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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, 2010

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.)



|                                                   |  |           
|-------------------------------------------------- |  | ----------
|1010 South Milpitas Boulevard
Milpitas, California |  | 95035     
|(Address of principal executive offices)           |  | (Zip Code)

(408)
582-7100

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to 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         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    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 8, 2010
|Common Stock par value $0.01 per share |  | 5,014,659                      









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DAYSTAR
TECHNOLOGIES, INC.

Quarterly Report on Form 10-Q

Quarterly Period Ended September 30, 2010

Table of Contents



|                                                                                                                                                                                                             |  |  |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | -- | 
|Part I  Financial Information                                                                                                                                                                               |  |  |    | 
|                                                                                                                                                                                                             | 
|Item 1. Financial Statements                                                                                                                                                                                 |  |  |    | 
|                                                                                                                                                                                                             | 
|Balance SheetsAs of September 30, 2010 (unaudited) and December 31,
2009                                                                                                                                    |  |  | 3  | 
|                                                                                                                                                                                                             | 
|Statements of OperationsFor the Three Months and Nine Months Ended September 
30, 2010 and 2009 and For the Period From July 1, 2005 (Inception of the Development Stage) to September 30, 2010 (unaudited) |  |  | 4  | 
|                                                                                                                                                                                                             | 
|Statement of Changes in Stockholders EquityFor the Period From July 
1, 2005 (Inception of the Development Stage) to September 30, 2010 (unaudited)                                                        |  |  | 5  | 
|                                                                                                                                                                                                             | 
|Statements of Cash Flows for the Nine Months Ended September 
30, 2010 and 2009 and For the Period From July 1, 2005 (Inception of the Development Stage) to September 30, 2010 (unaudited)                  |  |  | 7  | 
|                                                                                                                                                                                                             | 
|Notes to Financial Statements (unaudited)                                                                                                                                                                    |  |  | 8  | 
|                                                                                                                                                                                                             | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations                                                                                                                |  |  | 16 | 
|                                                                                                                                                                                                             | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                           |  |  | 20 | 
|                                                                                                                                                                                                             | 
|Item 4. Controls and Procedures                                                                                                                                                                              |  |  | 20 | 
|                                                                                                                                                                                                             | 
|PART II  Other Information                                                                                                                                                                                  |  |  |    | 
|                                                                                                                                                                                                             | 
|Item 1. Legal Proceedings                                                                                                                                                                                    |  |  | 21 | 
|                                                                                                                                                                                                             | 
|Item 1A. Risk Factors                                                                                                                                                                                        |  |  | 21 | 
|                                                                                                                                                                                                             | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                          |  |  | 22 | 
|                                                                                                                                                                                                             | 
|Item 3. Defaults Upon Senior Securities                                                                                                                                                                      |  |  | 22 | 
|                                                                                                                                                                                                             | 
|Item 4. (Removed and Reserved)                                                                                                                                                                               |  |  | 22 | 
|                                                                                                                                                                                                             | 
|Item 5. Other Information                                                                                                                                                                                    |  |  | 22 | 
|                                                                                                                                                                                                             | 
|Item 6. Exhibits                                                                                                                                                                                             |  |  | 23 | 
|                                                                                                                                                                                                             | 
|Signatures                                                                                                                                                                                                   |  |  | 24 | 



2



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PART I. FINANCIAL INFORMATION



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

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS



|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | - | ---------------- | - | ------------ | -
|                                                                                                                                                                             |  | September 30,2010 |              |   | December 31,2009 |  
|                                                                                                                                                                             |  | (Unaudited)       |              |   |                  |  
|ASSETS                                                                                                                                                                       |  |                   |              |   |                  |   |              |  
|Current Assets:                                                                                                                                                              |  |                   |              |   |                  |   |              |  
|Cash and cash equivalents                                                                                                                                                    |  | $                 | 187,408      |   |                  | $ | 17,320       |  
|Other current assets                                                                                                                                                         |  |                   | 397,102      |   |                  |   | 343,083      |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Total current assets                                                                                                                                                         |  |                   | 584,510      |   |                  |   | 360,403      |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Property and Equipment, at cost                                                                                                                                              |  |                   | 27,203,439   |   |                  |   | 52,915,965   |  
|Less accumulated depreciation and amortization                                                                                                                               |  |                   | (5,482,831   | ) |                  |   | (6,388,914   | )
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Net property and equipment                                                                                                                                                   |  |                   | 21,720,608   |   |                  |   | 46,527,051   |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Other Assets:                                                                                                                                                                |  |                   |              |   |                  |   |              |  
|Other assets                                                                                                                                                                 |  |                   | 37,922       |   |                  |   | 246,396      |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Total Assets                                                                                                                                                                 |  | $                 | 22,343,040   |   |                  | $ | 47,133,850   |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                         |  |                   |              |   |                  |   |              |  
|Current Liabilities:                                                                                                                                                         |  |                   |              |   |                  |   |              |  
|Accounts payable and accrued expenses                                                                                                                                        |  | $                 | 11,918,606   |   |                  | $ | 18,387,530   |  
|Notes and capital leases payable, current portion, net of discount of $3,445,053 and $795,413, respectively                                                                  |  |                   | 1,809,947    |   |                  |   | 1,629,587    |  
|Deferred rent, current portion                                                                                                                                               |  |                   |             |   |                  |   | 139,870      |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Total current liabilities                                                                                                                                                    |  |                   | 13,728,553   |   |                  |   | 20,156,987   |  
|Long-Term Liabilities:                                                                                                                                                       |  |                   |              |   |                  |   |              |  
|Deferred rent                                                                                                                                                                |  |                   |             |   |                  |   | 3,452,790    |  
|Conversion feature                                                                                                                                                           |  |                   | 6,173,571    |   |                  |   | 251,618      |  
|Stock warrants                                                                                                                                                               |  |                   | 24,855       |   |                  |   | 131,835      |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Total long-term liabilities                                                                                                                                                  |  |                   | 6,198,426    |   |                  |   | 3,836,243    |  
|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; 4,595,625 and 3,767,290 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively |  |                   | 45,955       |   |                  |   | 37,672       |  
|Additional paid-in capital                                                                                                                                                   |  |                   | 150,202,725  |   |                  |   | 145,106,851  |  
|Accumulated deficit                                                                                                                                                          |  |                   | (10,145,391  | ) |                  |   | (10,145,391  | )
|Deficit accumulated during the development stage                                                                                                                             |  |                   | (137,687,228 | ) |                  |   | (111,858,512 | )
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Total stockholders equity                                                                                                                                                   |  |                   | 2,416,061    |   |                  |   | 23,140,620   |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  
|Total Liabilities and Stockholders Equity                                                                                                                                   |  | $                 | 22,343,040   |   |                  | $ | 47,133,850   |  
|                                                                                                                                                                             |  |                   |              |   |                  |   |              |  

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 30,2010 | 
|                                                               |  | 2010                                    |            |   | 2009                                   |   |            | 2010                                                                                   |  |   | 2009        |   | 
|Revenue:                                                       |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Product revenue                                                |  | $                                       |           |   |                                        | $ |           |                                                                                        |  | $ |            |   |  | $ |            |   |  | $ | 3,528        |  
|Research and development contract revenue                      |  |                                         |           |   |                                        |   |           |                                                                                        |  |   |            |   |  |   |            |   |  |   | 615,000      |  
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Total revenue                                                  |  |                                         |           |   |                                        |   |           |                                                                                        |  |   |            |   |  |   |            |   |  |   | 618,528      |  
|Costs and Expenses:                                            |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Research and development                                       |  |                                         | 210,869    |   |                                        |   | 2,998,177  |                                                                                        |  |   | 5,264,054   |   |  |   | 12,164,271  |   |  |   | 60,263,953   |  
|Selling, general and administrative                            |  |                                         | 1,328,056  |   |                                        |   | 2,006,535  |                                                                                        |  |   | 4,661,127   |   |  |   | 4,846,650   |   |  |   | 34,138,191   |  
|Restructuring                                                  |  |                                         | 1,979,819  |   |                                        |   |           |                                                                                        |  |   | 9,745,407   |   |  |   |            |   |  |   | 13,025,458   |  
|Depreciation and amortization                                  |  |                                         | 375,515    |   |                                        |   | 807,716    |                                                                                        |  |   | 1,745,367   |   |  |   | 2,795,026   |   |  |   | 13,662,593   |  
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Total costs and expenses                                       |  |                                         | 3,894,259  |   |                                        |   | 5,812,428  |                                                                                        |  |   | 21,415,955  |   |  |   | 19,805,947  |   |  |   | 121,090,195  |  
|Other (Expense) Income:                                        |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Other (expense) income                                         |  |                                         | (46,720    | ) |                                        |   | (341,985   | )                                                                                      |  |   | (32,345     | ) |  |   | (485,278    | ) |  |   | 2,230,774    |  
|Interest expense                                               |  |                                         | (185,610   | ) |                                        |   | (36,390    | )                                                                                      |  |   | (413,534    | ) |  |   | (105,597    | ) |  |   | (2,944,150   | )
|Amortization of note discount and financing costs              |  |                                         | (1,809,947 | ) |                                        |   | (107,483   | )                                                                                      |  |   | (3,341,963  | ) |  |   | (107,483    | ) |  |   | (13,362,237  | )
|Gain on derivative liabilities                                 |  |                                         | 3,399,283  |   |                                        |   | 128,983    |                                                                                        |  |   | 4,274,348   |   |  |   | 28,341      |   |  |   | 7,850,788    |  
|Loss on extinguishment of debt                                 |  |                                         | (4,899,267 | ) |                                        |   |           |                                                                                        |  |   | (4,899,267  | ) |  |   |            |   |  |   | (10,990,736  | )
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Total other (expense) income                                   |  |                                         | (3,542,261 | ) |                                        |   | (356,875   | )                                                                                      |  |   | (4,412,761  | ) |  |   | (670,017    | ) |  |   | (17,215,561  | )
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Net Loss                                                       |  | $                                       | (7,436,520 | ) |                                        | $ | (6,169,303 | )                                                                                      |  | $ | (25,828,716 | ) |  | $ | (20,475,964 | ) |  | $ | (137,687,228 | )
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Weighted Average Common Shares Outstanding (Basic And Diluted) |  |                                         | 4,582,153  |   |                                        |   | 3,706,098  |                                                                                        |  |   | 4,176,480   |   |  |   | 3,712,433   |   |  |   |              |  
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  
|Net Loss Per Share (Basic and Diluted)                         |  | $                                       | (1.62      | ) |                                        | $ | (1.66      | )                                                                                      |  | $ | (6.18       | ) |  | $ | (5.52       | ) |  |   |              |  
|                                                               |  |                                         |            |   |                                        |   |            |                                                                                        |  |   |             |   |  |   |             |   |  |   |              |  

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, 2010

(Unaudited)



|                                                                                                    |  |              |           |  |                     |   |        |        |  |  |        |   |  |                           |     |   |                                  |   |            |                    |  |   |                                              |   |  |       |             |   |  |   |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------------- |  | ------------ | --------- |  | ------------------- | - | ------ | ------ |  |  | ------ | - |  | ------------------------- | --- | - | -------------------------------- | - | ---------- | ------------------ |  | - | -------------------------------------------- | - |  | ----- | ----------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                    |  |              |           |  |                     |   |        |        |  |  |        |   |  | AdditionalPaid-In Capital |     |   | DeferredEquity
BasedCompensation |   |            | AccumulatedDeficit |  |   | DeficitAccumulatedDuring theDevelopmentStage |   |  | Total |            
|                                                                                                    |  | Common Stock |           |  | Class BCommon
Stock |   |        |        |  |  |       
|                                                                                                    |  | Shares       |           |  | Amount              |   |        | Shares |  |  | Amount |   |  |                           |     |   |                                 
|BALANCES , July 1, 2005                                                                             |  |              | 564,806   |  |                     | $ | 5,648  |        |  |  | 3,222  |   |  | $                         | 32  |   |                                  | $ | 22,488,624 |                    |  | $ | (110,770                                     | ) |  | $     | (10,145,391 | ) |  | $ |            |   |  | $ | 12,238,143  |  
|Exercise of warrants and stock options, 7/05 -12/05 at $54.00$74.00 per share                      |  |              | 132,305   |  |                     |   | 1,323  |        |  |  |       |   |  |                           |    |   |                                  |   | 7,218,879  |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 7,220,202   |  
|Conversion of Class B common stock                                                                  |  |              | 6,444     |  |                     |   | 64     |        |  |  | (3,222 | ) |  |                           | (32 | ) |                                  |   | (32        | )                  |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   |            |  
|Share-based compensation                                                                            |  |              | 4,306     |  |                     |   | 43     |        |  |  |       |   |  |                           |    |   |                                  |   | 412,257    |                    |  |   | (292,940                                     | ) |  |       |            |   |  |   |            |   |  |   | 119,360     |  
|Net loss                                                                                            |  |              |          |  |                     |   |       |        |  |  |       |   |  |                           |    |   |                                  |   |           |                    |  |   |                                             |   |  |       |            |   |  |   | (3,904,151  | ) |  |   | (3,904,151  | )
|                                                                                                    |  |              |           |  |                     |   |        |        |  |  |        |   |  |                           |     |   |                                  |   |            |                    |  |   |                                              |   |  |       |             |   |  |   |             |   |  |   |             |  
|BALANCES, December 31, 2005                                                                         |  |              | 707,861   |  |                     | $ | 7,078  |        |  |  |       |   |  | $                         |    |   |                                  | $ | 30,119,728 |                    |  | $ | (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 $18.54$67.50 per share                |  |              | 14,757    |  |                     |   | 148    |        |  |  |       |   |  |                           |    |   |                                  |   | 671,725    |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 671,873     |  
|Share-based compensation                                                                            |  |              | 19,674    |  |                     |   | 197    |        |  |  |       |   |  |                           |    |   |                                  |   | 1,322,523  |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 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                 |  |              | 127,004   |  |                     |   | 1,270  |        |  |  |       |   |  |                           |    |   |                                  |   | 7,376,889  |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 7,378,159   |  
|Warrants issued for placement of convertible note at $48.42 per share                               |  |              |          |  |                     |   |       |        |  |  |       |   |  |                           |    |   |                                  |   | 140,419    |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 140,419     |  
|Net loss                                                                                            |  |              |          |  |                     |   |       |        |  |  |       |   |  |                           |    |   |                                  |   |           |                    |  |   |                                             |   |  |       |            |   |  |   | (20,441,201 | ) |  |   | (20,441,201 | )
|                                                                                                    |  |              |           |  |                     |   |        |        |  |  |        |   |  |                           |     |   |                                  |   |            |                    |  |   |                                              |   |  |       |             |   |  |   |             |   |  |   |             |  
|BALANCES, December 31, 2006                                                                         |  |              | 869,296   |  |                     | $ | 8,693  |        |  |  |       |   |  | $                         |    |   |                                  | $ | 40,451,416 |                    |  | $ |                                             |   |  | $     | (10,145,391 | ) |  | $ | (24,345,352 | ) |  | $ | 5,969,366   |  
|Exercise of warrants and stock options, 1/07, 3/07, 6/07, 9/07 & 11/07 at $18.00$31.05 per share   |  |              | 57,578    |  |                     |   | 576    |        |  |  |       |   |  |                           |    |   |                                  |   | 3,173,741  |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 3,174,317   |  
|Share-based compensation                                                                            |  |              | 21,826    |  |                     |   | 218    |        |  |  |       |   |  |                           |    |   |                                  |   | 4,089,826  |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 4,090,044   |  
|Issuance of shares pursuant to offering, 2/07 at $18.00 per share                                   |  |              | 277,777   |  |                     |   | 2,778  |        |  |  |       |   |  |                           |    |   |                                  |   | 4,997,222  |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 5,000,000   |  
|Issuance of shares pursuant to secondary offering, 10/07 at $38.25 per share, net of offering costs |  |              | 1,916,668 |  |                     |   | 19,166 |        |  |  |       |   |  |                           |    |   |                                  |   | 67,875,752 |                    |  |   |                                             |   |  |       |            |   |  |   |            |   |  |   | 67,894,918  |  



5



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##### Table of Contents

|                                                                                                                              |  |              |           |  |                     |   |        |        |  |  |        |  |  |                           |   |  |                                  |   |             |                    |  |   |                                              |  |  |       |             |   |  |   |              |   |  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- |  | ------------------- | - | ------ | ------ |  |  | ------ |  |  | ------------------------- | - |  | -------------------------------- | - | ----------- | ------------------ |  | - | -------------------------------------------- |  |  | ----- | ----------- | - |  | - | ------------ | - |  | - | ----------- | -
|                                                                                                                              |  |              |           |  |                     |   |        |        |  |  |        |  |  | AdditionalPaid-In Capital |   |  | DeferredEquity
BasedCompensation |   |             | AccumulatedDeficit |  |   | DeficitAccumulatedDuring theDevelopmentStage |  |  | Total |            
|                                                                                                                              |  | Common Stock |           |  | Class
BCommon Stock |   |        |        |  |  |       
|                                                                                                                              |  | Shares       |           |  | Amount              |   |        | Shares |  |  | Amount |  |  |                           |   |  |                                 
|Shares issued in payment of principal and interest on convertible note, 1/07 at $13.41 per share and 2/07 at $18.00 per
share |  |              | 430,598   |  |                     |   | 4,306  |        |  |  |       |  |  |                           |  |  |                                  |   | 7,322,619   |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 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 $18.00 per share                                                     |  |              | 50,841    |  |                     |   | 508    |        |  |  |       |  |  |                           |  |  |                                  |   | 2,397,163   |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 2,397,671   |  
|Net loss                                                                                                                      |  |              |          |  |                     |   |       |        |  |  |       |  |  |                           |  |  |                                  |   |            |                    |  |   |                                             |  |  |       |            |   |  |   | (36,142,861  | ) |  |   | (36,142,861 | )
|                                                                                                                              |  |              |           |  |                     |   |        |        |  |  |        |  |  |                           |   |  |                                  |   |             |                    |  |   |                                              |  |  |       |             |   |  |   |              |   |  |   |             |  
|BALANCES, December 31, 2007                                                                                                   |  |              | 3,624,584 |  |                     | $ | 36,245 |        |  |  |       |  |  | $                         |  |  |                                  | $ | 135,677,017 |                    |  | $ |                                             |  |  | $     | (10,145,391 | ) |  | $ | (60,488,213  | ) |  | $ | 65,079,658  |  
|Exercise of stock options, 6/08 at $28.26 per share                                                                           |  |              | 178       |  |                     |   | 2      |        |  |  |       |  |  |                           |  |  |                                  |   | 5,022       |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 5,024       |  
|Share-based compensation                                                                                                      |  |              | 90,667    |  |                     |   | 906    |        |  |  |       |  |  |                           |  |  |                                  |   | 4,794,222   |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 4,795,128   |  
|Net loss                                                                                                                      |  |              |          |  |                     |   |       |        |  |  |       |  |  |                           |  |  |                                  |   |            |                    |  |   |                                             |  |  |       |            |   |  |   | (26,330,271  | ) |  |   | (26,330,271 | )
|                                                                                                                              |  |              |           |  |                     |   |        |        |  |  |        |  |  |                           |   |  |                                  |   |             |                    |  |   |                                              |  |  |       |             |   |  |   |              |   |  |   |             |  
|BALANCES , December 31, 2008                                                                                                  |  |              | 3,715,429 |  |                     | $ | 37,153 |        |  |  |       |  |  | $                         |  |  |                                  | $ | 140,476,261 |                    |  | $ |                                             |  |  | $     | (10,145,391 | ) |  | $ | (86,818,484  | ) |  | $ | 43,549,539  |  
|Share-based compensation                                                                                                      |  |              | 51,861    |  |                     |   | 519    |        |  |  |       |  |  |                           |  |  |                                  |   | 4,133,012   |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 4,133,531   |  
|Warrants issued in connection with convertible note at $4.50 per
share                                                        |  |              |          |  |                     |   |       |        |  |  |       |  |  |                           |  |  |                                  |   | 497,578     |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 497,578     |  
|Net loss                                                                                                                      |  |              |          |  |                     |   |       |        |  |  |       |  |  |                           |  |  |                                  |   |            |                    |  |   |                                             |  |  |       |            |   |  |   | (25,040,028  | ) |  |   | (25,040,028 | )
|                                                                                                                              |  |              |           |  |                     |   |        |        |  |  |        |  |  |                           |   |  |                                  |   |             |                    |  |   |                                              |  |  |       |             |   |  |   |              |   |  |   |             |  
|BALANCES, December 31, 2009                                                                                                   |  |              | 3,767,290 |  |                     | $ | 37,672 |        |  |  |       |  |  | $                         |  |  |                                  | $ | 145,106,851 |                    |  | $ |                                             |  |  | $     | (10,145,391 | ) |  | $ | (111,858,512 | ) |  | $ | 23,140,620  |  
|                                                                                                                              |  |              |           |  |                     |   |        |        |  |  |        |  |  |                           |   |  |                                  |   |             |                    |  |   |                                              |  |  |       |             |   |  |   |              |   |  |   |             |  
|Exercise of warrants, 7/10 at $0.90 per share                                                                                 |  |              | 42,741    |  |                     |   | 427    |        |  |  |       |  |  |                           |  |  |                                  |   | 46,329      |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 46,756      |  
|Share-based compensation                                                                                                      |  |              | 623,432   |  |                     |   | 6,234  |        |  |  |       |  |  |                           |  |  |                                  |   | 4,046,686   |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 4,052,920   |  
|Warrants issued in connection with convertible note at $2.70 - $4.50 per share                                                |  |              |          |  |                     |   |       |        |  |  |       |  |  |                           |  |  |                                  |   | 704,481     |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 704,481     |  
|Shares issued in settlement of liabilities at $1.85 per share                                                                 |  |              | 162,162   |  |                     |   | 1,622  |        |  |  |       |  |  |                           |  |  |                                  |   | 298,378     |                    |  |   |                                             |  |  |       |            |   |  |   |             |   |  |   | 300,000     |  
|Net loss                                                                                                                      |  |              |          |  |                     |   |       |        |  |  |       |  |  |                           |  |  |                                  |   |            |                    |  |   |                                             |  |  |       |            |   |  |   | (25,828,716  | ) |  |   | (25,828,716 | )
|                                                                                                                              |  |              |           |  |                     |   |        |        |  |  |        |  |  |                           |   |  |                                  |   |             |                    |  |   |                                              |  |  |       |             |   |  |   |              |   |  |   |             |  
|BALANCES, September 30, 2010                                                                                                  |  |              | 4,595,625 |  |                     | $ | 45,955 |        |  |  |       |  |  | $                         |  |  |                                  | $ | 150,202,725 |                    |  | $ |                                             |  |  | $     | (10,145,391 | ) |  | $ | (137,687,228 | ) |  | $ | 2,416,061   |  
|                                                                                                                              |  |              |           |  |                     |   |        |        |  |  |        |  |  |                           |   |  |                                  |   |             |                    |  |   |                                              |  |  |       |             |   |  |   |              |   |  |   |             |  

See accompanying notes to these financial statements.



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DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|----------------------------------------------------------------------- |  | -------------------------------------- | ----------- | - | ---- | - | ----------- | -------------------------------------------------------------------------------------- |  | - | ------------ | -
|                                                                        |  |                                        |             |   |      |   |             | For the Periodfrom
July 1, 2005(Inception of theDevelopment Stage)to September 30,2010 | 
|                                                                        |  |                                        |             |   |      |   |            
|                                                                        |  | For the Nine Months
EndedSeptember 30, |             |  
|                                                                        |  | 2010                                   |             |   | 2009 |   |            
|Cash Flows from Operating Activities:                                   |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Net loss                                                                |  | $                                      | (25,828,716 | ) |      | $ | (20,475,964 | )                                                                                      |  | $ | (137,687,228 | )
|Adjustments to reconcile net loss to cash used in operating activities: |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Depreciation and amortization                                           |  |                                        | 1,745,367   |   |      |   | 2,795,026   |                                                                                        |  |   | 13,662,593   |  
|Share-based compensation                                                |  |                                        | 4,052,920   |   |      |   | 3,005,957   |                                                                                        |  |   | 18,651,758   |  
|Non-cash interest                                                       |  |                                        | 413,534     |   |      |   | 94,573      |                                                                                        |  |   | 2,183,751    |  
|Amortization of note discount and non-cash financing costs              |  |                                        | 3,306,963   |   |      |   | 107,483     |                                                                                        |  |   | 12,785,538   |  
|(Gain) on derivative liabilities                                        |  |                                        | (4,274,348  | ) |      |   | (28,341     | )                                                                                      |  |   | (7,850,788   | )
|Non-cash restructuring                                                  |  |                                        | 9,745,407   |   |      |   |            |                                                                                        |  |   | 11,023,660   |  
|Loss on sale of fixed assets                                            |  |                                        | 46,720      |   |      |   | 340,622     |                                                                                        |  |   | 387,342      |  
|Loss on extinguishment of debt                                          |  |                                        | 4,899,267   |   |      |   |            |                                                                                        |  |   | 10,990,736   |  
|Changes in operating assets and liabilities:                            |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Other assets                                                            |  |                                        | 99,117      |   |      |   | 35,678      |                                                                                        |  |   | (471,674     | )
|Accounts payable and accrued expenses                                   |  |                                        | 3,071,964   |   |      |   | (2,528,740  | )                                                                                      |  |   | 6,662,477    |  
|Deferred rent                                                           |  |                                        |            |   |      |   | 385,917     |                                                                                        |  |   | 1,595,239    |  
|Deferred revenue                                                        |  |                                        |            |   |      |   |            |                                                                                        |  |   | 217,618      |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Net cash used in operating activities                                   |  |                                        | (2,721,805  | ) |      |   | (16,267,789 | )                                                                                      |  |   | (67,848,978  | )
|Cash Flows from Investing Activities:                                   |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Purchase of investments                                                 |  |                                        |            |   |      |   |            |                                                                                        |  |   | (71,957,732  | )
|Proceeds from sale of investments                                       |  |                                        |            |   |      |   |            |                                                                                        |  |   | 72,662,973   |  
|Purchase of equipment and improvements                                  |  |                                        |            |   |      |   | (2,929,698  | )                                                                                      |  |   | (42,570,127  | )
|Proceeds from sale of assets                                            |  |                                        | 23,000      |   |      |   | 1,925,000   |                                                                                        |  |   | 1,951,120    |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Net cash provided by (used in) investing activities                     |  |                                        | 23,000      |   |      |   | (1,004,698  | )                                                                                      |  |   | (39,913,766  | )
|Cash Flows from Financing Activities:                                   |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Proceeds from sale of stock                                             |  |                                        |            |   |      |   |            |                                                                                        |  |   | 78,312,500   |  
|Proceeds from issuance of notes                                         |  |                                        | 2,830,000   |   |      |   | 2,000,000   |                                                                                        |  |   | 29,255,000   |  
|Payments on notes and capital leases                                    |  |                                        |            |   |      |   | (171,983    | )                                                                                      |  |   | (11,495,310  | )
|Cost of financing                                                       |  |                                        |            |   |      |   |            |                                                                                        |  |   | (6,342,379   | )
|Proceeds from exercise of warrants and stock options                    |  |                                        | 38,893      |   |      |   |            |                                                                                        |  |   | 8,849,013    |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Net cash provided by financing activities                               |  |                                        | 2,868,893   |   |      |   | 1,828,017   |                                                                                        |  |   | 98,578,824   |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Increase (decrease) in cash and cash equivalents                        |  |                                        | 170,088     |   |      |   | (15,444,470 | )                                                                                      |  |   | (9,183,920   | )
|Cash and cash equivalents, beginning of period                          |  |                                        | 17,320      |   |      |   | 17,120,401  |                                                                                        |  |   | 9,371,328    |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Cash and cash equivalents, end of period                                |  | $                                      | 187,408     |   |      | $ | 1,675,931   |                                                                                        |  | $ | 187,408      |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Supplemental Cash Flow Information:                                     |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Cash paid for interest                                                  |  | $                                      |            |   |      | $ | 11,024      |                                                                                        |  |   |              |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Non-Cash Transactions:                                                  |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Beneficial conversion feature on convertible note                       |  | $                                      | 6,173,571   |   |      | $ | 1,128,066   |                                                                                        |  |   |              |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  
|Accrued Property & Equipment                                            |  | $                                      | 5,949,420   |   |      | $ | 12,643,733  |                                                                                        |  |   |              |  
|                                                                        |  |                                        |             |   |      |   |             |                                                                                        |  |   |              |  

See accompanying notes to these financial statements.



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DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Nature of Operations:

DayStar Technologies, Inc. (the
Company) is a development stage enterprise that was formed in 1997 for the purpose of developing, manufacturing and marketing innovative products to the solar photovoltaic (PV) industry. From its inception, the Company has
focused primarily on thin film copper indium gallium di-selenide (CIGS) solar products. The Company has developed a proprietary one-step sputter deposition process and manufactured a commercial scale deposition tool to apply high
efficiency CIGS material over large area glass substrates in a continuous fashion. The Company intends to integrate this tool with commercially available thin film manufacturing equipment which will provide a critically differentiated manufacturing
process to produce low-cost monolithically integrated, CIGS-on-glass modules that address the grid-tied, ground-based PV market. The Company is pursuing a strategy to manufacture its CIGS modules offshore and is in discussions with potential
partners to implement this strategy.

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, 2009. The condensed balance sheet as of December 31, 2009 has been derived from
audited financial statements. The results of operations for the nine months ended September 30, 2010 and 2009 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, 2010 and the results of its operations and its cash flows for the nine months ended September 30, 2010 and 2009 and for the period from July 1, 2005 (Inception of the Development
Stage) to September 30, 2010.

Reverse Stock SplitOn April 23, 2010, the Companys shareholders
approved a reverse stock split of its issued and outstanding common shares in the range of one-for-five to one-for-nine, with the final ratio to be selected by the Companys Board of Directors. The total authorized shares of common stock
remained unchanged at 120,000,000. The Board of Directors selected a ratio of one-for-nine and the reverse stock split was effective on May 11, 2010. Trading of the Companys common stock on the NASDAQ Capital Market on a split-adjusted
basis began at the open of trading on May 12, 2010. The reverse stock split affected all shares of the Companys common stock, as well as options to purchase the Companys common stock and other equity incentive awards, as well as
convertible debt instruments and warrants that were outstanding immediately prior to the effective date of the reverse stock split. All references to common shares and per-share data for prior periods have been retroactively restated to reflect the
reverse stock split as if it had occurred at the beginning of the earliest period presented.

2. Liquidity and Future Operations:

The Companys financial statements for the year ended December 31, 2009 and for the nine months ended
September 30, 2010 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 $25.8 million for the nine months ended September 30, 2010. The net loss for the nine months ended September 30, 2010 includes non-cash expenses of $19.9 million. 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 require significant additional capital expenditures as well as associated continued development and
administrative costs. In order to continue operations, pursue offshore manufacturing partners and commence commercial shipments of its product, the Company requires immediate and substantial additional capital beyond its current cash on hand.



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DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)





In order to
address its financial requirements and commercialize its product, the Company has engaged financial advisors to seek long-term strategic investments and partnerships. To date, the Company has been unable to raise substantial additional capital or
complete an agreement with an investor or strategic partner. Those potential partnerships, if consummated, could include joint ventures, licensing agreements, contract manufacturing agreements, a reverse merger with or an acquisition of DayStar.
Although the Company continues to seek strategic investors or partners, in light of its current cash position, the Company may in the near term be forced to cease or further curtail operations. The Company has implemented cost savings measures to
limit its cash outflows while pursuing strategic investments and partnerships.

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

3. Significant Accounting
Policies:

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

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

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 September 30, 2010 and December 31, 2009, respectively.

Research and development contract revenue is recognized as the Company meets milestones as set forth under the contract. The Company recognized no revenue for the nine months ended September 30, 2010
and 2009, respectively.

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

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

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



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)



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, 2010 and 2009 was as follows:



|                                    |  |                                         |         |  |                                        |   |           |      |  |   |           |  |  |   |           | 
|----------------------------------- |  | --------------------------------------- | ------- |  | -------------------------------------- | - | --------- | ---- |  | - | --------- |  |  | - | --------- | 
|                                    |  | For the Three MonthsEnded
September 30, |         |  | For the Nine MonthsEnded
September 30, |  
|                                    |  | 2010                                    |         |  | 2009                                   |   |           | 2010 |  |   | 2009      | 
|Share-based compensation:           |  |                                         |         |  |                                        |   |           |      |  |   |           |  |  |   |           | 
|Selling, general and administrative |  | $                                       | 369,453 |  |                                        | $ | 823,062   |      |  | $ | 2,471,794 |  |  | $ | 1,314,187 | 
|Research and development            |  |                                         | 63,218  |  |                                        |   | 507,262   |      |  |   | 1,581,126 |  |  |   | 1,691,770 | 
|                                    |  |                                         |         |  |                                        |   |           |      |  |   |           |  |  |   |           | 
|Total share-based compensation      |  | $                                       | 432,671 |  |                                        | $ | 1,330,324 |      |  | $ | 4,052,920 |  |  | $ | 3,005,957 | 
|                                    |  |                                         |         |  |                                        |   |           |      |  |   |           |  |  |   |           | 

During the nine months ended September 30, 2010, the Company granted options to purchase 622,228 shares
of common stock at an exercise price of $3.60 per share, all with a contractual life of ten years. Options to purchase 99,071 shares of common stock were forfeited during the nine months ended September 30, 2010. During the nine
months ended September 30, 2010 there were restricted stock units granted to purchase 444,063 shares of common stock and restricted stock units to purchase 26,672 shares of common stock were forfeited. Also, as part of the Companys cost
savings measures, 163,559 shares of common stock were issued in lieu of cash for payroll to certain employees during the nine months ended September 30, 2010.

Subsequent to September 30, 2010 and through the date of this filing, there were no options or restricted stock units granted or forfeited. There were 70,108 shares of common stock issued in lieu of
cash for payroll to certain employees subsequent to September 30, 2010 and through the date of this filing.

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 $24,855 and $131,835 at September 30, 2010 and December 31, 2009, respectively, which represent the amount of potential cash settlement due to the warrant holders in
the event of a change in control.

RestructuringRestructuring expenses were $1,979,819 and $9,745,407 for the
three months and nine months ended September 30, 2010, respectively. In June 2010, the Company was unable to cure all alleged defaults under the lease for its Newark facility and on July 15, 2010, it was notified by its landlord that the
lease for the facility was forfeited and terminated, and that the landlord has received a judgment for possession of the premises. Therefore, the Company recorded an impairment charge for the book value of the leasehold improvements for this
facility and the write-off of any non-cash deferred rent. The Company also recorded impairment charges on certain equipment during the nine months ended September 30, 2010.

ReclassificationsCertain reclassifications have been made to the 2009 financial statements to conform to the 2010
presentation. Such reclassifications had no impact on net loss.

Impact of Recently Issued Accounting
Pronouncements

In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends the accounting and reporting guidance for debt (and certain preferred stock) with specific conversion features or other options. ASU 2009-15 is effective for
fiscal years beginning on or after December 15, 2009. The adoption of ASU 2009-15 on January 1, 2010 did not have a material impact on the Companys financial statements.



10



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)





In January 2010,
the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair Value Measurements. This ASU requires new disclosures and clarifies certain existing disclosure requirements about fair
value measurements. ASU 2010-06 requires a reporting entity to disclose significant transfers in and out of Level 1 and Level 2 fair value measurements, to describe the reasons for the transfers and to present separately information about purchases,
sales, issuances and settlements for fair value measurements using significant unobservable inputs. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2010; early adoption is permitted. The adoption of ASU
2010-06 on January 1, 2010 (with the exception of the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements) did not have a material impact on the Companys
financial statements. The Company does not expect the adoption of the disclosure requirements about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements effective January 1, 2011 to have
a material impact on its financial statements.

In January 2010, the FASB issued ASU 2010-01, Equity (Topic
505)Accounting for Distributions to Shareholders with Components of Stock and Cash. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or shares with a potential
limitation on the amount of cash that all shareholders can elect to receive is considered a share issuance. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective
basis. The adoption of ASU 2010-01 did not have a material impact on the Companys financial statements.

In February
2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. This ASU contains certain updates to standards for provisions that were outdated, contained inconsistencies, or needed clarification. The ASU contains various
effective dates. The clarifications of the guidance on embedded derivatives and hedging (Subtopic 815-15) are effective for fiscal years beginning after December 15, 2009. The amendments to the guidance on accounting for income taxes in a
reorganization (Subtopic 852-740) applies to reorganizations for which the date of the reorganization is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. All other amendments are effective
as of the first reporting period (including interim periods) beginning after the date this ASU was issued. The adoption of ASU 2010-08 did not have a material impact on the Companys financial statements.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855)Amendments to Certain Recognition and Disclosure
Requirements. This ASU removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. All the amendments in ASU 2010-09 were effective upon
issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The adoption of ASU 2010-09 did not have a material impact on
the Companys financial statements.

In March 2010, the FASB issued ASU 2010-11, Derivatives and Hedging (Topic
815)Scope Exception Related to Embedded Credit Derivatives. This ASU removes a scope exception, and an entity that has a beneficial interest in securitized financial assets that includes a credit derivative feature must evaluate that
feature for bifurcation from the host financial asset in accordance with the guidance at ASC 815. ASU 2010-11 is effective at the beginning of a reporting entitys first fiscal quarter beginning after June 15, 2010. Early adoption is
permitted at the beginning of an entitys first fiscal quarter beginning after March 5, 2010. The Company does not expect that the adoption of ASU 2010-11 will have a material impact on its financial statements.

In August 2010, the FASB issued ASU 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This update
amends various SEC paragraphs in the FASB Accounting Standards Codification pursuant to the SEC Rule, Technical Amendments to Rules Forms, Schedules and Codification of Financial Reporting Policies. The adoption of ASU 2010-21 did not have
any impact on the Companys financial statements.

In August 2010, the FASB issued ASU 2010-22, Accounting for Various
Topics. This ASU amends various SEC paragraphs in the FASB Accounting Standards Codification based on external comments received and the issuance of Staff Accounting Bulletin (SAB) No. 112, which amended or rescinded a portion of certain
SAB topics. SAB 112 was issued to bring existing SEC guidance into conformity with ASC 805, Business Combinations, and ASC 810, Consolidation. The adoption of ASU 2010-22 did not have any impact on the Companys financial
statements.



11



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)





4. Secured Convertible Notes
and Warrants

Beginning in September 2009, the Company has entered into a series of agreements with various lenders (the
Lenders) to provide bridge financing to the Company in exchange for convertible notes and warrants. These notes (the Notes) each contain terms of six months, are secured by all assets of the Company, and accrue interest at
rates of between 8  10% per annum. The Lenders may, at their option at any time prior to payment in full of the Notes, elect to convert all or any part of the entire outstanding principal amount of the Notes plus the accrued interest on
the then outstanding balance into shares of the Companys common stock at the conversion price specified in each of the Notes (subject to adjustment in the event of any stock splits, stock dividends or other recapitalization of common stock
subsequent to the date of such sale or issuance). If between the date of the Notes and such conversion, the Company issues or sells any shares of capital stock, other than certain excluded securities (a Future Issuance), at a per share
price below the original conversion price specified in the Notes, then the conversion price of the Notes will be reduced to the price of such Future Issuance. During the three months ended September 30, 2010, the Company issued convertible
notes totaling $800,000 and as of September 30, 2010 the aggregate principal balance of all outstanding convertible notes was $5,255,000. Also, during the three months ended September 30, 2010, the Company and the Lenders agreed to a
restructuring of all of the then outstanding notes payable (convertible and non-convertible), in which the Lenders extended the maturity date of the Notes to January 22, 2011 and the exercise price of the outstanding warrants was reduced to
$1.25 per share. The shares issuable under the Notes were increased to reflect the new conversion price of $0.90. As of September 30, 2010 the Notes were convertible into 5,838,892 shares of common stock.

The Notes conversion features were determined to be embedded derivative liabilities and therefore were bifurcated from the Notes
and recorded as a discount to the Notes at their fair value at issuance and are required to be adjusted to fair value at the end of each reporting period. The change in fair value of the conversion features, calculated using the Black Scholes model,
is recorded as a gain or loss on derivative liabilities. The fair value of the conversion features for the new notes in the aggregate principal amount of $800,000 issued during the third quarter of 2010 exceeded the principal amount of the notes by
$890,935 and this excess was charged to loss on derivative liabilities.

Additionally, the restructuring of all the other
outstanding Notes during the three months ended September 30, 2010 resulted in the extinguishment of the original notes and recording of new notes. The Company recorded new conversion features based on the terms of the restructured Notes with
the difference between the fair value of the conversion features over the principal amounts of the Notes recorded as loss on extinguishment of debt. The conversion feature fair value at September 30, 2010 and December 31, 2009 were
$6,173,571 and $251,618, respectively. The change in fair value of the conversion features during the three months and nine months ended September 30, 2010 resulted in a gain on derivative liabilities of $4,323,393 and $5,078,885, respectively.

The proceeds remaining, if any, after allocation to the conversion features are allocated on a relative fair value basis
between the Notes and the warrants and the amounts allocated to the warrants, calculated using the Black Scholes model, are recorded as additional note discount. The discount attributable to the issuance date aggregate fair value of the conversion
features and warrants, totaling $5,255,000, is being amortized using the effective interest method over the terms of the Notes. During the three months and nine months ended September 30, 2010, $1,809,947 and $3,306,963, respectively, of this
discount was amortized to expense. The total loss on extinguishment of debt due to the restructuring of the Notes during the third quarter of 2010 was $4,899,267, and included the write-off of the remaining discount on the original notes, as well as
the difference between the fair value of the conversion features over the principal amounts of the restructured notes.

The
warrants issued in connection with these Notes are exercisable upon issuance (with the exception of the warrants issued to Dynamic Worldwide Solar Energy, LLC) and entitle the Lenders to purchase up to 1,850,005 shares of common stock at an exercise
price of $1.25 per share, as adjusted for standard anti-dilution provisions and are exercisable for a period of 2  7 years from their respective issuance dates. In October 2010, warrants to purchase an additional 3,485,185 shares of common
stock at exercise prices ranging from $1.25  $1.70 per share were issued to certain of the Lenders.

As a result of
free-standing registration rights agreements, the Company has an obligation to register the shares underlying the Notes and warrants and has a continuing obligation to keep the registration statement effective. Failure to meet this obligation, as
defined, will result in liquidated damages, during the time in which this requirement is not met. The Lenders have agreed to provide the Company with additional time required to register the shares underlying the Notes and warrants.



12



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)





The following
table summarizes the pertinent details of the outstanding notes and warrants as of September 30, 2010.



|                                     |  |                  |           |  |          |   |           |                                |  |   |                                 |  |  |                 |           |  |          |   |      |                      |  |  |           |  |  |   |      | 
|------------------------------------ |  | ---------------- | --------- |  | -------- | - | --------- | ------------------------------ |  | - | ------------------------------- |  |  | --------------- | --------- |  | -------- | - | ---- | -------------------- |  |  | --------- |  |  | - | ---- | 
|Lender                               |  | Principal Amount |           |  | Discount |   |           | Note Payable(net 
of discount) |  |   | Note ConversionShares 
Issuable |  |  | ConversionPrice |           |  | Warrants |   |      | WarrantExercisePrice | 
|Peter Lacey (1)                      |  | $                | 3,075,000 |  |          | $ | 1,894,865 |                                |  | $ | 1,180,135                       |  |  |                 | 3,416,668 |  |          | $ | 0.90 |                      |  |  | 724,074   |  |  | $ | 1.25 | 
|Michael Moretti                      |  |                  | 750,000   |  |          |   | 462,162   |                                |  |   | 287,838                         |  |  |                 | 833,335   |  |          | $ | 0.90 |                      |  |  | 485,188   |  |  | $ | 1.25 | 
|John Gorman                          |  |                  | 700,000   |  |          |   | 431,351   |                                |  |   | 268,649                         |  |  |                 | 777,778   |  |          | $ | 0.90 |                      |  |  | 333,334   |  |  | $ | 1.25 | 
|William Steckel (2)                  |  |                  | 30,000    |  |          |   | 18,486    |                                |  |   | 11,514                          |  |  |                 | 33,333    |  |          | $ | 0.90 |                      |  |  | 11,112    |  |  | $ | 1.25 | 
|Robert Weiss (3)                     |  |                  | 50,000    |  |          |   | 30,811    |                                |  |   | 19,189                          |  |  |                 | 55,556    |  |          | $ | 0.90 |                      |  |  | 55,556    |  |  | $ | 1.25 | 
|Dynamic Worldwide Solar Energy, LLC. |  |                  | 650,000   |  |          |   | 607,378   |                                |  |   | 42,622                          |  |  |                 | 722,222   |  |          | $ | 0.90 |                      |  |  | 240,741   |  |  | $ | 1.25 | 
|                                     |  | $                | 5,255,000 |  |          | $ | 3,445,053 |                                |  | $ | 1,809,947                       |  |  |                 | 5,838,892 |  |          |   |      |                      |  |  | 1,850,005 |  |  |   |      | 



|(1) | Mr. Lacey is Chairman of the Board of Directors for the Company.
|--- | ----------------------------------------------------------------

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

|(3) | Mr. Weiss is the Companys Chief Technology Officer.
|--- | ----------------------------------------------------

The following table summarizes the pertinent details of the outstanding notes and warrants as of December 31, 2009.



|            |  |                  |           |  |          |   |         |                               |  |   |                 |  |  |                 |         |  |          |   |      |                |  |  |         |  |  |   |      | 
|----------- |  | ---------------- | --------- |  | -------- | - | ------- | ----------------------------- |  | - | --------------- |  |  | --------------- | ------- |  | -------- | - | ---- | -------------- |  |  | ------- |  |  | - | ---- | 
|Lender      |  | Principal Amount |           |  | Discount |   |         | Note Payable(net 
ofdiscount) |  |   | Shares Issuable |  |  | ConversionPrice |         |  | Warrants |   |      | Exercise Price | 
|Peter Lacey |  | $                | 2,425,000 |  |          | $ | 795,413 |                               |  | $ | 1,629,587       |  |  |                 | 370,371 |  |          | $ | 5.40 |                |  |  | 351,852 |  |  | $ | 4.50 | 

Mr. Lacey is
Chairman of the Board of Directors for the Company.

5. Derivative Liabilities

As described in Note 4 Secured Convertible Notes and Warrants, the Company is accounting for the conversion features in its secured
convertible notes as embedded derivative liabilities. The Company currently does not use hedging contracts to manage the risk of its overall exposure to interest rate and foreign currency changes. Neither the conversion features nor the stock
warrant liability discussed below is considered a hedging instrument.

The conversion feature liability on the balance sheet
at September 30, 2010 and December 31, 2009, and the change in the liability for the nine months ended September 30, 2010 and 2009 is summarized as follows:



|                            |  |                            |            |  
|--------------------------- |  | -------------------------- | ---------- | -
|                            |  | ConversionFeatureLiability |           
|Balance, December 31, 2008  |  | $                          |           |  
|New debt issuances          |  |                            | 1,324,825  |  
|Change in fair value        |  |                            | (196,759   | )
|                            |  |                            |            |  
|Balance, September 30, 2009 |  | $                          | 1,128,066  |  
|                            |  |                            |            |  
|Balance, December 31, 2009  |  | $                          | 251,618    |  
|New debt issuances          |  |                            | 11,000,838 |  
|Change in fair value        |  |                            | (5,078,885 | )
|                            |  |                            |            |  
|Balance, September 30, 2010 |  | $                          | 6,173,571  |  
|                            |  |                            |            |  



13



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)





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, due to the potential for cash settlement. In the
event of a change in control of the Company, the warrant holders 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, Fair Value
Measurements and Disclosures, 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. At
December 31, 2009, there were 66,667 warrants outstanding that were considered derivative liabilities. During the nine months ended September 30, 2010, 42,741 warrants were exercised for common stock and subsequent to September 30,
2010, the remaining 23,926 warrants were exercised for common stock.

The stock warrant liability on the balance sheet at
September 30, 2010 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 for the nine months ended September 30, 2010 and 2009 is summarized as
follows:



|                            |  |                         |         |  
|--------------------------- |  | ----------------------- | ------- | -
|                            |  | Stock 
WarrantLiability |        
|Balance, December 31, 2008  |  | $                       | 125,481 |  
|Change in fair value        |  |                         | 168,417 |  
|                            |  |                         |         |  
|Balance, September 30, 2009 |  | $                       | 293,898 |  
|                            |  |                         |         |  
|Balance, December 31, 2009  |  | $                       | 131,835 |  
|Exercises                   |  |                         | (7,862  | )
|Change in fair value        |  |                         | (99,118 | )
|                            |  |                         |         |  
|Balance, September 30, 2010 |  | $                       | 24,855  |  
|                            |  |                         |         |  

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, 2010 and December 31, 2009. There were no financial assets subject to the provisions of ASC 820 as of September 30, 2010 and December 31, 2009:



|                                             |  |         |   |  |         |   |   |         |  |   |           |  |  |   |           | 
|-------------------------------------------- |  | ------- | - |  | ------- | - | - | ------- |  | - | --------- |  |  | - | --------- | 
|                                             |  | Level 1 |   |  | Level 2 |   |   | Level 3 |  |   | Total     | 
|Financial liabilities at September 30, 2010: |  |         |   |  |         |   |   |         |  |   |           |  |  |   |           | 
|Derivative stock warrants                    |  | $       |  |  |         | $ |  |         |  | $ | 24,855    |  |  | $ | 24,855    | 
|Conversion feature                           |  |         |  |  |         |   |  |         |  |   | 6,173,571 |  |  |   | 6,173,571 | 
|                                             |  |         |   |  |         |   |   |         |  |   |           |  |  |   |           | 
|                                             |  | $       |  |  |         | $ |  |         |  | $ | 6,198,426 |  |  | $ | 6,198,426 | 
|                                             |  |         |   |  |         |   |   |         |  |   |           |  |  |   |           | 
|Financial liabilities at December 31, 2009:  |  |         |   |  |         |   |   |         |  |   |           |  |  |   |           | 
|Derivative stock warrants                    |  | $       |  |  |         | $ |  |         |  | $ | 131,835   |  |  | $ | 131,835   | 
|Conversion feature                           |  |         |  |  |         |   |  |         |  |   | 251,618   |  |  |   | 251,618   | 
|                                             |  |         |   |  |         |   |   |         |  |   |           |  |  |   |           | 
|                                             |  | $       |  |  |         | $ |  |         |  | $ | 383,453   |  |  | $ | 383,453   | 
|                                             |  |         |   |  |         |   |   |         |  |   |           |  |  |   |           | 



14



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##### Table of Contents

DAYSTAR TECHNOLOGIES, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS(Continued)

(Unaudited)





6. Commitments &
Contingencies

Legal Settlement

As described in Part II, Item 1 Legal Proceedings, the Company was party to a lawsuit in which Gordon Prill, the general contractor, and several subcontractors that completed tenant improvements at
the Companys Newark, California facility alleged damages of $1.6 million for breach of written contract, foreclosure on certain mechanics liens, and statutory penalties under the California Civil Code. On April 27, 2010, all parties
in this action had a court-ordered mediation to settle the dispute, and on May 11, 2010, Gordon Prill and the Company entered into a Settlement Agreement (the Gordon Prill Settlement). Under the Gordon Prill Settlement, the
Companys landlord for the Newark facility agreed to pay Gordon Prill $1.2 million in cash and the Company has agreed to issue Gordon Prill $300,000 in common stock. In exchange for the above, Gordon Prill will provide to the Company a full
release of all mechanics liens against the Newark, California facility. In addition, Gordon Prill will also provide the Company a dismissal with prejudice and a full lien release from all parties who have asserted claims in the action. The Gordon
Prill Settlement also provides for a waiver of all claims involved in the action, both current and future, and extends the benefit of the waiver to Gordon Prills subcontractors who provided labor, services, equipment, and materials during the
initial construction phase of the Companys Newark facility. The Company is currently in discussions with the landlord with respect to amounts owed to the landlord, including amounts paid on the Companys behalf as part of the Gordon Prill
Settlement. For further discussion of these legal proceedings, see Part II, Item 1 Legal Proceedings.

7. Subsequent Events

Settlement of Liabilities

On October 20, 2010, the Superior Court of the State of California for the County of Los Angeles (the Court) entered an Order Approving Stipulation for Settlement of Claim (the
Order) in the matter entitled Socius CG II, Ltd. v. DayStar Technologies, Inc. The Order provides for the full and final settlement of Socius GC II, Ltd.s (Socius) $977,147.59 claim against the Company (the
Claim). Socius purchased the Claim from fourteen creditors of the Company, pursuant to the terms of the Claim Purchase Agreements as negotiated by the Company with the respective vendors. Pursuant to the terms of the Order, on
October 21, 2010, the Company issued and delivered to Socius 325,000 shares of its common stock (the Settlement Shares), subject to adjustment as set forth in the Order. In accordance with the Order, the Company issued Socius an
additional 115,000 shares on November 10, 2010 to adjust for the change in the volume weighted average share price of the Companys common stock during the period since the issuance of the Settlement Shares and to cover certain expenses of
the transaction.

In no event will the aggregate number of shares of the Companys common stock issued to Socius or its
designee in connection with the settlement of the Claim, aggregated with any other shares of the Companys common stock issued to Socius and/or its designees, at any time exceed 19.99% of the total number of shares of common stock outstanding
immediately preceding the date of the Order unless the Company has obtained either (1) stockholder approval of the issuance of more than such number of shares of its common stock pursuant to NASDAQ Marketplace Rule 5635(d) or (2) a waiver
from NASDAQ of its compliance with Rule 5635(d).



15



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##### Table of Contents



|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. Such factors include our ability to raise substantial additional capital in the short term; our ability to achieve favorable
outcomes in pending litigation; our ability to continue our business as a going concern; our ability to execute our commercialization plan and additional factors set forth in our Annual Report on Form 10-K filed on March 19, 2010 as well as in
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 di-selenide (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 are pursuing a strategy to commercialize and manufacture our CIGS modules offshore and are in discussions with potential partners to implement this strategy.

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 15% 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%.

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.

In October 2007, we completed a follow-on public offering in which we sold 1,916,667 shares of our common stock. Our net proceeds from
the offering were approximately $68 million. 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. In the near
term, we will require substantial funds beyond our current cash on hand in order to fully build-out our first production line, to commence and support commercial production as currently planned, to fund future operations, and to expand our capacity
beyond our first production line.

In order to raise the capital required to commercialize our product, we have engaged
financial advisors to assist us in exploring strategic transactions.

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.

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.



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Results of
Operations

Comparison of the Three Months Ended September 30, 2010 and 2009

Certain reclassifications have been made to the 2009 financial information to conform to the 2010 presentation. Such reclassifications had
no impact on net loss.

Research and development expenses. Research and development expenses were $210,869 for the
three months ended September 30, 2010 compared to $2,998,177 for the three months ended September 30, 2009, a decrease of $2,787,308 or 93%. The decrease is primarily due to the cost savings measures implemented including a reduction in
our workforce as well as the consolidation of our facilities into one location in California and a reduction in expenditures for materials, supplies and consultants. Also, in July 2009, we sold substantially all our tangible assets at our Halfmoon,
NY facility to Veeco Compound Semiconductor, Inc. (Veeco) for $1.925 million and Veeco hired the 18 research and development employees located at the facility. This transaction further reduced our research and development expenses for
the three months ended September 30, 2010 as compared with the same period in the prior year. We also experienced a decrease in share based compensation of $444,044 during the three months ended September 30, 2010 as compared with the
three months ended September 30, 2009.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $1,328,056 for the three months ended September 30, 2010 compared to $2,006,535 for the three months ended September 30, 2009, a decrease of $678,479 or 34%. During the three months ended September 30,
2010 we experienced a decrease in selling, general and administrative expenses primarily due to cost savings measures implemented, including a reduction in our workforce as well as a reduction in outside consultants and professional fees. We also
experienced a decrease in share based compensation of $453,609 during the three months ended September 30, 2010 as compared with the three months ended September 30, 2009.

Restructuring.Restructuring expenses were $1,979,819 for the three months ended September 30, 2010. There were no
restructuring expenses for the three months ended September 30, 2009. Restructuring expenses during the three months ended September 30, 2010 are due to impairment charges recorded on certain equipment.

Depreciation and amortization expense. Depreciation and amortization expense was $375,515 for the three months ended
September 30, 2010 compared to $807,716 for the three months ended September 30, 2009, a decrease of $432,201 or 54%. During the second quarter of 2010, we consolidated our California facilities and recorded impairment charges on leasehold
improvements and certain equipment which resulted in a decrease in depreciation expense. Also, we experienced a decrease in depreciable assets from the sale of the equipment at our Halfmoon, NY facility in July 2009 which further reduced
depreciation expense.

Interest expense. Interest expense was $185,610 for the three months ended September 30,
2010 compared to $36,390 for the three months ended September 30, 2009, an increase of $149,220. The increase in interest expense was due to the interest on convertible notes issued in connection with our bridge financing.

Amortization of note discount and financing costs.Amortization of note discount and financing costs was $1,809,947 for the three
months ended September 30, 2010 compared to $107,483 for the three months ended September 30, 2009, an increase of $1,702,464. The convertible notes issued in connection with our bridge financing contain conversion features which result in
discounts to the principal amount of the notes payable reflected on our balance sheet, based on the fair value of the conversion features. The discounts on the convertible notes are amortized using the effective interest method over the terms of the
notes. The increase in amortization of note discount and financing costs was due to an increase in the convertible notes during the three months ended September 30, 2010 as compared with the three months ended September 30, 2009, as well as a
restructuring of the outstanding convertible notes during the third quarter of 2010 which resulted in an increase in the discount on the notes and a corresponding increase in amortization of the discount during the period.

Gain on derivative liabilities. Gain on derivative liabilities was $3,399,283 for the three months ended September 30, 2010
compared to a gain of $128,983 for the three months ended September 30, 2009. The conversion features on the convertible notes issued in conjunction with our bridge financing during 2009 and 2010 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, 2010, our common stock price decreased which caused a decrease in the fair value of the conversion features,
resulting in a gain on derivative liabilities. Additionally, during the three months ended September 30, 2010, we issued new convertible notes and the fair value of the conversion features for the new notes exceeded the principal amount the
notes. The excess of the fair value of the conversion features over the principal amount of the notes of $890,935 was charged to loss on derivative liabilities, which partially offset the gain on derivative liabilities during the period.



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Loss on
extinguishment of debt. Loss on extinguishment of debt was $4,899,267 for the three months ended September 30, 2010. There was no loss on extinguishment of debt during the three months ended September 30, 2010. During the three months
ended September 30, 2010, we restructured all of our existing convertible notes which resulted in the extinguishment of the original notes on our balance sheet and the recording of new notes and corresponding conversion features. The fair value
of the conversion features for the restructured notes exceeded the principal amount the notes and the excess of the fair value of the conversion features over the principal amount of the notes was charged to loss on extinguishment of debt.

Comparison of the Nine Months Ended September 30, 2010 and 2009

Certain reclassifications have been made to the 2009 financial information to conform to the 2010 presentation. Such reclassifications had
no impact on net loss.

Research and development expenses. Research and development expenses were $5,264,054 for the
nine months ended September 30, 2010 compared to $12,164,271 for the nine months ended September 30, 2009, a decrease of $6,900,217 or 57%. The decrease is primarily due to the cost savings measures implemented including a reduction in our
workforce as well as the consolidation of our facilities into one location in California and a reduction in expenditures for materials, supplies and consultants. Also, in July 2009, we sold substantially all our tangible assets at our Halfmoon, NY
facility to Veeco Compound Semiconductor, Inc. (Veeco) for $1.925 million and Veeco hired the 18 research and development employees located at the facility. This transaction further reduced our research and development expenses for the
nine months ended September 30, 2010 as compared with the same period in the prior year.

Selling, general and
administrative expenses. Selling, general and administrative expenses were $4,661,127 for the nine months ended September 30, 2010 compared to $4,846,650 for the nine months ended September 30, 2009, a decrease of $185,523 or 4%. The
decrease in selling, general and administrative expenses was primarily due to cost savings measures implemented, including a reduction in our workforce as well as a reduction in outside consultants and professional fees. However, the decrease in
selling, general and administrative expenses during the nine months ended September 30, 2010 as compared with the nine months ended September 30, 2009 was offset by an increase in share-based compensation of $1,157,607.

Restructuring.Restructuring expenses were $9,745,407 for the nine months ended September 30, 2010. There were no
restructuring expenses for the nine months ended September 30, 2009. In June 2010, we were unable to cure all alleged defaults under the lease for our Newark facility and on July 15, 2010, we were notified by our landlord that the lease
for the facility was forfeited and terminated, and that the landlord has received a judgment for possession of the premises. Therefore, we recorded an impairment charge for the book value of the leasehold improvements for this facility and the
write-off of any non-cash deferred rent, in the amount of $3,509,763. Additionally, we recorded impairment charges of $6,235,644 on certain equipment during the nine months ended September 30, 2010.

Depreciation and amortization expense. Depreciation and amortization expense was $1,745,367 for the nine months ended
September 30, 2010 compared to $2,795,026 for the nine months ended September 30, 2009, a decrease of $1,049,659 or 38%. During the second quarter of 2010, we consolidated our California facilities and recorded impairment charges on
leasehold improvements and certain equipment which resulted in a decrease in depreciation expense. Also, we experienced a decrease in depreciable assets from the sale of the equipment at our Halfmoon, NY facility in July 2009 which further reduced
depreciation expense.

Interest expense. Interest expense was $413,534 for the nine months ended September 30,
2010 compared to $105,597 for the nine months ended September 30, 2009, an increase of $307,937. The increase in interest expense was due to the interest on convertible notes issued in connection with our bridge financing.

Amortization of note discount and financing costs.Amortization of note discount and financing costs was $3,341,963 for the nine
months ended September 30, 2010 compared to $107,483 for the nine months ended September 30, 2009, an increase of $3,234,480. The convertible notes issued in connection with our bridge financing contain conversion features which result in
discounts to the principal amount of the notes payable reflected on our balance sheet, based on the fair value of the conversion features. The discounts on the convertible notes are amortized using the effective interest method over the terms of the
notes. The increase in amortization of note discount and financing costs was due to an increase in the convertible notes during the nine months ended September 30, 2010 as compared with the nine months ended September 30, 2009, as well as a
restructuring of the outstanding convertible notes during the third quarter of 2010 which resulted in an increase in the discount on the notes and a corresponding increase in amortization of the discount during the period.



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Gain on derivative
liabilities. Gain on derivative liabilities was $4,274,348 for the nine months ended September 30, 2010 compared to a gain of $28,341 for the nine months ended September 30, 2009. The conversion features on the convertible notes issued
in conjunction with our bridge financing during 2009 and 2010 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 nine months ended September 30, 2010,
our common stock price decreased which caused a decrease in the fair value of the conversion features, resulting in a gain on derivative liabilities. Additionally, during the third quarter of 2010, we issued new convertible notes and the fair value
of the conversion features for the new notes exceeded the principal amount the notes. The excess of the fair value of the conversion features over the principal amount of the notes of $890,935 was charged to loss on derivative liabilities, which
partially offset the gain on derivative liabilities during the period.

Loss on extinguishment of debt. Loss on
extinguishment of debt was $4,899,267 for the nine months ended September 30, 2010. There was no loss on extinguishment of debt during the nine months ended September 30, 2010. In the third quarter of 2010, we restructured all of our
existing convertible notes which resulted in the extinguishment of the original notes on our balance sheet and the recording of new notes and corresponding conversion features. The fair value of the conversion features for the restructured notes
exceeded the principal amount the notes and the excess of the fair value of the conversion features over the principal amount of the notes was charged to loss on extinguishment of debt.

Liquidity and Capital Resources

At September 30, 2010, our cash and cash equivalents totaled $187,000 compared to $17,000 at December 31, 2009.

We are in the development stage, and as such, have historically reported net losses, including a net loss of $25.8 million for the nine months ended September 30, 2010. The net loss for the nine
months ended September 30, 2010 includes non-cash expenses of $19.9 million. We anticipate incurring losses in the future, as we complete the commercialization of our products, invest in research and development, and incur associated
administrative and operating costs. Our financial statements for the year ended December 31, 2009 and the nine months ended September 30, 2010 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 1,916,667 shares of our common stock at $38.25 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 for down payments on equipment
for our initial production line. We are pursuing a strategy to commercialize and manufacture our CIGS modules offshore and are in discussions with potential partners to implement this strategy. Commercialization efforts, including continued
development and administrative costs will require significant additional capital.

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 × 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 commercialize our CIGS modules, we will require substantial funds in the near term beyond our current
cash on hand. In light of our current cash position, we implemented significant reductions in our workforce in 2009 and 2010 and other cost savings measures in order to preserve cash.

Beginning in September 2009, we have funded our operations through a series bridge financing transactions in which we have issued
convertible notes with an aggregate principal amount of $5,255,000 and also issued warrants exercisable for shares of our common stock.

In order to address our immediate capital requirements and commercialize our product, we have engaged financial advisors to seek long-term strategic investments and partnerships. To date, we have been
unable to raise substantial 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 may in the near term be forced to
cease or further 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 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.



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Commitments.At
September 30, 2010, we had outstanding approximately $1.0 million of purchase orders for equipment. Other material commitments include 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.

As discussed in Part II Item 1. Legal Proceedings, on July 15,
2010, we were notified by the landlord for our Newark, California facility that the lease for the facility was forfeited and terminated, and that the landlord has received a judgment for possession of the premises. On August 15, 2010, we leased
approximately 32,000 square feet of warehouse and office space in Milpitas, California and have relocated our development and production equipment, as well as our corporate headquarters to this location.

We also maintain leases for certain office equipment.

As discussed under Commitments, at September 30, 2010, we had approximately $1.0 million in commitments under outstanding purchase orders for equipment. 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 Accounting 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 Accounting 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 Accounting Officer concluded that our disclosure controls and procedures were effective as of September 30,
2010.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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

On January 6, 2010, New York State Urban Development, d/b/a/ Empire State Development Corporation (ESDC), filed a breach
of contract action against us. This action stems from the Grant Disbursement Award we entered into with ESDC when we relocated our headquarters to New York in 2004. ESDC has obtained a judgment for $420,000 in damages in this action plus interest
and penalties.



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

Item 1A (Risk Factors) of our annual report on Form 10-K for our fiscal year ended December 31, 2009 (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 and commercialization efforts, we require immediate and
substantial additional capital beyond our current cash on hand. To date, we have been unable to raise significant 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 implemented a significant reduction in our workforce during 2009 and 2010 and may in the near term be forced to cease or further 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 and increase the likelihood that
our stockholders could face the loss of all or a substantial part of their equity investment.



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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, 2009 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 $25.8
million for the nine months ended September 30, 2010 and $25.0 million for the year ended December 31, 2009, and have incurred negative cash flows from operations. As a result of ongoing losses, we had an accumulated deficit of
approximately $147.8 million and $122.0 million as of September 30, 2010 and December 31, 2009, respectively. 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.



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

None.



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

None.



|Item 4. | (Removed and Reserved).
|------- | -----------------------



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

(a)
None.

(b) None.



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|Item 6. | Exhibits
|------- | --------

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



|            |  |                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
No. |  | Description                                                                                                                                            
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                         
|            | 
|31.2        |  | Certification of Chief Accounting Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                        
|            | 
|32.1        |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
|            | 
|32.2        |  | Certification of the Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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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 15, 2010 |  |  |  | By:                        |  | /S/    MAGNUS
RYDE                                                  
|                        |  |  |  |                            |  | Magnus Ryde                                                         
|                        |  |  |  |                            |  | Chief Executive Officer (Principal Executive Officer)               
|                        |  |  | 
|Date: November 15, 2010 |  |  |  | By:                        |  | /S/    CHRISTOPHER T.
LAIL                                          
|                        |  |  |  |                            |  | Christopher T. Lail                                                 
|                        |  |  |  |                            |  | Vice President & Corporate Controller (Principal Accounting Officer)



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EXHIBIT INDEX



|            |  |                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
No. |  | Description                                                                                                                                            
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                         
|            | 
|31.2        |  | Certification of Chief Accounting Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                        
|            | 
|32.1        |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 
|            | 
|32.2        |  | Certification of the Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



25