issued and outstanding at
September 30, 2009 and December 31, 2008, respectively |  |                   | 335,381      |   |                  |   | 334,389     |  
|Additional paid-in capital                                                                                                                                                     |  |                   | 143,264,901  |   |                  |   | 140,179,025 |  
|Accumulated deficit                                                                                                                                                            |  |                   | (10,145,391  | ) |                  |   | (10,145,391 | )
|Deficit accumulated during the development stage                                                                                                                               |  |                   | (107,294,448 | ) |                  |   | (86,818,484 | )
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                     |  |                   | 26,160,443   |   |                  |   | 43,549,539  |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  
|Total Liabilities and Stockholders Equity                                                                                                                                     |  | $                 | 49,974,422   |   |                  | $ | 54,948,586  |  
|                                                                                                                                                                               |  |                   |              |   |                  |   |             |  

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 Three MonthsEnded
September 30, |            |   | For the Nine MonthsEnded
September 30, |   |            | For the Period fromJuly 1, 2005(Inception of theDevelopment Stage)to September 30,2009 | 
|                                                               |  | 2009                                    |            |   | 2008                                   |   |            | 2009                                                                                   |  |   | 2008        |   | 
|Revenue:                                                       |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Product revenue                                                |  | $                                       |           |   |                                        | $ |           |                                                                                        |  | $ |            |   |  | $ |            |   |  | $ | 3,528        |  
|Research and development contract revenue                      |  |                                         |           |   |                                        |   |           |                                                                                        |  |   |            |   |  |   |            |   |  |   | 615,000      |  
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Total revenue                                                  |  |                                         |           |   |                                        |   |           |                                                                                        |  |   |            |   |  |   |            |   |  |   | 618,528      |  
|Costs and Expenses:                                            |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Research and development                                       |  |                                         | 2,998,177  |   |                                        |   | 5,135,579  |                                                                                        |  |   | 12,164,271  |   |  |   | 11,991,015  |   |  |   | 52,422,186   |  
|Selling, general and administrative                            |  |                                         | 2,006,535  |   |                                        |   | 2,016,110  |                                                                                        |  |   | 4,846,650   |   |  |   | 6,806,396   |   |  |   | 28,265,040   |  
|Restructuring                                                  |  |                                         |           |   |                                        |   |           |                                                                                        |  |   |            |   |  |   |            |   |  |   | 3,280,051    |  
|Depreciation and amortization                                  |  |                                         | 807,716    |   |                                        |   | 783,268    |                                                                                        |  |   | 2,795,026   |   |  |   | 2,307,672   |   |  |   | 11,177,482   |  
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Total costs and expenses                                       |  |                                         | 5,812,428  |   |                                        |   | 7,934,957  |                                                                                        |  |   | 19,805,947  |   |  |   | 21,105,083  |   |  |   | 95,144,759   |  
|Other Income (Expense):                                        |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Other (expense) income                                         |  |                                         | (341,985   | ) |                                        |   | 268,394    |                                                                                        |  |   | (485,278    | ) |  |   | 716,165     |   |  |   | 2,263,336    |  
|Interest expense                                               |  |                                         | (36,390    | ) |                                        |   | (8,877     | )                                                                                      |  |   | (105,597    | ) |  |   | (32,039     | ) |  |   | (2,446,584   | )
|Amortization of note discount and financing costs              |  |                                         | (107,483   | ) |                                        |   |           |                                                                                        |  |   | (107,483    | ) |  |   |            |   |  |   | (9,031,428   | )
|Gain on derivative liabilities                                 |  |                                         | 128,983    |   |                                        |   | 926,664    |                                                                                        |  |   | 28,341      |   |  |   | 1,914,782   |   |  |   | 2,537,928    |  
|Loss on extinguishment of debt                                 |  |                                         |           |   |                                        |   |           |                                                                                        |  |   |            |   |  |   |            |   |  |   | (6,091,469   | )
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Total other income (expense)                                   |  |                                         | (356,875   | ) |                                        |   | 1,186,181  |                                                                                        |  |   | (670,017    | ) |  |   | 2,598,908   |   |  |   | (12,768,217  | )
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Net Loss                                                       |  | $                                       | (6,169,303 | ) |                                        | $ | (6,748,776 | )                                                                                      |  | $ | (20,475,964 | ) |  | $ | (18,506,175 | ) |  | $ | (107,294,448 | )
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Weighted Average Common Shares Outstanding (Basic And Diluted) |  |                                         | 33,354,884 |   |                                        |   | 33,348,373 |                                                                                        |  |   | 33,411,894  |   |  |   | 33,073,037  |   |  |   |              |  
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Net Loss Per Share (Basic and Diluted)                         |  | $                                       | (0.18      | ) |                                        | $ | (0.20      | )                                                                                      |  | $ | (0.61       | ) |  | $ | (0.56       | ) |  |   |              |  
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  

See accompanying notes to these financial statements.



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DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE PERIOD FROM
JULY 1, 2005 (INCEPTION OF THE DEVELOPMENT STAGE) TO SEPTEMBER 30, 2009

(Unaudited)



|                                                                                                   |  |              |  |                     |         |        |                          |   |        |                                  |      |   |                    |   |            |                                              |  |   |          |   |  |   |             |   |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------- | ------- | ------ | ------------------------ | - | ------ | -------------------------------- | ---- | - | ------------------ | - | ---------- | -------------------------------------------- |  | - | -------- | - |  | - | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                   |  | Common Stock |  | Class BCommon Stock |         |        | AdditionalPaid-InCapital |   |        | DeferredEquity BasedCompensation |      |   | AccumulatedDeficit |   |            | DeficitAccumulatedDuring theDevelopmentStage |  |   | Total    |  
|                                                                                                   |  | Shares       |  | Amount              |         | Shares |                          |   | Amount |                                  |      |   |                    |   |           
|BALANCES, July 1, 2005                                                                             |  | 5,083,258    |  | $                   | 50,833  |        | 29,000                   |   |        | $                                | 290  |   |                    | $ | 22,443,181 |                                              |  | $ | (110,770 | ) |  | $ | (10,145,391 | ) |  | $ |            |   |  | $ | 12,238,143  |  
|Exercise of warrants and stock options, 7/05 - 12/05 at $6.00 $8.25 per share                     |  | 1,190,748    |  |                     | 11,907  |        |                         |   |        |                                  |     |   |                    |   | 7,208,295  |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 7,220,202   |  
|Conversion of Class B common stock                                                                 |  | 58,000       |  |                     | 580     |        | (29,000                  | ) |        |                                  | (290 | ) |                    |   | (290       | )                                            |  |   |         |   |  |   |            |   |  |   |            |   |  |   |            |  
|Share-based compensation                                                                           |  | 38,750       |  |                     | 388     |        |                         |   |        |                                  |     |   |                    |   | 411,912    |                                              |  |   | (292,940 | ) |  |   |            |   |  |   |            |   |  |   | 119,360     |  
|Net loss                                                                                           |  |             |  |                     |        |        |                         |   |        |                                  |     |   |                    |   |           |                                              |  |   |         |   |  |   |            |   |  |   | (3,904,151  | ) |  |   | (3,904,151  | )
|                                                                                                   |  |              |  |                     |         |        |                          |   |        |                                  |      |   |                    |   |            |                                              |  |   |          |   |  |   |             |   |  |   |             |   |  |   |             |  
|BALANCES, December 31, 2005                                                                        |  | 6,370,756    |  | $                   | 63,708  |        |                         |   |        | $                                |     |   |                    | $ | 30,063,098 |                                              |  | $ | (403,710 | ) |  | $ | (10,145,391 | ) |  | $ | (3,904,151  | ) |  | $ | 15,673,554  |  
|Reclassification upon adoption of SFAS 123(R)                                                      |  |             |  |                     |        |        |                         |   |        |                                  |     |   |                    |   | (403,710   | )                                            |  |   | 403,710  |   |  |   |            |   |  |   |            |   |  |   |            |  
|Exercise of warrants and stock options, 1/06, 3/06 & 9/06 at $2.06$7.50 per share                 |  | 132,815      |  |                     | 1,328   |        |                         |   |        |                                  |     |   |                    |   | 670,544    |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 671,872     |  
|Share-based compensation                                                                           |  | 177,062      |  |                     | 1,771   |        |                         |   |        |                                  |     |   |                    |   | 1,320,949  |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 1,322,720   |  
|Beneficial conversion feature on convertible note                                                  |  |             |  |                     |        |        |                         |   |        |                                  |     |   |                    |   | 1,223,842  |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 1,223,842   |  
|Shares issued in payment of principal and interest on convertible note, 8/06 -12/06                |  | 1,143,036    |  |                     | 11,430  |        |                         |   |        |                                  |     |   |                    |   | 7,366,729  |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 7,378,159   |  
|Warrants issued for placement of convertible note at $5.38 per share                               |  |             |  |                     |        |        |                         |   |        |                                  |     |   |                    |   | 140,419    |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 140,419     |  
|Net loss                                                                                           |  |             |  |                     |        |        |                         |   |        |                                  |     |   |                    |   |           |                                              |  |   |         |   |  |   |            |   |  |   | (20,441,201 | ) |  |   | (20,441,201 | )
|                                                                                                   |  |              |  |                     |         |        |                          |   |        |                                  |      |   |                    |   |            |                                              |  |   |          |   |  |   |             |   |  |   |             |   |  |   |             |  
|BALANCES, December 31, 2006                                                                        |  | 7,823,669    |  | $                   | 78,237  |        |                         |   |        | $                                |     |   |                    | $ | 40,381,871 |                                              |  | $ |         |   |  | $ | (10,145,391 | ) |  | $ | (24,345,352 | ) |  | $ | 5,969,365   |  
|Exercise of warrants and stock options, 1/07, 3/07, 6/07, 9/07 & 11/07 at $2.00$3.45 per share    |  | 518,200      |  |                     | 5,182   |        |                         |   |        |                                  |     |   |                    |   | 3,169,135  |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 3,174,317   |  
|Share-based compensation                                                                           |  | 196,438      |  |                     | 1,965   |        |                         |   |        |                                  |     |   |                    |   | 4,088,080  |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 4,090,045   |  
|Issuance of shares pursuant to offering, 2/07 at $2.00 per share                                   |  | 2,500,000    |  |                     | 25,000  |        |                         |   |        |                                  |     |   |                    |   | 4,975,000  |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 5,000,000   |  
|Issuance of shares pursuant to secondary offering, 10/07 at $4.25 per share, net of offering costs |  | 17,250,000   |  |                     | 172,500 |        |                         |   |        |                                  |     |   |                    |   | 67,722,418 |                                              |  |   |         |   |  |   |            |   |  |   |            |   |  |   | 67,894,918  |  



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|                                                                                                                            |  |              |  |                     |         |                          |   |                                  |   |                    |  |   |                                              |  |   |       |  |   |             |   |  |   |              |   |  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------- | ------- | ------------------------ | - | -------------------------------- | - | ------------------ |  | - | -------------------------------------------- |  | - | ----- |  | - | ----------- | - |  | - | ------------ | - |  | - | ----------- | -
|                                                                                                                            |  | Common Stock |  | Class BCommon Stock |         | AdditionalPaid-InCapital |   | DeferredEquity BasedCompensation |   | AccumulatedDeficit |  |   | DeficitAccumulatedDuring theDevelopmentStage |  |   | Total | 
|                                                                                                                            |  | Shares       |  | Amount              |         | Shares                   |   | Amount                           |   |                    |  |   |                                             
|Shares issued in payment of principal and interest on convertible note, 1/07 at $1.49 per share and 2/07 at $2.00 per
share |  | 3,875,384    |  |                     | 38,754  |                          |  |                                  |   |                   |  |   | 7,288,171                                    |  |   |      |  |   |            |   |  |   |             |   |  |   | 7,326,925   |  
|Loss on extinguishment due to excess of fair market value of shares issued over issuance price                              |  |             |  |                     |        |                          |  |                                  |   |                   |  |   | 5,369,278                                    |  |   |      |  |   |            |   |  |   |             |   |  |   | 5,369,278   |  
|Shares issued for placement of note and offering 3/07 at $2.00 per share                                                    |  | 457,571      |  |                     | 4,575   |                          |  |                                  |   |                   |  |   | 2,393,096                                    |  |   |      |  |   |            |   |  |   |             |   |  |   | 2,397,671   |  
|Net loss                                                                                                                    |  |             |  |                     |        |                          |  |                                  |   |                   |  |   |                                             |  |   |      |  |   |            |   |  |   | (36,142,861  | ) |  |   | (36,142,861 | )
|                                                                                                                            |  |              |  |                     |         |                          |   |                                  |   |                    |  |   |                                              |  |   |       |  |   |             |   |  |   |              |   |  |   |             |  
|BALANCES, December 31, 2007                                                                                                 |  | 32,621,262   |  | $                   | 326,213 |                          |  |                                  | $ |                   |  | $ | 135,387,049                                  |  | $ |      |  | $ | (10,145,391 | ) |  | $ | (60,488,213  | ) |  | $ | 65,079,658  |  
|Exercise of stock options, 6/08 at $3.14 per share                                                                          |  | 1,600        |  |                     | 16      |                          |  |                                  |   |                   |  |   | 5,008                                        |  |   |      |  |   |            |   |  |   |             |   |  |   | 5,024       |  
|Share-based compensation                                                                                                    |  | 816,000      |  |                     | 8,160   |                          |  |                                  |   |                   |  |   | 4,786,968                                    |  |   |      |  |   |            |   |  |   |             |   |  |   | 4,795,128   |  
|Net loss                                                                                                                    |  |             |  |                     |        |                          |  |                                  |   |                   |  |   |                                             |  |   |      |  |   |            |   |  |   | (26,330,271  | ) |  |   | (26,330,271 | )
|                                                                                                                            |  |              |  |                     |         |                          |   |                                  |   |                    |  |   |                                              |  |   |       |  |   |             |   |  |   |              |   |  |   |             |  
|BALANCES, December 31, 2008                                                                                                 |  | 33,438,862   |  | $                   | 334,389 |                          |  |                                  | $ |                   |  | $ | 140,179,025                                  |  | $ |      |  | $ | (10,145,391 | ) |  | $ | (86,818,484  | ) |  | $ | 43,549,539  |  
|Share-based compensation                                                                                                    |  | 99,250       |  |                     | 992     |                          |  |                                  |   |                   |  |   | 3,004,965                                    |  |   |      |  |   |            |   |  |   |             |   |  |   | 3,005,957   |  
|Warrants issued in connection with convertible note at $0.50 per share                                                      |  |             |  |                     |        |                          |  |                                  |   |                   |  |   | 80,911                                       |  |   |      |  |   |            |   |  |   |             |   |  |   | 80,911      |  
|Net loss                                                                                                                    |  |             |  |                     |        |                          |  |                                  |   |                   |  |   |                                             |  |   |      |  |   |            |   |  |   | (20,475,964  | ) |  |   | (20,475,964 | )
|                                                                                                                            |  |              |  |                     |         |                          |   |                                  |   |                    |  |   |                                              |  |   |       |  |   |             |   |  |   |              |   |  |   |             |  
|BALANCES, September 30, 2009                                                                                                |  | 33,538,112   |  | $                   | 335,381 |                          |  |                                  | $ |                   |  | $ | 143,264,901                                  |  | $ |      |  | $ | (10,145,391 | ) |  | $ | (107,294,448 | ) |  | $ | 26,160,443  |  
|                                                                                                                            |  |              |  |                     |         |                          |   |                                  |   |                    |  |   |                                              |  |   |       |  |   |             |   |  |   |              |   |  |   |             |  

See accompanying notes to these financial statements.



6



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|----------------------------------------------------------------------- |  | -------------------------------------- | ----------- | - | -------------------------------------------------------------------------------------- | - | ----------- | - |  | - | ------------ | -
|                                                                        |  | For the Nine Months EndedSeptember 30, |             |   | For the Periodfrom
July 1, 2005(Inception of theDevelopment Stage)to September 30,2009 |  
|                                                                        |  | 2009                                   |             |   | 2008                                                                                   |   |            
|Cash Flows from Operating Activities:                                   |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Net loss                                                                |  | $                                      | (20,475,964 | ) |                                                                                        | $ | (18,506,175 | ) |  | $ | (107,294,448 | )
|Adjustments to reconcile net loss to cash used in operating activities: |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Depreciation and amortization                                           |  |                                        | 2,795,026   |   |                                                                                        |   | 2,307,672   |   |  |   | 11,177,482   |  
|Share-based compensation                                                |  |                                        | 3,005,957   |   |                                                                                        |   | 3,673,286   |   |  |   | 13,471,263   |  
|Non-cash interest                                                       |  |                                        | 94,573      |   |                                                                                        |   |            |   |  |   | 1,699,657    |  
|Amortization of note discount and non-cash financing costs              |  |                                        | 107,483     |   |                                                                                        |   |            |   |  |   | 8,489,728    |  
|Gain on derivative liabilities                                          |  |                                        | (28,341     | ) |                                                                                        |   | (1,914,782  | ) |  |   | (2,537,929   | )
|Shares issued for restructuring                                         |  |                                        |            |   |                                                                                        |   |            |   |  |   | 1,278,253    |  
|Loss on sale of fixed assets                                            |  |                                        | 340,622     |   |                                                                                        |   |            |   |  |   | 340,622      |  
|Loss on extinguishment of debt                                          |  |                                        |            |   |                                                                                        |   |            |   |  |   | 6,091,469    |  
|Changes in operating assets and liabilities:                            |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Other assets                                                            |  |                                        | 35,678      |   |                                                                                        |   | (33,675     | ) |  |   | (604,793     | )
|Accounts payable and accrued expenses                                   |  |                                        | (2,528,740  | ) |                                                                                        |   | 1,959,171   |   |  |   | 3,109,691    |  
|Deferred rent                                                           |  |                                        | 385,917     |   |                                                                                        |   | 705,843     |   |  |   | 1,515,265    |  
|Deferred revenue                                                        |  |                                        |            |   |                                                                                        |   | (2,333      | ) |  |   | 217,618      |  
|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Net cash used in operating activities                                   |  |                                        | (16,267,789 | ) |                                                                                        |   | (11,810,993 | ) |  |   | (63,046,122  | )
|Cash Flows from Investing Activities:                                   |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Purchase of investments                                                 |  |                                        |            |   |                                                                                        |   | (47,679,060 | ) |  |   | (71,957,732  | )
|Proceeds from sale of investments                                       |  |                                        |            |   |                                                                                        |   | 39,050,000  |   |  |   | 72,662,973   |  
|Purchase of equipment and improvements                                  |  |                                        | (2,929,698  | ) |                                                                                        |   | (14,999,501 | ) |  |   | (42,567,567  | )
|Proceeds from sale of assets                                            |  |                                        | 1,925,000   |   |                                                                                        |   |            |   |  |   | 1,928,120    |  
|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Net cash used in investing activities                                   |  |                                        | (1,004,698  | ) |                                                                                        |   | (23,628,561 | ) |  |   | (39,934,206  | )
|Cash Flows from Financing Activities:                                   |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Proceeds from sale of stock                                             |  |                                        |            |   |                                                                                        |   |            |   |  |   | 78,312,500   |  
|Proceeds from issuance of notes                                         |  |                                        | 2,000,000   |   |                                                                                        |   |            |   |  |   | 26,000,000   |  
|Payments on notes and capital leases                                    |  |                                        | (171,983    | ) |                                                                                        |   | (131,307    | ) |  |   | (11,495,310  | )
|Cost of financing                                                       |  |                                        |            |   |                                                                                        |   |            |   |  |   | (6,342,379   | )
|Proceeds from exercise of warrants and stock options                    |  |                                        |            |   |                                                                                        |   | 5,024       |   |  |   | 8,810,120    |  
|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Net cash provided by (used in) financing activities                     |  |                                        | 1,828,017   |   |                                                                                        |   | (126,283    | ) |  |   | 95,284,931   |  
|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Decrease in cash and cash equivalents                                   |  |                                        | (15,444,470 | ) |                                                                                        |   | (35,565,837 | ) |  |   | (7,695,397   | )
|Cash and cash equivalents, beginning of period                          |  |                                        | 17,120,401  |   |                                                                                        |   | 61,365,559  |   |  |   | 9,371,328    |  
|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Cash and cash equivalents, end of period                                |  | $                                      | 1,675,931   |   |                                                                                        | $ | 25,799,722  |   |  | $ | 1,675,931    |  
|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Supplemental Cash Flow Information:                                     |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Cash paid for interest                                                  |  | $                                      | 11,024      |   |                                                                                        | $ | 32,039      |   |  |   |              |  
|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Non-Cash Transactions:                                                  |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  
|Construction in progress equipment accrual                              |  | $                                      | 12,643,733  |   |                                                                                        | $ |            |   |  |   |              |  
|                                                                        |  |                                        |             |   |                                                                                        |   |             |   |  |   |              |  

See accompanying notes to these financial statements.



7



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Nature of Operations:

DayStar Technologies, Inc. (the Company) is a development stage enterprise that was formed in 1997 for the purpose of developing, manufacturing and marketing innovative products to the solar
photovoltaic (PV) industry. From its inception, the Company has focused primarily on thin film copper indium gallium diselenide (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. The Company intends to integrate this tool with commercially available thin film
manufacturing equipment which will provide a critically differentiated manufacturing process to produce monolithically integrated, CIGS-on-glass modules that address the grid-tied, ground-based PV market.

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, 2008. The condensed balance sheet as of December 31, 2008 has been derived from audited financial statements. The results of
operations for the nine months ended September 30, 2009 and 2008 are not necessarily indicative of the operating results for the full year.

In the opinion of management, all adjustments, consisting only of normal recurring accruals, have been made to present fairly the Companys financial position at September 30, 2009 and the
results of its operations and its cash flows for the nine months ended September 30, 2009 and 2008 and for the period from July 1, 2005 (Inception of the Development Stage) to September 30, 2009.

2. Liquidity and Future Operations:

The Companys financial statements for the year ended December 31, 2008 and for the nine months ended September 30, 2009 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 $20.5 million for the nine months ended
September 30, 2009. The Company anticipates it will continue to incur losses in the future as it commercializes its product. 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.

Commercialization efforts, including the completion and ramp-up of the Companys initial
module production line requires significant additional capital expenditures as well as associated continued development and administrative costs. In order to continue operations, including its development efforts utilizing its pre-production line,
fully build-out its initial manufacturing line and commence commercial shipments of its product, the Company requires immediate and substantial additional capital beyond its current cash on hand. To date, the Company has been unable to raise
substantial additional capital or complete an agreement with an investor or strategic partner. Although the Company continues to seek strategic investors or partners, in light of its current cash position, the Company implemented a significant
reduction in its workforce during the nine months ended September 30, 2009 and may in the near term be forced to cease or substantially curtail operations.

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.

For additional information on cost savings and fundraising measures implemented during the third quarter of 2009, see Note 4 Sale of
Assets regarding the sale by the Company of substantially all of its tangible assets located at its Halfmoon, New York facilities to Veeco Compound Semiconductor, Inc., and Note 5 Secured Convertible Promissory Note and Warrants
for information regarding a bridge loan received by the Company from Mr. Peter Alan Lacey.



8



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)



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.

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 $420,000 at both September 30, 2009 and December 31, 2008.

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 GAAP 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.

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 and nine months ended September 30, 2009 and 2008 was as follows:



|                                    |  |                                         |           |                                        |   |           |  |      |           |  |   |          
|----------------------------------- |  | --------------------------------------- | --------- | -------------------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                    |  | For the Three MonthsEnded
September 30, |           | For the Nine MonthsEnded
September 30,
|                                    |  | 2009                                    |           | 2008                                   |   | 2009      |  | 2008
|Share-based compensation:           |  |                                         |           |                                        |   |           |  |      |           |  |   |          
|Selling, general and administrative |  | $                                       | 823,062   |                                        | $ | 480,869   |  | $    | 1,314,187 |  | $ | 1,606,132
|Research and development            |  |                                         | 507,262   |                                        |   | 594,725   |  |      | 1,691,770 |  |   | 972,339  
|                                    |  |                                         |           |                                        |   |           |  |      |           |  |   |          
|Total share-based compensation      |  | $                                       | 1,330,324 |                                        | $ | 1,075,594 |  | $    | 3,005,957 |  | $ | 2,578,471
|                                    |  |                                         |           |                                        |   |           |  |      |           |  |   |          



9



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)



During the nine months ended September 30, 2009, the Company granted options to
purchase 86,400 shares of common stock at a prices ranging from $0.76 to $1.23 per share, all with a contractual life of ten years. Options to purchase 1,329,337 shares of common stock were forfeited during the nine months ended
September 30, 2009. During the nine months ended September 30, 2009 there were 50,000 shares of restricted stock awards granted and 276,250 shares of restricted stock awards forfeited. Additionally, there were 2,642,500 shares of
restricted stock units granted and 255,000 shares of restricted stock units forfeited.

Subsequent to September 30, 2009
and through the date of this filing, 62,301 options to purchase common stock were forfeited.

Derivative Stock
WarrantsCertain terms in a convertible note and related documents issued on May 25, 2006 as well as subsequent agreements entered into on January 19, 2007, namely the potential for cash settlement, require that the warrants
issued in conjunction with these documents be treated as a derivative instrument and, therefore, classified as a liability on the balance sheet. As such, the liability must be adjusted to fair value at the end of each reporting period and any
changes in fair value reported as a gain or loss on derivative liabilities in the statement of operations. In the event of a change in control of the Company, the warrant holders have the option of either exercising their warrants or requesting a
cash settlement at the fair value of the warrants. The Black-Scholes option-pricing model is used to estimate the warrant fair values. The Company has recorded liabilities on the balance sheet of $293,898 and $125,481 at September 30, 2009 and
December 31, 2008, respectively, which represent the amount of potential cash settlement due to the warrant holders in the event of a change in control.

ReclassificationsCertain reclassifications have been made to the 2008 financial statements to conform to the 2009 presentation. Such reclassifications had no impact on net loss.

Impact of Recently Issued Accounting Pronouncements 

Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 105-10, Generally Accepted Accounting Principles. ASC 105-10 establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification
supersedes all existing non-SEC accounting and reporting standards. The FASB will now issue new standards in the form of Accounting Standards Updates (ASUs). The FASB will not consider ASUs as authoritative in their own right. ASUs will
serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the changes in the Codification. References made to FASB guidance have been updated for the Codification throughout
this document.

FASB ASC 805 Business Combinations, Pre Codification SFAS No. 141 (revised 2007), Business
Combinations. On January 1, 2009, the Company adopted FASB ASC 805, Business Combinations, which replaces SFAS No. 141, Business Combinations, and requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. ASC 805 also requires the acquirer in a business combination achieved in stages to
recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. Additionally, ASC 805 requires acquisition related costs to be expensed in the period in which the
costs were incurred and the services are received instead of including such costs as part of the acquisition price. ASC 805 makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the
guidance in that literature to that provided in ASC 805. The adoption of ASC 805 had no impact on the Companys financial statements.

FASB ASC 820 Fair Value Measurements and Disclosures, Pre Codification SFAS No. 157, Fair Value Measurements. Effective January 1, 2008, the Company adopted the new
standard. The new standard defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value as follows:



| |  |  | Level 1Quoted prices in active markets for identical assets or liabilities.
| | - |  | ----------------------------------------------------------------------------



10



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)



| |  |  | Level 2Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

The adoption of this new standard for financial assets and liabilities, effective
January 1, 2008, did not have a material impact on the Companys financial statements. The Company adopted the new standard on January 1, 2009 for its nonfinancial assets and nonfinancial liabilities, which did not have a material
impact on its financial statements. See Note 5 Secured Convertible Promissory Note and Warrants and Note 6, Derivative Liabilities, below.

FASB ASC 810 Consolidation, Pre Codification SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. On January 1, 2009,
the Company adopted FASB ASC 810, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51, (ASC 810). ASC 810 amends Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest, previously called a minority interest, as
the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. ASC 810-10-65 requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity
separate from the parents equity; consolidated net income to be reported at amounts inclusive of both the parents and noncontrolling interests shares and, separately, the amounts of consolidated net income attributable to the
parent and noncontrolling interest all on the consolidated income statement; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in
net income based on such fair value. The adoption of ASC 810-10-65 had no impact on the Companys financial statements.

FASB ASC 855 Subsequent Events, Pre Codification SFAS No. 165,Subsequent Events. In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). The objective of
ASC 855 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 discusses two types of subsequent events:
(1) events that provide additional evidence about conditions that existed at the date of the balance sheet, and is recognized in the financial statements and (2) events that provide evidence about conditions that did not exist at the date
of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued, and not recognized at the balance sheet date. An entity shall also disclose the date through which subsequent
events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The requirements of ASC 855 are effective for interim and annual financial
periods ending after June 15, 2009. The requirements do not have a material impact on the Companys financial statements. The Company evaluated its September 30, 2009 financial statements for subsequent events through
November 9, 2009, the date the financial statements were available to be issued.

4. Sale of Assets

On July 15, 2009, the Company and Veeco Compound Semiconductor, Inc. (Veeco) entered into an Asset Purchase Agreement,
whereby the Company sold substantially all of its tangible assets located at its Halfmoon, New York facilities to Veeco for $2.0 million, of which $1.7 million was paid in cash at closing and $300,000 was to be held in escrow until December 31,
2009 for indemnification claims. The Company retained ownership of the intellectual property developed in New York for future use in either glass or flexible substrate PV modules. The transaction also allows the Company to continue its efforts on
its proprietary reactive sputter process currently in use to produce CIGS-on-glass photovoltaic modules without diminishing opportunities to re-enter flexible PV module markets when business, technology, and market conditions favor such a product.
Upon completion of the transaction, Veeco hired 18 employees of the Company who were located in Halfmoon.

On
September 18, 2009, the Company and Veeco amended the Asset Purchase Agreement to reduce the purchase price of the assets to $1,925,000. Simultaneously, the Company and Veeco terminated the Escrow Agreement, and $225,000 of the escrowed funds
were released to the Company with the remaining $75,000 of the escrowed funds released to Veeco. The Company recorded a loss on sale of assets related to this transaction of $340,622.



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DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)



5. Secured Convertible Promissory Note and Warrants

On September 21, 2009, the Company entered into a series of agreements with Mr. Peter Alan Lacey (the Holder) pursuant
to a bridge financing transaction providing for, among other things, the issuance of a secured convertible promissory note (the Note) in the aggregate principal amount of $2.0 million, a warrant to purchase 1,500,000 shares of the
Companys $.01 par value per share common stock (the First Warrant) and an additional warrant to purchase 1,666,667 shares of the Companys common stock upon the completion of an amendment to the Companys Shareholder
Rights Plan (the Second Warrant).

The Note is secured by all assets of the Company. Interest on the outstanding
principal amount shall accrue at the rate of 8% per annum, commencing September 21, 2009 and shall continue on the outstanding principal until paid in full. The Holder may, at its option at any time prior to payment in full of the Note,
elect to convert all or any part of the entire outstanding principal amount of the Note plus the accrued interest on the then outstanding balance into shares of the Companys common stock at a conversion price of $0.60 per share. If between the
date of the Note 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 $0.60 (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), then the conversion price of the Note will be reduced to the price of such Future Issuance; provided that the Holder will only be
permitted to convert that portion of the outstanding principal amount of the Note plus the accrued interest on the then outstanding balance that will not result in the issuance of more than 3,333,333 shares of common stock (subject to adjustment in
the event of any stock splits, stock dividends or other recapitalization of such class or series of capital stock subsequent to the date of such sale or issuance).

All principal and all unpaid accrued interest that has not been converted into common stock shall be due and payable on or before March 20, 2010, and may be extended at the option of the Holder. The
Company may prepay the Note at any time after one month following the date of the Note; provided that the Company shall give the Holder at least 30 calendar days advance written notice of the Companys intent so to prepay and the Holder shall
have the right to convert all or any portion of the Note, as applicable, at any time during such 30 calendar day period.

The
Notes conversion feature was determined to be an embedded derivative liability and therefore was bifurcated from the Note and recorded at fair value at issuance and is required to be adjusted to fair value at the end of each reporting period.
The fair value of the conversion feature on September 21, 2009 calculated using the Black Scholes model totaled $1.3 million. As of September 30, 2009, the fair value of the conversion feature decreased by $0.2 million to $1.1 million and
the Company recorded this change in fair value as a gain on derivative liabilities. At the date of issuance of the Note, the Second Warrant was required to be issued. In the event the Second Warrant was not issued, the Company would be liable to the
Holder for liquidated damages in the amount of $416,667 and therefore this amount was recorded as a liability and an increase to the discount on the Note. The Shareholder Rights Plan was amended on October 2, 2009 and the Second Warrant was
issued to the Holder and the Company reversed this liability to equity at that time.

The proceeds remaining after allocation
to the conversion feature and warrant liability for the Second Warrant were allocated on a relative fair value basis between the Note and the First Warrant and the amount allocated to the First Warrant was recorded as additional debt discount. The
discount attributable to the issuance date aggregate fair value of the conversion feature and warrants, totaling $1.8 million, is being amortized using the effective interest method over the term of the Note. During the three months ended
September 30, 2009, $0.1 million of this discount was amortized to expense.

The warrants issued on September 21,
2009 and October 2, 2009 are exercisable upon issuance and entitle the Holder to purchase up to 3,166,667 shares of common stock at an exercise price of $0.50 per share, as adjusted for standard anti-dilution provisions. The warrants are
exercisable for a period of two years from their respective issuance dates.

As a result of a free-standing registration
rights agreement, the Company has an obligation to register the shares underlying the Note and related warrants and has a continuing obligation to keep the registration statement effective. Failure to meet this obligation, as defined, will result in
liquidated damages of $20,000 per month during the time in which this requirement is not met. Mr. Lacey has agreed to extend the filing deadline for a period of sixty days from the original filing deadline of October 31, 2009.

Subsequent to these transactions, on October 19, 2009, Mr. Lacey was appointed Chairman of the Board of Directors for the
Company.



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DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)



6. Derivative Liabilities

As described in Note 5 Secured Convertible Promissory Note and Warrants the Company is accounting for the conversion feature in
the Note as an embedded derivative liability. The Company currently does not use hedging contracts to manage the risk of its overall exposure to interest rate and foreign currency changes. Neither the conversion feature nor the stock warrant
liability discussed below is considered a hedging instrument.

The Company is accounting for free-standing warrants issued in
May 2006 and February 2007 in connection with a convertible note, as derivative liabilities in accordance with FASB ASC 815 Derivatives and Hedging, Pre Codification SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), SFAS 157, SFAS 161, Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock,
and EITF No. 05-2, The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19, due to the potential for cash settlement. In the event of a change in control of the Company, warrant holders having the
right to purchase 600,003 shares of the Companys common stock would have the option of either exercising their warrants or requesting a cash settlement at the fair value of the warrants. Therefore, in accordance with ASC 820, the warrant
liabilities are adjusted to their fair value at the end of each reporting period. The Black-Scholes model is used to estimate the fair value of the warrants and the change in fair value each period is reported as gain or loss on derivative
liabilities. Generally, this accounting treatment will result in a reported loss during any accounting period in which there is a reported increase in the value of the Companys common stock on the NASDAQ Capital Market. Conversely, this
accounting treatment generally will result in a reported gain during any accounting period in which there is reported decrease in the value of the Companys common stock on the NASDAQ Capital Market.

The liability on the balance sheet at September 30, 2009 represents the amount of potential cash settlement due to the warrant holders
in the event of a change in control, and the change in the liability since December 31, 2007 is summarized as follows:



|                            |  |                        |            |  
|--------------------------- |  | ---------------------- | ---------- | -
|                            |  | Stock WarrantLiability |           
|Balance, December 31, 2007  |  | $                      | 2,771,090  |  
|Change in fair value        |  |                        | (2,645,609 | )
|                            |  |                        |            |  
|Balance, December 31, 2008  |  | $                      | 125,481    |  
|Change in fair value        |  |                        | 168,417    |  
|                            |  |                        |            |  
|Balance, September 30, 2009 |  | $                      | 293,898    |  
|                            |  |                        |            |  

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 September 30, 2009 and December 31, 2008. There were no financial assets subject to the provisions of ASC 820 as of September 30, 2009 and
December 31, 2008:



|                                             |  |         |   |         |   |         |  |       |           |  |   |          
|-------------------------------------------- |  | ------- | - | ------- | - | ------- |  | ----- | --------- |  | - | ---------
|                                             |  | Level 1 |   | Level 2 |   | Level 3 |  | Total
|Financial liabilities at September 30, 2009: |  |         |   |         |   |         |  |       |           |  |   |          
|Derivative stock warrants                    |  | $       |  |         | $ |        |  | $     | 293,898   |  | $ | 293,898  
|Conversion feature                           |  |         |  |         |   |        |  |       | 1,128,066 |  |   | 1,128,066
|                                             |  |         |   |         |   |         |  |       |           |  |   |          
|                                             |  | $       |  |         | $ |        |  | $     | 1,421,964 |  | $ | 1,421,964
|                                             |  |         |   |         |   |         |  |       |           |  |   |          
|Financial liabilities at December 31, 2008:  |  |         |   |         |   |         |  |       |           |  |   |          
|Derivative stock warrants                    |  | $       |  |         | $ |        |  | $     | 125,481   |  | $ | 125,481  
|                                             |  |         |   |         |   |         |  |       |           |  |   |          

7. Subsequent Events

The Company evaluated its September 30, 2009 financial statements for subsequent events through November 9, 2009, the date the
financial statements were available to be issued.



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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 16, 2009 as well as Part II, Item 1A below.

Overview

We
have developed a proprietary thin film deposition technology for solar photovoltaic (PV) products. We utilize a proprietary one-step sputter deposition process and have manufactured a commercial scale deposition tool to apply
high-efficiency copper indium gallium diselenide (CIGS) material over large area glass substrates in a continuous fashion. We intend to integrate this tool with commercially available thin film manufacturing equipment, which will provide
us with a critically differentiated manufacturing process to produce low-cost monolithically integrated, CIGS-on-glass modules that address the grid-tied, ground-based PV market.

We believe this proprietary deposition process, when operated at an annual capacity of approximately 100 megawatts, will enable us to
achieve a total module manufacturing cost of less than $1.00 per watt. This cost would be competitive with the lowest in the solar PV industry. Using this approach, we have achieved greater than 14% cell efficiencies over large areas on CIGS PV
devices, and we believe that this approach will enable us to reach module efficiencies greater than 13%.

We have initiated
construction of our first module production line. To facilitate our entry into the addressable solar PV market, we have entered into a contract with Blitzstrom GmbH, one of the worlds leading thin film solar PV integrators that commits
Blitzstrom to purchase a minimum of 50% of our production through 2011, subject to these products meeting defined performance criteria. We have also signed a Letter of Intent with juwi Solar, who is interested in purchasing up to 25% of our
production through 2011.

We will require immediate and substantial additional funds beyond our current cash on hand in order
to continue operations and to build-out our first production line, to commence and support commercial production as currently planned, and to expand our capacity beyond our first production line.

We continue to seek strategic investors or partners; however, in light of our current cash position, we implemented a significant reduction
in our workforce during 2009. In the near term we may be forced to cease or substantially curtail 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 and external conditions could adversely affect our ability to secure
additional funding necessary to continue operations and the terms of any funding that we secure.



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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 the financial statements set forth in our Annual Report on Form 10-K. Certain of our accounting policies are
considered critical as they are both important to the portrayal of our financial condition and results of operations and require judgments on the part of management about matters that are uncertain. We have identified the following accounting
policies that are important to the presentation of our financial condition and results of operations.

Revenue
Recognition. We recognize revenue in accordance with FASB ASC 605 Revenue Recognition and the Securities and Exchange Commission (the SEC)s Staff Accounting Bulletin (SAB) 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, we have earned minimal amounts of product revenue.

Since inception of the development stage on July 1, 2005, our principal source of revenue has been from government funded research and
development contracts and grants. Grant revenue is recognized when we fulfill obligations as set forth under the grant. Terms of the grant reflected in the accompanying financial statements require us to maintain specified employment criteria over a
five year period. If we fail to meet the specified criteria, we must repay the unearned portion of the grant. As a result, we recorded a liability of $420,000 as of September 30, 2009.

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.

Derivative Stock Warrants. Certain terms in the convertible note
(Note) and related documents issued and entered into on May 25, 2006, as well as subsequent agreements entered into on January 19, 2007, namely the potential for cash settlement require that the warrants issued in conjunction
with these documents be treated as a derivative instrument and, therefore, classified as a liability on the balance sheet. As such, the liability must be adjusted to fair value at the end of each reporting period, and any changes in fair value
reported as a gain or loss on derivative liabilities in our statement of operations. The Black-Scholes option-pricing model is used to estimate the warrant fair values. Upon a change in control of our company, warrant holders having the right to
purchase 600,003 shares of common stock would have the right to require us to repurchase the warrants from them at a purchase price equal to the Black-Scholes value of the unexercised portion of the warrants. Generally, this accounting treatment
will result in a reported loss during any accounting period in which there is a reported increase in the sales price of our common stock on the NASDAQ Capital Market. Conversely, this accounting treatment generally will result in a reported gain
during any accounting period in which there is reported decrease in the sales price of our common stock on the NASDAQ Capital Market.



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Results of Operations

Comparison of the Three Months Ended September 30, 2009 and 2008

Certain reclassifications have been made to the 2008 financial information to conform to the 2009 presentation. Such reclassifications had no
impact on net loss.

Research and development expenses. Research and development expenses were $2,998,177 for the three
months ended September 30, 2009 compared to $5,135,579 for the three months ended September 30, 2008, a decrease of $2,137,402 or 42%. The decrease is primarily due to the cost savings measures implemented during the period including a
reduction in our workforce as well as a reduction in expenditures for materials, supplies and consultants. During the three months ended September 30, 2009, we prioritized our development efforts to focus on our core CIGS technology and related
development in order continue to advance our product toward commercialization while we seek additional financing to complete the build-out of our initial production line. Also, in July 2009, we sold substantially all our tangible assets at our
Halfmoon, NY facility to Veeco Compound Semiconductor, Inc. (Veeco) and Veeco hired the 18 research and development employees located at the facility. This transaction further reduced our research and development expenses during the
three months ended September 30, 2009.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $2,006,535 for the three months ended September 30, 2009 compared to $2,016,110 for the three months ended September 30, 2008, a decrease of $9,575. The decrease in selling, general and administrative expenses
was primarily due to the cost savings measures implemented during the period including a reduction in our workforce as well as a reduction in outside consultants and professional fees. The reduction in cash expenses was offset by an increase of
$342,193 in non-cash expenses for share-based compensation during the three months ended September 30, 2009 compared to the same period in 2008.

Depreciation and amortization expenses. Depreciation and amortization expenses were $807,716 for the three months ended September 30, 2009 compared to $783,268 for the three months ended
September 30, 2008, an increase of $24,448 or 3%. Depreciation and amortization expense increased primarily due to an increase in equipment utilized in the development of our CIGS PV products and manufacturing processes as well as the leasehold
improvements required for our initial manufacturing facility. This increase was offset by a reduction in expense due to the sale of the fixed assets at our Halfmoon, NY facility in July 2009.

Other (expense) income.Other expense was $341,985 for the three months ended September 30, 2009 compared to income of $268,394
for the three months ended September 30, 2008, a decrease of $610,379. Other expense for the three months ended September 30, 2009 was primarily due to the loss on sale of assets from our Halfmoon, NY facility in July 2009. Other income
during the third quarter of 2008 was primarily due to interest income earned during the period.

Interest expense.Interest expense was $36,390 for the three months ended September 30, 2009 compared to $8,877 for the three months ended September 30, 2008, an increase of $27,513. The increase in interest expense was primarily due to the recording of
interest on tenant improvements financed by the landlord in our Newark, CA facility, partially offset by a decrease in interest related to notes and capital leases payable.

Amortization of note discount and financing costsAmortization of note discount and financing costs was $107,483 for the three months
ended September 30, 2009. There was no amortization of note discount and financing costs during the three months ended September 30, 2008. The expense during the three months ended September 30, 2009 primarily represents the
amortization of the discount on a $2.0 million convertible note entered into in September 2009.

Gain on derivative
liabilities. Gain on derivative liabilities was $128,983 for the three months ended September 30, 2009 compared to a gain on derivative liabilities of $926,664 for the three months ended September 30, 2008. The warrants issued in May
2006 in conjunction with a convertible note, as well as a conversion feature on a convertible note issued in September 2009 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 September 30, 2009, our common stock price decreased which caused a decrease in the fair value of the warrant liability and conversion feature, resulting in a gain on derivative liabilities.



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Comparison of the Nine Months Ended September 30, 2009 and 2008

Research and development expenses. Research and development expenses were $12,164,271 for the nine months ended September 30,
2009 compared to $11,991,015 for the nine months ended September 30, 2008, an increase of $173,256 or 1%. Cost savings measures were implemented during the period including a reduction in our workforce as well as a reduction in expenditures for
materials, supplies and consultants. During the nine months ended September 30, 2009, we prioritized our development efforts to focus on our core CIGS technology and related development in order continue to advance our product toward
commercialization while we seek additional financing to complete the build-out of our initial production line. Also, in July 2009, we sold substantially all our tangible assets at our Halfmoon, NY facility to Veeco Compound Semiconductor, Inc.
(Veeco) and Veeco hired the 18 research and development employees located at the facility. This transaction further reduced our research and development expenses during the nine months ended September 30, 2009. The reduction in cash
expenses was offset by an increase of $719,431 in non-cash expenses for share-based compensation during the nine months ended September 30, 2009 compared to the same period in 2008.

Selling, general and administrative expenses. Selling, general and administrative expenses were $4,846,650 for the nine months ended
September 30, 2009 compared to $6,806,396 for the nine months ended September 30, 2008, a decrease of $1,959,746 or 29%. The decrease in selling, general and administrative expenses was primarily due to the cost savings measures
implemented during the period including a reduction in our workforce as well as a reduction in outside consultants and professional fees. We also experienced an increase in share-based compensation expense of $341,848 during the nine months ended
September 30, 2009 compared to the same period in 2008.

Depreciation and amortization expenses. Depreciation and
amortization expenses were $2,795,026 for the nine months ended September 30, 2009 compared to $2,307,672 for the nine months ended September 30, 2008, an increase of $487,354 or 21%. Depreciation and amortization expense increased
primarily due to an increase in equipment utilized in the development of our CIGS PV products and manufacturing processes as well as the leasehold improvements required for our initial manufacturing facility. This increase was offset by a reduction
in expense due to the sale of the fixed assets at our Halfmoon, NY facility in July 2009.

Other (expense) income.Other expense was $485,278 for the nine months ended September 30, 2009 compared to other income of $716,165 for the nine months ended September 30, 2008. Other expense for the nine months ended September 30, 2009 was primarily
due to the loss on sale of assets from our Halfmoon, NY facility in July 2009. Other income during the nine months ended September 30, 2008 was primarily due to interest income earned during the period.

Interest expense. Interest expense was $105,597 for the nine months ended September 30, 2009 compared to $32,039 for the nine
months ended September 30, 2008, an increase of $73,558. The increase in interest expense was primarily due to the recording of interest on tenant improvements financed by the landlord in our Newark, CA facility, partially offset by a decrease
in interest related to notes and capital leases payable.

Amortization of note discount and financing costs
Amortization of note discount and financing costs was $107,483 for the nine months ended September 30, 2009. There was no amortization of note discount and financing costs during the nine months ended September 30, 2008. The expense during
the nine months ended September 30, 2009 primarily represents the amortization of the discount on a $2.0 million convertible note entered into in September 2009.

Gain on derivative liabilities. Gain on derivative liabilities was $28,341 for the nine months ended September 30, 2009 compared to a gain on derivative liabilities of $1,914,782 for the nine
months ended September 30, 2008. The warrants issued in May 2006 in conjunction with a convertible note, as well as a conversion feature on a convertible note issued in September 2009 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 September 30, 2009, our common stock price decreased which caused a decrease in the fair value of the warrant liability and conversion
feature, resulting in a gain on derivative liabilities.

Liquidity and Capital Resources

At September 30, 2009, our cash and cash equivalents totaled $1.7 million compared to $17.1 million at December 31, 2008. The
decrease in cash was primarily due to the payment of operating expenses, payment for certain equipment on order for our initial production line, as well as leasehold improvements completed in our initial manufacturing facility in Newark, California.
We are in the development stage, and as such, have historically reported net losses, including a net loss of $20.5 million for the nine months ended September 30, 2009. We anticipate incurring losses in the future, as we complete the build-out
of our initial module manufacturing line and enter commercialization of our products, invest in research and development, and incur associated



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administrative and operating costs. Our financial statements for the nine months ended September 30, 2009 and for the year ended December 31, 2008 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.

We have historically financed our operations primarily from proceeds of the sale of equity securities. We
presently do not have any bank lines of credit that provide us with an additional source of debt financing. In order to fund the costs associated with our continued development and commercialization efforts, we completed a registered public offering
during the fourth quarter of 2007 in which we sold 17,250,000 shares of our common stock at $4.25 per share and generated net proceeds of approximately $68 million after deducting underwriting discounts and the fees and expenses of the offering.
Upon receipt of the proceeds from the offering, we re-paid in full $9.2 million of existing indebtedness. We have used these proceeds to develop our proprietary deposition process, to build our prototype and commercial scale deposition tools, and to
begin installation of our first production line. Commercialization efforts, including the completion and ramp-up of our initial module production line will require significant additional capital expenditures as well as associated continued
development and administrative costs.

During 2008 and 2009, we achieved several key milestones as we completed the
development of our proprietary one step sputter deposition process, built our prototype and commercial scale deposition tools, completed our first full size (2 x 4) monolithically integrated CIGS-on-glass modules and continued to enhance
the performance of such modules, and began installation of our first production line. In order to continue operations and build-out our initial manufacturing line and commence commercial shipments of our product, we will require substantial funds in
the near term beyond our current cash on hand. Although we continue to seek strategic investors or partners, in light of our current cash position, we implemented a significant reduction in our workforce in 2009 and may in the near term be forced to
cease or substantially curtail operations.

On July 15, 2009, we sold substantially all of our tangible assets located at
our Halfmoon, New York facilities to Veeco Compound Semiconductor, Inc. (Veeco) for $1.925 million. Upon completion of this transaction, Veeco employed all 18 of our employees located in Halfmoon which reduced our payroll and related
costs, and assumed responsibility for the facilities and operating costs associated with the facilities which further reduced our overall operating burn. We have retained ownership of the intellectual property developed in New York for future use in
either glass or flexible substrate PV modules. The transaction also allows us to continue our efforts on our proprietary reactive sputter process currently in use to produce CIGS-on-glass photovoltaic modules without diminishing opportunities to
re-enter flexible PV module markets when business, technology, and market conditions favor such a product.

On
September 18, 2009, we entered into a letter of intent with EPOD Solar Inc. (EPOD Canada) (the LOI). The LOI contemplated a series of transactions resulting in the combination of DayStar and EPOD Canada. After initial
discussions, on October 19, 2009, our Board of Directors accepted EPOD Canadas notification to terminate the LOI.

On September 21, 2009, we entered into a series of agreements with Mr. Peter Alan Lacey in which Mr. Lacey provided us $2.0 million in bridge financing in exchange for a secured convertible promissory note and warrants to
purchase shares of our common stock.

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 in our Annual Report on Form 10-K and section 1A of Part II of this report, 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
September 30, 2009, we had outstanding approximately $3.1 million of purchase orders for equipment and improvements. Other material commitments include rental payments under operating leases for manufacturing and 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 included 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 approximately 144,000 square feet of manufacturing and office space in
Newark, California. The lease commenced on September 15, 2008 and the initial term of the lease expires on September 14, 2018. We have two options to extend the lease by five years each at the completion of the initial term. This facility
is the primary location for our initial manufacturing line.



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We lease 50,000 square feet of factory and office space in Santa Clara, California under a
fifty-one month lease that commenced June 2006. In July 2009, this lease was amended and now expires in March 2010. We also maintain leases for certain office equipment.

As discussed under Commitments, at September 30, 2009, we had approximately $3.1 million in commitments under outstanding purchase orders for equipment and improvements. Such commitments are
primarily related to manufacturing equipment which we expect to be delivered throughout 2009 and early 2010. Generally we are required to remit any balances due to the suppliers upon delivery and acceptance of the 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 September 30, 2009.

Changes in Internal Control Over Financial Reporting

There were no
changes in our internal control over financial reporting during the quarter ended September 30, 2009 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
|------- | -----------------

On
June 2, 2009, Valley Process Systems, Inc. (VPS, Inc.), a subcontractor utilized in the initial construction phase of the Companys Newark location, filed suit against the general contractor for the project, Gordon Prill, Inc.
(Gordon Prill), BMR-Gateway Blvd., LLC (the Landlord), and Does 1-25, inclusive in Superior Court of the State of California in Alameda County, CA, alleging monies due, breach of written contract, quantum meruit, and
foreclosure on the mechanics lien. In the VPS, Inc. action, Landlord joined the Company by filing a cross-complaint on July 27, 2009, alleging breach of the lease agreement dated April 29, 2008, and seeking indemnification. Both
actions allege damages in the amount of $343,562 and seek reasonable attorneys fees and expenses.



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On August 4, 2009, Gordon Prill filed suit against the Company, the Landlord, and Does
1-250, inclusive in Superior Court of the State of California in Alameda County, CA, alleging breach of written contract, foreclosure on the mechanics lien, and statutory penalties under California Civil Code sections 3260 and 3260.1. This
action alleges damages in the amount of $1,595,523 and seeks reasonable attorneys fees and expenses. The damages in this action include the $343,562 in the VPS, Inc. action and the $584,068 in the Sprig Electric Co. action discussed below.

On July 14, 2009, Sprig Electric Co., a subcontractor utilized in the initial construction phase of the Companys
Newark location, filed suit against Gordon Prill, the Landlord, and Does 1-100, inclusive in Superior Court of the State of California in Alameda County, CA, alleging monies due, breach of written contract, quantum meruit, and foreclosure on the
mechanics lien. In the Sprig Electric Co. action, the Landlord joined the Company by filing a cross-complaint on September 29, 2009, alleging breach of the lease agreement dated April 29, 2008, and seeking indemnification. The
Sprig Electric Co. action alleges damages in the amount of $584,068 and both actions seek reasonable attorneys fees and expenses.

On September 9, 2009, the Landlord filed an unlawful detainer action in Superior Court of the State of California in Alameda County, CA against the Company alleging damages in the amount of $838,078 and
to recover possession of the premises. The Parties have stipulated to a trial date of December 11, 2009, and are currently negotiating a settlement in the unlawful detainer and other pending actions against the Company.

The damages sought in these cases have already been recorded in accounts payable on the Companys balance sheet as part of the
leasehold improvements at the Companys manufacturing facility.



|Item 1A. | Risk Factors
|-------- | ------------

Item 1A (Risk Factors) of our annual report on Form 10-K for our fiscal year ended December 31, 2008 (Annual Report) sets forth information relating to important risks and uncertainties that could
materially adversely affect our business, financial condition or operating results. Set forth below are certain risk factors that have been substantively expanded or updated from the Annual Report. The risks and uncertainties described in the Annual
Report, as expanded or updated below 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.

In order to continue operations, we require immediate and substantial additional capital beyond our current cash on hand.

In order to continue operations, including development efforts utilizing our pre-production line, fully build-out our initial manufacturing line and commence commercial shipments of our product, we
require immediate and substantial additional capital beyond our current cash on hand. To date, we have been unable to raise additional capital or complete an agreement with an investor or strategic partner. Although we continue to seek strategic
investors or partners, in light of our current cash position, we have implemented a significant reduction in our workforce during 2009 and may in the near term be forced to cease or substantially curtail 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.

Our independent auditors report expresses doubt about our ability to continue as a going concern, which may make it more difficult
and expensive for us to raise additional capital.

The report of our independent registered public accounting firm
relating to our financial statements as of December 31, 2008 and for the year then ended, stated that there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our
ability to take advantage of raising capital through securities offerings, debt financing, or partnerships. Management is focusing on raising capital through any one or more of these options. Such opinion from our outside auditors may make it more
difficult and expensive to for us to raise additional capital. If we are unable to obtain such financing we may not be able to continue our operations, which would have an adverse effect on our stock price and significantly impair our prospects.
There can be no assurance that any of managements plans will be successfully implemented.

We have incurred net
losses since our inception and anticipate continued net losses as we execute our commercialization plan.

Since our
inception, we have incurred net losses, including net losses of $26.3 million and $36.1 million for the years ended December 31, 2008 and 2007, respectively, and $20.5 million for the first nine months of 2009, and have incurred negative cash
flows



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from operations. As a result of ongoing losses, we had an accumulated deficit of approximately $117.4 million as of September 30, 2009. We expect to continue to incur significant losses as
we enter commercialization and expand our manufacturing capacity and may never achieve or maintain profitability. We expect to continue to make significant capital expenditures and anticipate that our expenses will increase to the extent we continue
to develop our manufacturing technologies, build manufacturing lines, establish our sales and distribution network, implement internal systems and infrastructure and hire additional personnel.

As we do not expect to become profitable until after we expand capacity beyond our initial manufacturing line, if ever, we will be unable to
satisfy our obligations solely from cash generated from operations. If, for any reason, we are unable to make required payments under our obligations, one or more of our creditors may take action to collect their debts. If we continue to incur
substantial losses and are unable to secure additional financing, we could be forced to discontinue or curtail our business operations; sell assets at unfavorable prices; refinance existing debt obligations on terms unfavorable to us; or merge,
consolidate or combine with a company with greater financial resources in a transaction that may be unfavorable to us.

Current and future litigation against us may be costly and time consuming to defend, and the outcome of current litigation could affect our ability to operate at our Newark, California location.

We are sometimes subject to legal proceedings and claims that arise in the course of our business. Litigation may result in substantial
costs and may divert managements attention and resources, which may seriously harm our business, overall financial condition, and operating results. In addition, legal claims that have not yet been asserted against us may be asserted in the
future. See Item 1 (Legal Proceedings) of this Quarterly Report on Form 10-Q for further information regarding pending litigation.

As described in Item 1 (Legal Proceedings) of this Quarterly Report on Form 10-Q, BMR-Gateway Blvd., LLC (the Landlord) has filed an unlawful detainer action against us alleging
damages in the amount of $838,078 and seeking to recover possession of the premises we occupy at the Companys Newark, California location. We are currently negotiating with the Landlord regarding a potential settlement of the unlawful detainer
action as well as certain other legal claims. We cannot assure that these negotiations will be successful. The trial proceedings associated with the unlawful detainer action are currently scheduled to commence on December 11, 2009, in Superior Court
of the State of California in Alameda County, CA. If we are unable to settle this matter with the Landlord, we will be required to proceed with the defense of this action and, depending on the outcome, we may be required to pay monetary damages to
the Landlord and/or cease operations and vacate the premises at our Newark, California location.



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

On September 21, 2009, the Company issued a secured convertible promissory note (the Note) to Mr. Peter Alan Lacey in exchange for an aggregate amount of $2.0 million. The Note is
convertible at $0.60 per share into a maximum of 3,333,333 shares of the Companys common stock. The conversion price for the Note is subject to adjustment in the event of a future issuance at a price lower than $0.60 per share during the term
and prior to conversion of the Note. Also, in conjunction with this transaction, on September 21, 2009 the Company issued Mr. Lacey a warrant to purchase 1,500,000 shares of the Companys common stock and on October 2, 2009, an
additional warrant to purchase 1,666,667 shares of the Companys common stock. The warrants are exercisable for $0.50 per share of the Companys common stock.

The Company entered into a Registration Rights Agreement with Mr. Lacey whereby the Company is required to register all shares underlying the convertible note and warrants issued on
September 21, 2009 and October 2, 2009. Mr. Lacey has agreed to extend the filing deadline of the Registration Rights Agreement for a period of sixty days from the original filing deadline of October 31, 2009.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None.



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

None.



|Item 5. | Other Information.
|------- | ------------------

None.



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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)      |  | Certificate of Designations, Preferences and Rights of a Series of Preferred Stock classifying and designating the Series A Junior Participating Cumulative Preferred
Stock.    
|            | 
|4.1(4)      |  | Stockholder Rights Agreement, dated as of May 6, 2008 between the Company and Computershare Trust Company, N.A., as Rights Agent.                                               
|            | 
|4.2(5)      |  | Form of Common Stock Certificate.                                                                                                                                               
|            | 
|4.3(5)      |  | Form of Class A Public Warrant.                                                                                                                                                 
|            | 
|4.4(5)      |  | Form of Class B Public Warrant.                                                                                                                                                 
|            | 
|4.5(5)      |  | Form of Unit Certificate.                                                                                                                                                       
|            | 
|4.6(5)      |  | Form of Warrant Agent Agreement.                                                                                                                                                
|            | 
|4.7(5)      |  | Form of Representatives Warrant.                                                                                                                                               
|            | 
|10.1(6)     |  | Separation Agreement dated May 12, 2009, by and between the Company and Stephan J. DeLuca.                                                                                      
|            | 
|10.2(6)     |  | Offer Letter with Robert G. Aldrich dated May 15, 2009.                                                                                                                         
|            | 
|10.3(7)     |  | Form of Restricted Stock Unit Agreement for Employees and Consultants.                                                                                                          
|            | 
|10.4(7)     |  | Form of Restricted Stock Unit Agreement for Non-Employee Directors.                                                                                                             
|            | 
|31.1        |  | Certification of Chief Executive Officer & Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                        
|            | 
|32.1        |  | Certification of the Chief Executive Officer & Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



|(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 Report on Form 10-Q filed with the SEC on November 14, 2008.
|--- | -------------------------------------------------------------------------------------------------------

|(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 Registration Statement on Form 8-A filed with the SEC on May 8, 2008.
|--- | ------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to our Registration Statement on Form SB-2 filed with the SEC on November 7, 2003.
|--- | ------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 18, 2009.
|--- | -----------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 2, 2009.
|--- | -----------------------------------------------------------------------------------------------



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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: November 9, 2009 |  |  |  | By:                        |  | /s/    WILLIAM S.
STECKEL                                                      
|                       |  |  |  |                            |  | William S. Steckel                                                             
|                       |  |  |  |                            |  | Chief Executive Officer (Principal Executive, Financial and Accounting Officer)



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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)      |  | Certificate of Designations, Preferences and Rights of a Series of Preferred Stock classifying and designating the Series A Junior Participating Cumulative Preferred
Stock.    
|            | 
|4.1(4)      |  | Stockholder Rights Agreement, dated as of May 6, 2008 between the Company and Computershare Trust Company, N.A., as Rights Agent.                                               
|            | 
|4.2(5)      |  | Form of Common Stock Certificate.                                                                                                                                               
|            | 
|4.3(5)      |  | Form of Class A Public Warrant.                                                                                                                                                 
|            | 
|4.4(5)      |  | Form of Class B Public Warrant.                                                                                                                                                 
|            | 
|4.5(5)      |  | Form of Unit Certificate.                                                                                                                                                       
|            | 
|4.6(5)      |  | Form of Warrant Agent Agreement.                                                                                                                                                
|            | 
|4.7(5)      |  | Form of Representatives Warrant.                                                                                                                                               
|            | 
|10.1(6)     |  | Separation Agreement dated May 12, 2009, by and between the Company and Stephan J. DeLuca.                                                                                      
|            | 
|10.2(6)     |  | Offer Letter with Robert G. Aldrich dated May 15, 2009.                                                                                                                         
|            | 
|10.3(7)     |  | Form of Restricted Stock Unit Agreement for Employees and Consultants.                                                                                                          
|            | 
|10.4(7)     |  | Form of Restricted Stock Unit Agreement for Non-Employee Directors.                                                                                                             
|            | 
|31.1        |  | Certification of Chief Executive Officer & Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                        
|            | 
|32.1        |  | Certification of the Chief Executive Officer & Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



|(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 Report on Form 10-Q filed with the SEC on November 14, 2008.
|--- | -------------------------------------------------------------------------------------------------------

|(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 Registration Statement on Form 8-A filed with the SEC on May 8, 2008.
|--- | ------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to our Registration Statement on Form SB-2 filed with the SEC on November 7, 2003.
|--- | ------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 18, 2009.
|--- | -----------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on July 2, 2009.
|--- | -----------------------------------------------------------------------------------------------



24