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Executives

Deborah A. Stapleton – Stapleton Communications, Inc.

Stephen J. DeLuca - Chief Executive Officer & Director

William Steckel - Chief Financial Officer

Analysts

Patrick Corkin

Colin Rusch – Broadpoint Capital

Adam Cropp

Jonathan Hoopes – Thinkpanmure, LLC

DayStar Technologies, Inc. (OTCPK:DSTI) Business Update Call July 8, 2008 5:00 PM ET

Operator

Welcome you to the DayStar conference call. (Operator Instructions) I would now like to turn the call over to Deborah Stapleton.

Deborah A. Stapleton

Welcome everyone to the DayStar Mid-Year 2008 Operational Update Conference Call. The speaker today will be Dr. Stephen DeLuca, the company’s CEO.

But before we begin I would like to remind you that some of the comments we will make on this call are forward-looking including, without limitation, statements regarding expectations of further technological development as well as timing and ability to scale to production capacity and complete the build out of a production facility.

These statements are only predictions based on assumptions that are believed to be reasonable at the time they are made and are subject to significant risks and uncertainties. You should not rely on these forward-looking statements as representing our views in the future and we undertake no obligation to publicly update or revise these statements.

Our actual results may differ materially and adversely from any projections and forward-looking statements discussed on this call. Our Annual Report on Form 10-KSB and other forms on file with the SEC identify important risk factors and uncertainties that you should consider and that may affect whether our forward-looking statements prove to be correct.

Now I’ll turn the call over to Dr. Stephen DeLuca.

Stephen J. DeLuca

With me today is our new CFO, Bill Steckel. Bill will be making the formal presentation of our financial disclosures at our earnings release next month but he’ll also be available to take questions at the end of this session. I’m extremely happy to have Bill on our team and I look forward to his contributions in developing and implementing our financial strategy. While Bill is focused on strategic issues, Chris Lail will continue handling the Corporate Controlling function and based on his accomplishments at DayStar, I’m pleased to announce today that Chris has been promoted to Vice President and Corporate Controller.

Now we’d like to give you some context around the operational update today. Our last conference call we set out a significant milestone of releasing the design for our CIGS production tool by the end of Q2 this year. We know there is a lot of interest in our progress on Big Baby and how we are maintaining our timeline to begin production in Q1 2009. Rather than waiting for our earnings release which we are planning to do in early August, we decided to give you an operational update to answer these questions about our progress. As a reminder to those of you who have been following our progress this year we set milestones in three major areas, that’s mini-module development, engineering the scale up of our CIGS Deposition Process and building out the production line to begin partial shipments. I’ll update you on our progress in each of these areas.

While most of the mini-module development so far has been focused on the CIGS Deposition Process we have also used this program to develop processes for the other steps in making a complete module. A key feature for any PV module is its survivability and proper encapsulation is key to making modules that last more than 20 years in the environment. As I have discussed in the past CIGS is especially sensitive to moisture. Encapsulating processes and materials that work for silicon-based [thin phones] don’t necessarily work for CIGS due to moisture ingress. With this in mind we have developed lamination and edge seal processes for our glass modules that we have tested for moisture penetration. These test modules have passed the 1,000 [GMPS] heat test which we believe provides a good indication that our encapsulation process will protect the modules from moisture over a 20 year lifetime.

In cost effective manufacture of high performance CIGS getting the proper control on the incorporation of selenium is critical. The work on mini-modules has progressed from the initial task of proving out DayStar’s one step CIGS Deposition Process so that development of monitoring and control systems required for scale up of the process. We have successfully developed these systems to the point where we now believe we have effective control over the reactive sputtering process achieving stable, controllable and reproducible results has a direct impact on the scale up of our process in Big Baby and is a necessary step for ultimately meeting our goals of producing low cost photovoltaic panels in high volumes.

In our last update we said that Big Baby had arrived in our facility in Santa Clara and we stated our belief that we would be able to release the chamber design for our production tool by the enc of the second quarter. The initial tests on Big Baby have gone well and the films we have made have been well within the uniformity specifications we set. In this first stage of development we have been focused on fundamental engineering issues which allow us to make decisions about the viability of the tool for production.

First, the mechanical and electrical performance of the tool was shaken out in initial testing. The vacuum integrity, operation of the transport mechanism, load lock systems, computer controls were all validated. Secondly, since heating the sub-strait to high temperatures the key to our process we demonstrated the ability to bring the sub-straits to proper temperature in the time we believe is required for our process to work in production.

The third aspect of our initial testing was the sputtering capability of the tool that is the ability to make uniform films on a large scale. The tool deposit simultaneously on two two-foot by four-foot pieces of glass so we were looking for uniform films on four-foot by four-foot scale. The [milithium] films that we have produced to date have uniformity of thickness and electrical properties as well as adhesion well within the specifications over both two-foot by four-foot panels.

These results give us confidence that the basic structure of our tool design is sound and so we have released the tool design to begin fabrication of our production CIGS Deposition tool for the 25-megawatt line. This keeps us on our timeline to have our first production line up and running in Q1 in 2009. We expect the first production CIGS chambers to arrive in September. In my last update I mentioned that we expected to have a scaled up process of record for the CIGS thin film developed by the time we start up our first production line in Q1 of 2009. We plan to begin making CIGS films in Big Baby this month. Our expectation is that we will achieve a stable CIGS Deposition Process in Big Baby by the end of this quarter that can be further refined in Q4 to meet our Q1 2009 milestone to release the production process of record.

The factory in Newark, California is currently undergoing its initial fit up. We expect this process to be completed in time to receive the initial production tools scheduled to begin arriving in September. Purchasing of the major tools for the production line is well under way. We have also engaged vendors to design and implement the automation systems required for high true put operation.

As I mentioned tools will begin arriving in September and we expect to be receiving tools throughout the year as we build out the line. We have taken steps to offset the potential for delayed tool deliveries. As an example, we have ordered extra deposition chambers that have multiple use capabilities. We can utilize these chambers initially to offset delays that may occur in equipment delivery or they can be used to add capacity. We believe the added cost of this contingency may be offset by the potential for such additional components to assist in keeping our timeline in tact and ultimately to add to our plant capacity.

Although we will not give financial guidance on this call I would like to point out that due to planned capital spending including the acquisition of production equipment as we build out our factory you should expect to see significant changes to our balance sheet. We will discuss this in more detail at our earnings release next month.

In summary we have accomplished the tasks in Q2 2008 that permit us to remain confident that we can commence production at our factor in Q1 2009. Finally I would like to say a few words about our management and staff. DayStar is in a transition from being a development stage company to becoming a commercial manufacturing company. During this transition we have had several management changes. We have flattened our organization, promoted from within and brought in a group of highly qualified managers at the Director and Senior Director level. These changes were necessary to bring DayStar through its ongoing transition as we build an organization focused on attaining manufacturing excellence. The additions this year of Ratson Morad as President and COO and Bill Steckel as CFO give us the foundation we need to take the technology we have developed and move DayStar forward to production.

Now we are happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Patrick Corkin.

Patrick Corkin

With respect to the continued mini-module development and the engineering scale up, have you seen anything that impacts your assessment of efficiency at the cell and module level from the previous update that you’ve given?

Stephen J. DeLuca

What we have been doing is continuing to make mini-modules and continuing to make the films at the efficiency levels that we have specified in the past. So we haven’t been spending a lot of time working on the development, trying to push that number up at this point in time. What we are working on as I mentioned here is the development of the tools that we need to turn this into a large scale production process. At this point in time, we’re satisfied with the efficiencies of the films that we’re getting and we’re focused on the scale up and bringing this into production now.

Patrick Corkin

Is it fair to say that your longer term target is for module efficiencies greater than 11.5%?

Stephen J. DeLuca

Yes. Yes.

Patrick Corkin

Based on the results today, it sounds like you’ve made some good progress and you’ve released the design for the tool, can you talk about your target markets and any cost that you have with respect to capacity expansions beyond 125 megawatts?

Stephen J. DeLuca

Our target markets in the short term of course, we have two customer relationships that we’ve outlined in the past with [inaudible] and UV. Our initial target markets really are focused on free sealed installations for solar power plants. But going forward of course as we expand our capacity, we’ll be looking at growing in that market segment and also the possibility to expanding to other segments as well. We have plans again to build our first 25-megawatt plant. As we mentioned in our last conference call, the facility that we have available there has the capability to hold significantly more than 25-megawatts so as we grow that facility with the proper capital we have the capability of growing that to a larger scale operation.

Our plans also call for a 100-megawatt facility to be built going forward and let me step back and explain the reason why we chose these numbers, 25-megawatts and 100-megawatts initially. At the 25-megawatt scale we can run that plant profitably. That’s a large enough scale to where we’re not running it at a loss. With the addition of a 100-megawatt plant and having that combined capacity our models show that we can get our cost below $1 per watt and that $1 per watt cost is also a critical number. When we set out our planning we laid out those two factory capacities to get to those two key indicators.

However our plans going forward, one of the things we are looking at is how fast can we ramp up our capacity, how long would it take to ramp up our capacity and how much money would it take to ramp up our capacity and those are things that we are actively looking at right now that I don’t have an answer for you as to how much, what, when and where at this point in time.

Patrick Corkin

Last question and I’ll jump back in the queue, generally speaking could you give us an update on activity along the lines of interest level by customers or potential customers or collaborative or strategic partners?

Stephen J. DeLuca

Of course we would be making statements about significant partnerships once we got to a stage where those were real and signed agreements, so I’m not going to comment particular arrangements right now. What I will say that is if you look out in the industry today there is a lot of activity in electronics companies, industrial companies in Asia, in India and Europe and even in the US, there’s a lot of companies looking at getting into this marketplace right now and a lot of them are doing evaluations of companies looking at their own internal capabilities and trying to make decisions about should they develop their capabilities in the PV field by organic growth, by partnerships, by acquisitions and so on. That is something that’s going on out in the industry and we’ve said in the past that we’re interested in partnerships. Of course that means we’re actively working in certain areas there but we don’t have anything to announce.

Operator

Our next question is from Colin Rusch.

Colin Rusch – Broadpoint Capital

Can you give us a bit more detail on the selenium control in the mini-module process? What have been the primary engineering tasks you’ve focused on and what are the primary challenges you’re anticipating as you move up to the larger scale?

Stephen J. DeLuca

First of all, we’re already giving a lot of detail about how we’re doing this engineering process. Even talking about that is I think is a lot more information than you would get from most companies. We want to be open with what we’re doing but we don’t want to give away any of our technical knowledge here and of course how we do this one stage sputter deposition process is critical, that’s the IT that we have, that’s what we know how to do that other people don’t know how to do.

So I don’t want to talk about any of the details about how we do that. What I will say is what I said in this script here is that being able to monitor what’s happening in that process so having the tools to watch what’s going on in there and being able to put in feedback mechanisms to control the process so that you have a stable running process, a stable sputtering in that environment, that’s what’s critical. How we do that monitoring, how we do the feedback are things that I’m not going to get into.

Colin Rusch – Broadpoint Capital

On the three test runs it sounds like you have done [molly] deposition. Have you used other materials or has it just been the one material so far?

Stephen J. DeLuca

On sputtering of film.

Colin Rusch – Broadpoint Capital

Yes.

Stephen J. DeLuca

So far we have sputtered the molly films, we have not sputtered the CIGS at this point in time.

Colin Rusch – Broadpoint Capital

Could you put some parameters on the uniformity of the characteristics that you’re looking for or requiring? We can maybe take that off line if that’s [inaudible].

Stephen J. DeLuca

I would not disclose those that’s for sure.

Colin Rusch – Broadpoint Capital

So let’s talk about the equipment vendors for the deposition process and the balance of the plant, how many are you working with and can you give us a little bit more detail on when you expect to start receiving tools other than just in September?

Stephen J. DeLuca

If you look at each of those process steps, so everything from [inaudible] to putting down molly, putting the CIGS tool is something we’re doing ourselves then there’s a buffer layer, then there’s a GCO layer, then there’s a lamination step that goes in there, all of those are vendors that we are talking to and in process of acquiring equipment. There are other pieces around there. I mentioned the automation, being able to move the glass through the factory, robotics to hold the glass, move it around, put it on the conveyors, all of that is also in process with vendors and that equipment will also be arriving in this year.

We’re not giving out specific timelines of every tool and when each tool is going to arrive. As we said, September is not that far away and equipment will begin arriving in September and clearly we need to have the tool set in place at the end of the year and the beginning of the Q1 so that we can turn on that factory in Q1.

Colin Rusch – Broadpoint Capital

One more quick question on the tools, with the excess ordering in terms of capacity where you could reach everything shows up and is on time, we’re looking at a 20% larger capacity than you’re anticipating for the original 25-megawatt factory? Could you just put a little bit more detail around that?

Stephen J. DeLuca

If you think about how we scale up the factory, we put a set of tools on the floor and we get all of those things up and running and then when we get to where we have a bottleneck in the factory then we can add another tool. I always use the laminator as an example because that’s a simple thing that you buy right off the shelf and if you just look at the capacity for a single laminator it’s about half of a 25-megawatt capacity line for us.

Clearly we’re going to need two laminators. We don’t necessarily go buy two laminators at the beginning. We would buy one, get it up and running. When the rest of the factory is running at its capacity and it looks like the laminator is going to be the bottleneck then we go get another laminator. Obviously we have to do that somewhat in advance because there’s a lead time for that kind of tool. But that’s the process that we would go through.

Now if we bought the second laminator and now we’re at 25-megawatts and we say well all the capacity and the rest of our tool, our six deposition tool and maybe our molly tool, those are somewhat higher capacity, then we could go buy another laminator, put it on line and that’s how we would build up a capacity in that first line there. So think of it as a continuum rather than you get to a point where you stop and then you can’t grow any more. It’s more of adding small components to incrementally increase the capacity and we can continue doing that until we basically filled up that factory and what we said in the last meeting was we think that the space that we have today could hold approximately 80-megawatt factory capacity.

Colin Rusch – Broadpoint Capital

Where is the headcount right now?

Stephen J. DeLuca

We’re between 85 and 90 people in the company today.

Operator

Our next question is from Adam Cropp.

Adam Cropp

On your three test runs, the test sputtering runs, are you able to share any more information as far as what potential cycle times may look like for the modules going forward?

Stephen J. DeLuca

No. I want to clarify, we didn’t say we did three sputtering runs, we’ve run a lot more than three sputtering runs. We broke it up into three basic tests that I characterized in the fundamental mechanical design of the machine, the thermal design of the machine and the sputtering design of the machine. So in the sputtering process what you look at is what is the deposition rate that you need to get and based on the process that we’ve run on the films that we’ve run the deposition rate is well within the time that we specified for our production rate.

Adam Cropp

But no more detail on what that time may be?

Stephen J. DeLuca

No, what we said in the past is our factory tech time is a module a minute.

Adam Cropp

As you’re ramping up your capacity next year in 2009, the 25-megawatts, when should we expect a spike in the SG&A? In other words, when should we look, I’m just trying to figure out what the SG&A should look like in the early part of the year with ramping personnel?

Stephen J. DeLuca

We begin the ramping in Q1, we start the production in Q1 and what we said is our first commercial shipping will begin in Q3. During that time we are ramping up the labor, there’s some shift work that’s being added during that time, but that happens pretty much when you start up the factory. With these kind of factories you don’t run during the day and turn it off at night, you have to run the tools all the time. The big ramp up in the cost would be in the materials that you’d be buying and not selling at that point in time so you’ll see from an SG&A perspective you’ll see a big ramp and then once we move into commercial shipments then that cost runs into the cost of goods sold.

Adam Cropp

One general question for you, can you just comment on what you’re seeing for trends in the Indian supply and I know in order to ramp up next year, have you, just maybe comment on some of the trends you’re seeing in India as far as pricing and supply there?

Stephen J. DeLuca

In fact we just had a meeting today with one of our Indian suppliers, the trend is we’re confident that we have the supply we need going forward and so we’ve got good relationships with our suppliers, with the vendors, the indium is available

it’s available in the form that we need it, we don’t just go buy raw indium of course it’s made into targets and so the capacity is there, capability to deliver indium in the form we need it is there, at this point in time we don’t have any concerns about the supply availability of indium targets. We’re not buying indium targets per se, but in a target.

Operator

Our next question is from Jonathan Hoopes – Thinkpanmure, LLC.

Jonathan Hoopes – Thinkpanmure, LLC

Steve, if you could just put a little more clarification around your comments about the change in the cash balance. Specifically should we be thinking about are you going to be front loading the majority of your spend here in the next couple of quarters or did you already do that? Can you provide maybe some detail on how the cash balance might evolve, not necessarily on absolute terms but maybe on percentage like terms as we go through 2008 and into the third quarter of 09 assuming that you don’t have another capital raise?

Stephen J. DeLuca

I didn’t want to get into the details of cash, we’ll talk more about that as I said in our earnings release and I’ll let Bill Steckel comment on that next month, but we did want to raise that just to get people aware that we are purchasing equipment and purchasing equipment means you typically put down 30% of the cost of the tool upon order. As we order this equipment, even before it shows up, you’ll start seeing significant cash out flows.

Probably the best guidance I can give you here is to think about 30% of the cost of each of these tools and you can add up for the whole cap ex of the factory and say that’s how much money is going to be going out in the next quarter. As we receive tools we said starting in September and then going into Q4 as we receive the tools we then pay the next big chunk which is typically 60% level, 60% of the cost and then finally upon acceptance of the tool you pay the last 10% at that time. Those are rough numbers, those are typical for this industry and that’s what you should expect. As we are planning to have our factory running in Q1 of 09, that cash will be spent by that time.

Jonathan Hoopes – Thinkpanmure, LLC

Can you clarify whether or not Big Baby will be used in any of the 25-megawatt production line or is Big Baby there just to create the process of record for the two by four-foot panel deposition onto the two by four-foot panels?

Stephen J. DeLuca

The primary role of Big Baby at this point in time is the scaling of the process, getting the CIGS Deposition Process running and as we pass the point where we now understand what the production tool design is and as we said we’ve released that tool design, we’ve already started on building those tools, we’ve released the material orders and those tools are being worked on now. What we use Big Baby for going forward will be continuing process development. If we decide at some point we want to drop it into the production facility, we have those chambers and we can choose to do that in the future but right now our plan is to keep that as a development tool.

Jonathan Hoopes – Thinkpanmure, LLC

Can you tell me when will you know with a high level of confidence, with certainty, that your deposition process on the two by four-foot pieces of glass is going to do what it needs to do for you to hit your converging efficiency targets and also to have a comfort level around your ability to produce at the rate that you need to produce? Is that something that you will come to comfort level with by the first quarter of next year or will you get there before that? I’m just curious whether Big Baby can answer that question for you or not, or you need all of the pieces together in the production process to know that you’re going to be able to get to that one panel per minute rate.

Stephen J. DeLuca

At the beginning of the question you asked when are you going to be sure and depending on how many lawyers are on the call, we’d answer that differently, but the level of comfort obviously when we’re producing modules, when we start producing modules in Q1 and when we’re shipping modules in Q3 that’s when you have the ultimate confidence at that point. However we don’t have to wait until then to build our confidence.

We’ve been building that confidence through this quarter since we’ve had Big Baby up and running, since we’ve been able to do the things that we said we could there, since we’ve been running the mini-modules and creating those films reproducibly and understanding how to control the processes, those are all things that build confidence. What we are doing starting this month is making CIGS films, that obviously is going to be a big step in the process here. We expect to be making CIGS films by the end of this month and we expect to have a stable process for making CIGS films by the end of the quarter.

Those are big steps, but the steps continue as I’ve mentioned before. This is a continuous process of building up the production facility so we won’t stop, this isn’t like getting FDA approval for a new drug, this is a continuously building through the production facility even once we have the production facility running, we’ll plan to continue building the capacity out.

Jonathan Hoopes – Thinkpanmure, LLC

You said [inaudible] still starting here in the month of July and you should have a stable process by the end of September quarter, what percentage of that CIGS film stable process comes from the Big Baby exercise and what percent comes from the mini-module exercise? My question is are we flipping over to Big Baby is more instrumental or critical in the design path now? Or is mini-module still a very large component there?

Stephen J. DeLuca

I was talking about Big Baby, sorry if I didn’t make that clear. We are going to begin making CIGS films on Big Baby this month and we expect to have a stable process for making CIGS on Big Baby by the end of this quarter.

Jonathan Hoopes – Thinkpanmure, LLC

I think it seems what we’re doing here is you’re moving off of mini-module development track on to a two foot by four foot pole size module development track and basically, if I understand it correctly, the mini-module becomes much, much less a part of significance. Is that correct?

Stephen J. DeLuca

Yes, I’d say it becomes less of significance in terms of getting our factory built. There are still things we can do on mini-modules. I think Pat Corkin asked the question about efficiencies and moving the efficiencies up, that’s stuff we can continue to work on using the mini-module format as we go forward but that’s a different kind of development that will occur on that format.

Operator

Our next question is from Patrick Corkin.

Patrick Corkin

Your company filed an S3 after the close here today and I think the timing of that filing has caused a little confusion. Steve, I was wondering if you might be able to clarify the purpose of that filing?

Stephen J. DeLuca

Yes, I’d like to do that. In fact, I have a prepared statement here in case anybody asked that. Bringing that up in the conference call myself was an issue so let me answer that question here. We filed the S3 as a post effective amendment to our existing [SB2] registration statement that related to the potential resale of securities by certain stockholders. This registration statement is intended merely to update the already affected registration statement and does not relate to any potential new issuance of securities by the company.

So, that’s the prepared statement. The color then I would add to that is if you remember we did a restructuring of the company’s finances that we completed in February of 2007. There was a registration statement on [SB2] that we did at the end of 2007 beginning of 2008 and what we are doing now is moving that to a form S3. So, it’s something that’s already been in existence and by moving it to form S3 it makes it more convenient for us so we don’t have to continually go to updating that form [SB2]. Does that clarify what that’s about?

Patrick Corkin

Yes, it’s clear that this is a registration of stock and it’s not a new issuance of securities.

Stephen J. DeLuca

The registration has already been done, it’s already in existence, and this is just an update to that already existing registration statement.

Operator

We show no further questions at this time.

Stephen J. DeLuca

I’d like to thank everybody for joining us today and we’ll look forward to talking to you again in early August when we do our Q2 earnings release.

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