Edgar Filing: SPACEDEV INC

As filed with the Securities and Exchange Commission on May 6, 2004 .

Registration Statement No. 333-107360

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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POST EFFECTIVE AMENDMENT NO. 1
FORM SB-2A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

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SPACEDEV, INC.
(Exact name of registrant as specified in its charter)

COLORADO 3761
84-1374613
------------------------------- ---------
----------------------
(State or other jurisdiction of (Primary standard Industrial
(I.R.S. Employer
incorporation or organization) Classification Code Number)
Identification Number)

13855 STOWE DRIVE
POWAY, CALIFORNIA 92064
(858) 375-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------------

JAMES W. BENSON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
SPACEDEV, INC.
13855 STOWE DRIVE
POWAY, CALIFORNIA 92064
(858) 375-2020
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
-------------------------

Copies to:
GRETCHEN COWEN, ESQ.
WEINTRAUB DILLON PC
12520 HIGH BLUFF DRIVE, SUITE 260
SAN DIEGO, CALIFORNIA 92130
(858) 259-2529

Approximate date of commencement of proposed sale to public: FROM TIME TO TIME
AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT , WHICH WAS AUGUST 6,
2003 .

If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: | |

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box: |X|

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: | |

If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: |X|

If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act, please check the following box: | |

CALCULATION OF REGISTRATION FEE
-------------------------------

PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OF REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE OFFERING PRICE FEE
------------------------------- ----------------- ---------------- ---------------- ---------------

Common Stock, $0.001 par value,
underlying Convertible Note 1,818,182 (2) 0.550 (3) 1,000,000 80.90

Common Stock, $0.001 par value,
underlying Warrants 125,000 0.630 (3) 78,750 6.37

Common Stock, $0.001 par value,
underlying Warrants 50,000 0.690 (3) 34,500 2.79

Common Stock, $0.001 par value,
underlying Warrants 25,000 0.800 (3) 20,000 1.62

Common Stock, $0.001 par value,
underlying Warrants 158,333 0.750 (3) 118,750 9.61

Common Stock, $0.001 par value,
underlying Warrants 23,419 0.854 (3) 20,000 1.62

Common Stock, $0.001 par value,
underlying Warrants 818,248 0.490 (3) 400,942 32.44

Common Stock, $0.001 par value,
underlying Warrants 196,079 0.510 (3) 100,000 8.09
------------------------------- ----------------- ---------------- --- ---------------- ---------------
Total 3,214,261 1,772,941 143.43
=============================== ================= ================ ===============

(1) In the event of a stock split, stock dividend, or similar transaction
involving common stock of the registrant, in order to prevent dilution, the
number of shares registered shall be automatically increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act. This
registration statement covers an aggregate of 3,214,261 shares.

(2) Represents 100% of the good faith estimate of the number of shares that
are issuable to the selling security holder following the conversion of interest
on and/or principal of a convertible note held by the selling security holder.
If our good faith estimate is incorrect and we determine that additional common
stock will be required to cover all principal and interest payments, we will be
required to file a new registration statement to register any such additional
shares.

(3) Exercise prices fixed in each warrant agreement.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING UNDER SECTION 8(a), MAY
DETERMINE.

PROSPECTUS

SPACEDEV, INC.

3,214,261 SHARES OF COMMON STOCK

This prospectus relates to the resale by security holders of up to
3,214,261 shares of our common stock underlying (1) common stock purchase
warrants issued in a prior private placement of our securities to accredited
investors representing 1,196,079 shares (the "Warrants"), (2) a three-year
secured convertible note, or the Convertible Note, issued to Laurus Master Fund,
Ltd. ("Laurus") in the principal amount of $1,000,000, and (3) a common stock
purchase warrant for up to 200,000 issued to Laurus in relation to the
Convertible Note (the "Laurus Warrant"). We will not receive any of the proceeds
from the sale of the shares by the selling security holders. We have not
retained any underwriter in connection with the sale of the securities. We have
paid, on behalf of the selling security holders, the expenses of the offering
estimated to be $16,143.

Our common stock trades on The Over-the-Counter Bulletin Board under the
symbol "SPDV." The last reported sale price of our common stock on May 4,
2004, was $1.20 per share .

Our principal offices are located at 13855 Stowe Drive, Poway, California
92064, and our telephone number is (858) 375-2000.

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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. AS YOU REVIEW THE PROSPECTUS, YOU
SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS" BEGINNING
ON PAGE 6.

-------------------------

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.

The date of this prospectus is May 6, 2004.

TABLE OF CONTENTS

Page
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PROSPECTUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
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TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
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PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
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RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . 15
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SELLING SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 34
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DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 55
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MARKET FOR COMMON EQUITY & RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . 56
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS & CONTROL PERSONS. . . . . . . . . . . . . . 58
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EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . 68
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DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
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DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES . 72
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . 72
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EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
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LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
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WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 76
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PROSPECTUS SUMMARY

This summary highlights some information from this prospectus. Because it
is a summary, it necessarily does not contain all of the information necessary
to your investment decision. To understand this offering fully, you should read
carefully the entire prospectus, especially the risks of investing in our common
stock discussed under "Risk Factors."

In connection with a strategic financing with Laurus Master Fund, Ltd., or
simply Laurus, this prospectus covers the resale of up to 1,818,182 shares of
our common stock that are issuable upon conversion of a three-year Secured
Convertible Note, or the Convertible Note, in the principal amount of
$1,000,000, and up to 200,000 shares of common stock that are issuable upon the
exercise by Laurus of a warrant, called the Laurus Warrant in this prospectus,
that we provided to Laurus in connection with the strategic financing. In
addition, this prospectus covers the resale of up to 1,196,079 shares of common
stock issuable upon exercise of outstanding warrants issued in a private
placement offering from November 2000 to February 2003, referred to herein as
the Warrants.

OUR COMPANY

THE OFFERING

Common stock underlying the
interest and/or principal of the
Convertible Note 1,818,182 shares

Common stock underlying the
Laurus Warrant and the Warrants 1,396,079 shares

Common Stock Outstanding after
Exercise of outstanding Warrants, the
Laurus Warrant and the Convertible
Note 19,462,965 shares

Termination of the Offering The offering will conclude upon the
earlier of the sale of all 3,214,261
shares of common stock registered,
the date the shares no longer need to
be registered to be sold or the three-
year anniversary of the effective date
of the registration statement of which
this prospectus is a part.

Use of Proceeds All proceeds from the sale of shares
underlying the Warrants, the Convertible
Note and the Laurus Warrant will be
received by the selling security holders
for their own accounts. See "Use of
Proceeds."

Risk Factors You should read the "Risk Factors"
beginning on page 6, as well other
cautionary statements throughout this
prospectus, before investing in shares
of our common stock.

SELECTED CONSOLIDATED FINANCIAL DATA

The following financial data is provided as of and for the fiscal years
ended December 31, 2003, 2002 and 2001 . The financial data as of and for
the fiscal years ended December 31, 2002 and 2001 is derived from, and is
qualified by reference to, the audited consolidated financial statements and the
notes to those consolidated financial statements which are a part of this
prospectus. Our historical results are not necessarily indicative of
results to be expected for any future periods.

CONSOLIDATED STATEMENTS OF OPERATIONS DATA

YEARS ENDING
DECEMBER 31,
2003 2002 2001
-------------- ------------ -------------
Net revenues $ 2,956,322 $ 3,370,118 $ 4,099,094
Loss from operations $ (890,092)$ 13,920 $(1,551,620)
Net loss $ (1,246,067)$ (376,160) $(1,855,871)
Basic loss per share $ (0.08)$ (0.03) $ (0.13)
Weighted average shares outstanding, basic 16,092,292 14,744,423 14,440,354

CONSOLIDATED BALANCE SHEET DATA (IN THOUSANDS):

December 31, 2003 December 31, 2002 December 31, 2001
------------------ ------------------ -----------------
Cash and cash equivalents 592,006 27,648 211,637
------------------ ------------------ -----------------
Working capital deficit (630,805) (197,381) (1,002,390)
------------------ ------------------ -----------------
Total assets 1,084,819 3,811,957 3,013,651
------------------ ------------------ -----------------
Long-term debt, net of current portion 1,627,123 661,314 2,986,270
------------------ ------------------ -----------------
Stockholders' Deficit (2,072,628) (1,767,459) (1,489,235)
------------------ ------------------ -----------------

RISK FACTORS

AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST OR
MAINTAIN AN INVESTMENT IN SHARES OF OUR COMMON STOCK. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE
OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR
INVESTMENT.

OUR PLANS TO BECOME PROFITABLE DEPEND ON OUR ABILITY TO INCREASE REVENUES, WHILE
CONTROLLING COSTS IN A VARIETY OF AREAS AND IMPROVING OUR PROJECT MANAGEMENT
EXPERTISE.

Our auditors expressed in their formal auditors' opinion dated February 11, 2004
(except for Note 11 as to which the date is April 2, 2004) that in their
opinion, based on their audit, our consolidated financial statements referred to
herein present fairly, in all material respects, the consolidated financial
position of SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2003, and the
consolidated results of our operations and our cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America. In previous years, including the opinion of Nation Smith
dated February 13, 2003 herein, our auditors expressed an opinion that our
financial position raised substantial doubt about our ability to continue as a
going concern. After an analysis of our newly awarded $43,362,271 contract from
MDA, our projections (including revenue projections) for the next several
quarters and other relevant factors, our auditors concluded there is no longer
substantial doubt as to the Company's ability to continue as a going concern,
and has, therefore, not included the going concern language in its report dated
February 11, 2004 (except for Note 11 as to which the date is April 2, 2004) for
the year ended December 31, 2003. We believe that this was appropriate and
reflects our improved financial condition, our ability to forecast more
accurately and further validation of customer demand for our technology,
products and services. Our ability to continue as a going concern depends upon
our ability to ultimately implement our plans, which includes (but is not
limited to) generating substantial new revenue from the Missile Defense Agency
by successfully performing under the newly awarded contract and continuing to
attract and successfully complete other government and commercial contracts,
development of a project management expertise to profitably execute on new
business contracts and reduce the working capital deficit by raising additional
capital. We are working with our revolving credit facility provider and
investigating the possibility of raising additional capital to further support
operations as new contracts and business opportunities materialize. The
prospective funding, as well as, new business opportunities, can come from a
variety of sources, including public or private equity markets, state and
federal grants and government and commercial customer program funding. However,
there can be no assurance that we will be able to obtain such funding or
contracts as needed or, if such funding or contracts are available, that we can
obtain then on terms favorable to the Company. The likelihood of our success
must be considered in light of the expenses, difficulties and delays frequently
encountered in connection with the developing businesses, those historically
encountered by us, and the competitive environment in which we operate.

IF WE ARE UNABLE TO RAISE CAPITAL IN THE FUTURE, WE MAY BE UNABLE TO FUND
OPERATING CASH SHORTFALLS.

Our future capital requirements will depend upon many factors, including
but not limited to sales and marketing efforts, the development of new products
and services, the successful completion of existing projects, possible future
strategic acquisitions, the progress of our research and development efforts,
and the status of competitive products and services. As of December 31,
2003, 2002 and 2001, we had a working capital deficit of $630,805, $197,381 and
$1,002,390, respectively, and an accumulated deficit of $11,817,776, $10,571,709
and $10,195,547, respectively. As of those dates, we had $592,006, $27,648 and
$211,637, respectively, in cash and cash equivalents and $187,062, $82,325 and
$290,615, respectively, of accounts receivable, net of allowance for doubtful
accounts.

We believe that current and future available capital resources will be
adequate to fund our operations for the next twelve months. However,
historically we have not been able to generate sufficient cash from our
operating activities and have relied upon cash from financing activities to fund
part of the cash requirements of our operating and investing activities. To the
extent we are in need of any additional financing, it may not be available to us
on acceptable terms, or at all. Our inability to obtain any needed financing
could result in a significant loss of ownership and/or control of our
proprietary technology and other important assets and could also hinder our
ability to fund our continued operations and our product development efforts
that historically have contributed significantly to our competitiveness.

Any financing may cause significant dilution to existing stockholders. Any
debt financing or other financing of securities senior to common stock likely
will include financial and other covenants that will restrict our flexibility.
Also, we need to obtain the consent of Laurus for future equity financing. At a
minimum, we expect covenants to restrict our ability to pay dividends on our
common stock.

IF A SIGNIFICANT PORTION OF THE SECURED CONVERTIBLE NOTE WERE CONVERTED
INTO SHARES OF OUR COMMON STOCK, THE VOTING POWER OF YOUR INVESTMENT AND OUR
EARNINGS PER SHARE COULD BE DILUTED.

The Convertible Note in the amount of $1,000,000, that we issued to Laurus,
on June 3, 2003, was convertible by Laurus into up to 1,818,182 shares of our
common stock at an initial

fixed conversion price of $0.55 per share, to the extent that we draw funds on
the credit facility and have not repaid those funds. As of May 4, 2004, Laurus
had converted 1,465,000 of the 1,818,182 shares and had 353,182 shares remaining
to convert under the revolving credit facility. The remaining number of shares
represents approximately 2.0% of the 17,813,704 shares of our common stock
outstanding on May 4, 2004. As a result, if the remaining principal balance of
the Note were converted at the initial conversion price, dilution of the voting
power of your investment and of our earnings per share could continue to occur.
Furthermore, after the initial conversion by Laurus of the first $1,000,000,
Laurus has a continuing right to convert, to the extent that we draw funds on
the credit facility and have not repaid those funds, at a fixed conversion price
of $0.85 per share for the next $500,000 and thereafter based on a fair market
value formula specified in the agreement.

THE MARKET PRICE OF OUR COMMON STOCK AND THE VALUE OF YOUR INVESTMENT COULD
SUBSTANTIALLY DECLINE IF ALL OR A SIGNIFICANT PORTION OF THE CONVERTIBLE NOTE
WERE CONVERTED INTO COMMON SHARES WHICH WERE RESOLD INTO THE MARKET, OR IF A
PERCEPTION EXISTS THAT SUCH SALES COULD OCCUR.

If the conversion prices at which the Convertible Note is converted are
lower than the price at which you made your investment, immediate dilution of
the value of your investment will occur. In addition, sales of a substantial
number of shares of common stock issued upon conversion of the Note, or even the
perception that such sales could occur, could adversely affect the market price
of our common stock. You could, therefore, experience a decline in the value of
your investment as a result of both the actual and potential conversion of Note.

WE CAN GIVE NO ASSURANCE OF THE SUCCESSFUL OR TIMELY DEVELOPMENT OF
PRODUCTS.

Despite our success in designing, launching and monitoring our first
micro-satellite, our products and technologies are currently under various
stages of development, including our hybrid rocket technology. Further
development and testing will be required to prove additional performance
capability beyond current tests and commercial viability. Additionally, the
final cost of development cannot be determined until development is complete.
The success, if any, will depend on the ability to timely complete our projects
within estimated cost parameters and ultimately deploy the product in a
cost-effective manner.

THE MARKETPLACE FOR OUR TECHNOLOGY AND PRODUCTS IS UNCERTAIN.

There can be no assurance that there will be a demand for our technology,
products and services or that we will be successful in obtaining a sufficient
market share to sustain our business or to achieve profitable operations. Our
business plan is based on the assumption that significant revenues will be
generated in connection with the government being early adopters and deploying
micro-satellites in the near-term with a long-term commercial market developing
for private manned and unmanned space exploration. Because micro-satellites and
commercial space exploration are still relatively new concepts, it is difficult
to accurately predict the ultimate size of the market. We have a limited prior
operating history, and there can be no assurance that we will increase our
revenues and become profitable. Additionally, if either the demand for our
products produced or services rendered or if general economic conditions
deteriorate significantly, our business could be impacted to a substantial
degree resulting in lower profitability or losses as a direct result. Many of
our products and services are new and unproven, and the true level of consumer
demand is uncertain. Lack of significant market acceptance of our products and
services, delays in such acceptance, or failure of markets to develop could
negatively affect our business, financial condition, and results of operations.
Many of the factors, which affect us, and our business, are dictated by the
marketplace and are beyond our control.

CONTRACTUAL LIMITATIONS THAT RESTRICT LAURUS' ABILITY TO CONVERT THE NOTE
MAY NOT NECESSARILY PREVENT SUBSTANTIAL DILUTION OF THE VOTING POWER AND VALUE
OF YOUR INVESTMENT.

The contractual limitations that restrict Laurus' ability to convert the
Note into shares of our common stock are limited in their application and effect
and may not prevent dilution of your investment. Laurus is subject to a
contractual 4.99% beneficial ownership limitation that prohibits Laurus from
converting the note if and to the extent that the conversion would result in
Laurus, together with its affiliates, beneficially owning more than 4.99% of our
outstanding common stock. However, this 4.99% limitation automatically becomes
void upon an event of default under the Note and can be waived by Laurus upon 75
days' advance notice to us. In addition, this 4.99% limitation does not prevent
Laurus from converting the note into shares of common stock and then reselling
those shares in stages over time where Laurus and its affiliates do not, at any
given time, beneficially own shares in excess of the 4.99% limitation.
Consequently, these limitations will not necessarily prevent dilution of the
voting power and value of your investment.

IF WE ARE UNSUCCESSFUL IN ACHIEVING AND MAINTAINING COMPLIANCE WITH OUR
REGISTRATION OBLIGATIONS WITH REGARD TO THE CONVERTIBLE NOTE AND LAURUS WARRANT,
WE MAY INCUR SUBSTANTIAL MONETARY PENALTIES.

The agreements we entered into in connection with our issuance of the
Convertible Note require us to, among other things, register for resale the
shares of common stock issued or issuable under the note and the accompanying
warrant and maintain the effectiveness of the registration statement for an
extended period of time. We are subject to liquidated damage assessment of 2%
of the outstanding principal amount of the note for each thirty (30) days of
non-compliance thereafter, subject to pro ration for partial months. If we are
unable to obtain and maintain effectiveness of the required registration
statement, then we may be required to pay additional liquidated damages, to the
extent that any amounts are drawn under the Convertible Note, which could
adversely affect our business, operating results, financial condition, and
ability to service our other indebtedness by negatively impacting our cash
flows.

OUR LIMITED OPERATING HISTORY AND LACK OF EXPERIENCE IN OUR NEW OR PROPOSED
LINES OF BUSINESS MAKES IT DIFFICULT TO PREDICT OUR FUTURE SUCCESS.

We have only recently launched our first micro-satellite, CHIPSat, and are
developing applications for our other technologies and products. We intend to
provide micro-satellites to early adopters, primarily the U.S. military, and
hybrid rocket motors to government and commercial customers. As a result, we
have limited or no operating histories in each of these new or proposed lines of
business. Therefore, our historical financial information is of limited value
in projecting our future success in these markets.

OUR PRODUCTS AND SERVICES ARE TECHNOLOGICALLY ADVANCED AND MAY NOT FUNCTION
UNDER CERTAIN CONDITIONS.

Most of our products are technologically advanced and sometimes novel
systems that must function under demanding operating conditions. Even though we
believe that we employ sophisticated design, manufacturing, and testing
practices, there can be no assurance that our products will be successfully
launched or operated or that they will be developed or will perform as intended.
Like most organizations that have launched satellite programs, we will likely
experience some product and service failures, schedule delays, and other
problems in connection with our products in the future. Our products and
services are and will continue to be subject to significant technological change
and innovation. Our success will generally depend on our ability to penetrate
and retain markets for our existing products and services and to continue to
conceive, design, manufacture and market new products and services on a
cost-effective and timely basis. We anticipate that we will incur significant
expenses in the design and initial manufacture and marketing of new products and
services. There can be no assurance that we will be able to achieve the
technological advances necessary to remain competitive and profitable, that new
products and services will be developed and manufactured on schedule and on a
cost-effective basis, that anticipated markets will exist or develop for new
products or services, or that our existing products and services will not become
technologically obsolete.

OUR FAILURE TO LAUNCH COULD CAUSE SERIOUS ADVERSE AFFECTS.

A launch failure could adversely affect our cash flow, since a large
portion of customer payments is often contingent upon a successful launch.
Micro-satellite launches are subject to significant risks, including causing
disabling damage to or loss of a micro-satellite. Delays in the launch could
also adversely affect our revenues as a customer may have timing requirements
for milestone payments or we may have guarantee requirements. Delays could be
caused by a number of factors, including designing, constructing, integrating,
or testing the micro-satellite, micro-satellite components, or related ground
systems; delays in receiving the license necessary to operate the
micro-satellite systems; delays in obtaining the customer's payload; delays
related to the launch vehicle; weather; and other events beyond our control.
Delays and the perception of potential delay could negatively affect our
marketing efforts. There is no assurance that we will be able to launch
micro-satellites on a timely basis and any delays in the launch could have a
material adverse effect on our financial position.

OUR EXPANSION INTO OTHER NEW LINES OF BUSINESS MAY DIVERT MANAGEMENT'S
ATTENTION FROM OUR EXISTING OPERATIONS AND PROVE TO BE TOO COSTLY.

We are developing our technology into products for micro-satellites and
hybrid rocket motors. In addition, we are investigating other applications of
our technology and other markets for our products. Our expansion into new lines
of business may be difficult for us to manage because they may involve different
disciplines and require different expertise than our core businesses.
Consequently, this expansion may detract management's time and attention away
from our core business, and we may need to incur significant expenses in order
to develop the expertise and reputation we desire, which could prevent us from
generating revenues from these lines of business in amounts sufficient to
justify the expenses we incur in operating them.

OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR KEY PERSONNEL.

Our success is dependent upon the efforts of certain key members of our
management and engineering team, including our chief executive officer, James W.
Benson, our chief financial officer, Richard B. Slansky , our Vice President
of engineering, Randall K. Simpson and our director of engineering, Jeffrey
Janicik. Each of these individuals has substantial prior business experience and
we have added other experienced key personnel to our staff. The loss of any of
these persons could have a material adverse effect on us if suitable
replacements are not found. Our future success is likely to depend substantially
on our continued ability to attract and retain highly qualified personnel. The
competition for such personnel is intense, and our inability to attract and
retain such personnel could have a material adverse effect on us. We do not have
current key man life insurance on any of our key personnel.

THE U.S. FEDERAL GOVERNMENT MAY INCREASE REGULATION, WHICH COULD CAUSE OUR
BUSINESS TO HAVE SERIOUS ADVERSE EFFECTS.

Our business activities are regulated by various agencies and departments
of the U.S. federal government and, in certain circumstances, the governments of
other countries. Several government agencies, including NASA and the U.S. Air
Force, maintain Export Control Offices to ensure that any disclosure of
Scientific and Technical Information ("STI") complies with the Export
Administration Regulations and the International Traffic in Arms Regulations
("ITAR"). Exports of our products, services and technical information require
either Technical Assistance Agreements ("TAAs") or licenses from the U.S.
Department of State depending on the level of technology being transferred. This
includes recently published regulations restricting the ability of U.S.-based
companies to complete offshore launches, or to export certain satellite
components and technical data to any country outside the United States. The
export of information with respect to ground-based sensors, detectors,
high-speed computers, and national security and missile technology items are
controlled by the Department of Commerce. The government is very strict with
respect to compliance and has served notice that failure to comply with the ITAR
and/or the Commerce Department regulations may subject guilty parties to fines
of up to US$1 million and/or up to 10 years imprisonment per violation. Failure
to comply with any of the above mentioned regulations could have serious adverse
effects as dictated by the rules associated with compliance to the ITAR
regulations. Our conservative position is to consider any material beyond
standard marketing material to be regulated by ITAR regulations.

In addition to the standard local, state and national government
regulations that all businesses must adhere to, the space industry has specific
regulations. Command and telemetry frequency assignments for space missions are
regulated internationally by the International Telecommunications Union ("ITU").
In the United States, the Federal Communications Commission ("FCC") and the
National Telecommunications Information Agency ("NTIA") regulates command and
telemetry frequency assignments. All launch vehicles that are launched from a
launch site in the United States must pass certain launch range safety
regulations that are administered by the U.S. Air Force. In addition, all
commercial space launches that we would perform require a license from the
Department of Transportation. Satellites that are launched must obtain approvals
for command and frequency assignments. For international approvals, the

FCC and NTIA obtain these approvals from the ITU. These regulations have been in
place for a number of years to cover the large number of non-government
commercial space missions that have been launched and put into orbit in the last
15 to 20 years. Any commercial deep space mission that we would perform would be
subject to these regulations. These regulations are well understood by us. At
the present time, we are not aware of any additional or unique government
regulations related to commercial space missions.

We are required to obtain permits, licenses, and other authorizations under
federal, state, local and foreign statutes, laws or regulations or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof. At the present time, we do not have a requirement to
obtain any special environmental licenses or permits.

Our failure to comply with any of the above-mentioned regulations could
have serious adverse effects.

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON
STOCK.

The market prices of securities of technology-based companies like ours,
are highly volatile. The market price of our common stock has fluctuated
significantly in the past. In fact, during the 52-week period ended May 4,
2004, the high and low closing price of a share of our common stock was $2.05
and $0.75 , respectively. Our market price may continue to exhibit
significant fluctuations in response to a variety of factors, many of which are
beyond our control. These factors include, among others, deviations in our
results of operations from estimates, changes in estimates of our financial
performance, changes in market valuations of similar companies and stock market
price and volume fluctuations generally. Additionally, until the full effects of
our cost reduction efforts become clear, including whether those cuts have a
long-term negative impact on revenues, it is likely that our quarter-to-quarter
performance will be unpredictable and our stock price particularly volatile.

OUR NET OPERATING LOSS CARRYFORWARDS MAY BE SUBJECT TO AN ANNUAL LIMITATION
ON THEIR UTILIZATION, WHICH MAY INCREASE OUR TAXES AND DECREASE AFTER-TAX INCOME
AND CASH FLOWS.

As of December 31, 2003, we had available net operating loss
carryforwards of $4,229,589 for federal income tax purposes and $1,846,945 for
state income tax purposes. California net operating loss carryforwards are
suspended from use for 2003 and 2004 and there is no guarantee that the
suspension will not be extended further . Due to the "change in ownership"
provisions of the Tax Reform Act of 1986, our net operating loss carryforwards
may be subject to an annual limitation on the utilization of these carryforwards
against taxable income in future periods if a cumulative

change in ownership of more than 50% occurs within any three-year period. To the
extent we are unable to fully use these net operating loss carryforwards to
offset future taxable income, we will be subject to income taxes on future
taxable income, which will decrease our after-tax income and cash flows.
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of approximately $2.2 million, consisted primarily of the
income tax benefits from net operating loss carryforwards, amortization of
goodwill and research and development credit carryforwards. The federal and
state tax loss carry forwards will expire through 2022 unless previously
utilized. Deferred income taxes are provided for temporary differences in
recognizing certain income and expense items for financial and tax reporting
purposes. The deferred tax asset of $2,190,000 and $1,372,000 as of December 31,
2003 and 2002, respectively, consisted primarily of the income tax benefits from
net operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$818,000 in 2003 from $1,372,000 at December 31, 2002 to $2,190,000 at December
31, 2003. At December 31, 2003, the Company has federal and state tax net
operating loss and capital loss carryforwards of approximately $4,230,000 and
$1,847,000, respectively. The federal and state tax loss carryforwards will
expire in 2023 and 2013, respectively, unless previously utilized. The State of
California has suspended the utilization of net operating loss for 2002 and
2003. Please refer to our consolidated financial statements, which are a part of
this prospectus, for further information regarding our liquidity and capital
resources.

THE CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK GIVES A FEW INDIVIDUALS
SIGNIFICANT CONTROL OVER IMPORTANT POLICY DECISIONS AND COULD DELAY OR PREVENT
CHANGES IN CONTROL.

As of March 4, 2004, our executive officers and directors together beneficially
owned approximately 60.0% of the issued and outstanding shares of our common
stock. As a result, these persons have the ability to exert significant control
over matters that could include the election of directors, changes in the size
and composition of the board of directors, and mergers and other business
combinations involving us. In addition, through control of the board of
directors and voting power, they may be able to control certain decisions,
including decisions regarding the qualification and appointment of officers,
dividend policy, access to capital (including borrowing from third-party lenders
and the issuance of additional equity securities), and the acquisition or
disposition of our assets. In addition, the concentration of voting power in the
hands of those individuals could have the effect of delaying or preventing a
change in control of our company, even if the change in control would benefit
our stockholders. A perception in the investment community of an anti-takeover
environment at our company could cause investors to value our stock lower than
in the absence of such a perception.

OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY IS ESSENTIAL TO THE GROWTH
AND DEVELOPMENT OF OUR PRODUCTS AND SERVICES.

We rely, in part, on patents, trade secrets and know-how to develop and
maintain our competitive position and technological advantage. We intend to
protect our intellectual property through a combination of license agreements,
trademark, service mark, copyright, trade secret laws and other methods of
restricting disclosure and transferring title. There is no guarantee that such
applications will be granted. We have and intend to continue entering into
confidentiality agreements with our employees, consultants and vendors; entering
into license agreements with third parties; and generally seeking to control
access to and distribution of our intellectual property.

OUR ABILITY TO SOURCE AND OBTAIN COMPONENTS AND RAW MATERIALS COULD AFFECT OUR
ABILITY TO SATISFY CUSTOMER ORDERS OR CONTRACTS.

We purchase a significant percentage of our product components, including
structural assemblies, electronic equipment, and computer chips, from third
parties. We also occasionally obtain from the U.S. Government parts and
equipment that are used in the production of our products or in the provision of
our services. We have not experienced material difficulty in obtaining product
components or necessary parts and equipment and believe that alternative sources
of supply would be available, although increased costs and possible delays could
be incurred in securing alternative sources of supply.

OUR ABILITY TO OBTAIN ONLY LIMITED INSURANCE MAY NOT COVER ALL RISKS.

We may find it difficult to insure certain risks involved in our
operations. Insurance market conditions or factors outside of our control at
the time the insurance is purchased could cause premiums to be significantly
higher than current estimates. Additionally, the U.S. Department of State has
published regulations, which could significantly affect the ability of brokers
and underwriters to place insurance for certain launches. These factors
could cause other terms to be significantly less favorable than those currently
available, may result in limits on amounts of coverage that we can obtain, or
may prevent us from obtaining insurance at all. Furthermore, there is no
assurance that proceeds from insurance that we are able to purchase will be
sufficient to cover losses.

OUR GROWTH MAY NOT BE MANAGEABLE.

Even if we are successful in obtaining new business, failure to manage the
growth could adversely affect our condition. We may experience extended periods
of very rapid growth. This growth could place a significant strain on our
management, operating, financial and other resources. Our future performance
will depend in part on our ability to manage growth effectively including, but
not limited to, recruiting engineering talent quickly and financing the
increased costs associated with rapid growth. We must develop management
information systems, including operating, financial, and accounting systems and
expand, train, and manage employees to keep pace with growth. Our inability to
manage growth effectively could negatively affect results of operations and the
ability to meet obligations as they come due.

OUR BUSINESS COULD BE ADVERSELY AFFECTED BY TERRORIST ATTACKS.

Our business partially depends on activities regulated by various agencies
and departments of the U.S. government and other companies that rely on the
government. In the recent past, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial, and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial, or other services could have a material adverse
effect on our business, results of operations, and financial condition.
Furthermore, we may experience a small increase in operating costs, such as
costs for transportation, insurance, and security as a result of the activities
and potential activities. The U.S. economy in general has been adversely
affected by the terrorist activities and potential activities, and any economic
downturn could adversely impact our results of operations, impair

our ability to raise capital, or otherwise adversely affect our ability to grow
our business. Conversely, because of the nature of our products and services,
there may be opportunities for us to offer solutions to the government that may
address some of the problems that the country faces at this time.

OUR INVESTORS MAY NOT RECEIVE DIVIDENDS.

We have not paid dividends since our inception and do not anticipate
issuing them in the foreseeable future. There can be no guarantee or assurance
that dividends will ever be paid. In fact, our goal is to reinvest earnings in
an effort to complete development of our technologies and products, and to
increase sales and long-term profitability and value. In addition, the
revolving credit facility with Laurus or other bank lines of credit, which we
may establish in the future or other credit or borrowing arrangements may
significantly impact our ability to pay dividends to our shareholders.

OUR SHAREHOLDERS MAY EXPERIENCE DILUTION IF OUR OUTSTANDING WARRANTS AND
OPTIONS ARE EXERCISED.

We are obligated to issue 889,852 shares of our common stock if all of
our outstanding warrants, outside of the warrants in this offering, are
exercised. In addition, as of May 4, 2004, we have outstanding stock options to
purchase an aggregate of 6,650,606 shares of our common stock, including
currently unvested options issued to our Chief Executive Officer. The total
number of shares which could be issued upon the exercise of currently vested
warrants and options (4,187,416 shares) represents approximately 23.5% of our
issued and outstanding shares of common stock as of May 4, 2004 . Shares of
common stock issued as a result of the exercise of stock options will have a
dilutive effect, which could be substantial, on the currently and then
outstanding shares of common stock.

OUR COMMON STOCK IS SUBJECT TO PENNY STOCK RULES.

Our common stock is subject to Rule 15g-1 through 15g-9 under the
Securities Exchange Act of 1934, as amended, which imposes certain sales
practice requirements on broker-dealers which sell our common stock to persons
other than established customers and "accredited investors" (generally,
individuals with net worths in excess of $1,000,000 or annual incomes exceeding
$200,000 (or $300,000 together with their spouses)). For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to the sale. This rule adversely affects the ability of broker-dealers to
sell our common stock and purchasers of our common stock to sell their shares of
such common stock.

Additionally, our common stock is subject to the Securities and Exchange
Commission regulations for "penny stock." Penny stock includes any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. The regulations require that prior to any non-exempt
buy/sell transaction in a penny stock, a disclosure schedule set forth by the
Securities and Exchange Commission relating to the penny stock market must be
delivered to the purchaser of such penny stock. This disclosure must include the
amount of commissions payable to both the broker-dealer and the registered
representative and current price quotations for the common stock. The
regulations also require that monthly statements be sent to holders of penny
stock which disclose recent price information for the penny stock and
information of the limited market for penny stocks. These requirements adversely
affect the market liquidity of our common stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. We intend that those forward-looking statements
be subject to the safe harbors created by those sections. These forward-looking
statements generally include the plans and objectives of management for future
operations, including plans and objectives relating to our future economic
performance, and can generally be identified by the use of the words "believe,"
"intend," "plan," "expect," "forecast," "project," "may," "should," "could,"
"seek," "pro forma," "estimates," "continues," "anticipate" and similar words.
The forward-looking statements and associated risks may include, relate to, or
be qualified by other important factors, including, without limitation:

our ability to return to profitability and obtain additional working
capital, if required;
our ability to successfully implement our future business plans;
our ability to attract strategic partners, alliances and advertisers;
our ability to hire and retain qualified personnel;
the risks of uncertainty of trademark protection;

risks associated with existing and future governmental regulation to which
we are subject; and,
uncertainties relating to economic conditions in the markets in which we
currently operate and in which we intend to operate in the future.

These forward-looking statements necessarily depend upon assumptions and
estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements. We do not undertake to update, revise or correct any
forward-looking statements.

Any of the factors described above or in the "Risk Factors" section above
could cause our financial results, including our net income (loss) or growth in
net income (loss) to differ materially from prior results, which in turn could,
among other things, cause the price of our common stock to fluctuate
substantially.

SELLING SECURITY HOLDERS

Laurus may sell, from time to time under this prospectus, up to an
aggregate of 2,018,182 shares of our common stock consisting of up to 1,818,182
shares of our common stock, representing 100% of the shares that may become
issuable upon conversion of the principal of and interest on the Convertible
Note at the fixed conversion price of $0.55 per share and up to 200,000 shares
of our common stock issuable upon exercise of the Laurus Warrant. Laurus may
convert principal and interest on the Convertible Note into our common stock
only to the extent that there are amounts outstanding under the revolving credit
facility described under "Description of Business - The Laurus Master Fund Ltd.
Revolving Credit Facility" below and only if we have not repaid the outstanding
amounts before Laurus exercises its conversion rights.

As of May 4, 2004, Laurus had converted 1,465,000 of the 1,818,182 shares and
had 353,182 shares remaining to convert under the revolving credit facility. The
remaining number of shares represents approximately 2.0% of the 17,813,704
shares of our common stock outstanding on May 4, 2004. Furthermore, after the
initial conversion by Laurus of the first 1,818,182 shares, Laurus has a
continuing right to convert, to the extent that we draw funds on the credit
facility and have not repaid those funds, at a fixed conversion price of $0.85
per share for the next 588,235 shares and thereafter based on a fair market
value formula specified in the agreement.

The following table sets forth, to our knowledge, certain information about
Laurus as of May 4, 2004 . Beneficial ownership is determined in
accordance with the rules of the Commission, and includes voting or investment
power with respect to the securities. In computing the number of shares
beneficially owned by a holder and the percentage ownership of that holder,
shares of common stock subject to options or warrants or underlying convertible
notes held by that holder that are currently exercisable or convertible or are
exercisable or convertible within 60 days after the date of the table are deemed
outstanding. To our knowledge, Laurus has sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by it, except
that Laurus Capital Management, LLC, a Delaware limited liability company, may
be deemed a control person of the shares owned by Laurus. David Grin and Eugene
Grin are the principals of Laurus Capital Management, LLC. The address for
Messrs. David Grin and Eugene Grin is 152 West 57th Street, New York, NY 10019.

Percentage of beneficial ownership is based on presumed ownership of
17,813,704 shares of common stock outstanding as of May 4, 2004 . Actual
ownership of the shares is subject to conversion of the Convertible Note and
exercise of the Warrant.

SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY SHARES OF STOCK BENEFICIALLY
OWNED PRIOR COMMON STOCK OWNED AFTER
TO OFFERING BEING OFFERING (1)
------------------ -------------------
SELLING SECURITY HOLDER NUMBER PERCENTAGE REGISTERED NUMBER PERCENTAGE
------------------------ ------------------ ---------- ------------ ------------------- ----------

LAURUS MASTER FUND, LTD. 2,018,182 (2) 1.3 2,018,182 0 N/A

(1) The amount assumes the sale of all shares being offered under this
prospectus.
(2) The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. For purposes of this table, we assume Laurus converts the full $1
million under the Secured Convertible Note. Under such Rule 13d-3, beneficial
ownership includes any shares as to which the selling security holder has sole
or shared voting power or investment power and also any shares, which the
selling stockholder has the right to acquire within 60 days. The actual number
of shares of common stock issuable upon the conversion or payment of the Secured
Convertible Note is subject to the amount drawn under the note and, if less than
$1 million is drawn and converted, the number of shares available to Laurus
could be materially less but not more than the number estimated in the table.
Furthermore, the selling stockholder has contractually agreed, absent an event
of default under the revolving credit facility, to restrict its ability to
convert the convertible note or exercise its warrants and receive shares of our
common stock if the number of shares of common stock held by it and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock. Laurus may void this restriction
upon seventy-five days prior written notice to us. As of May 4, 2004, Laurus
had converted 1,465,000 of the 1,818,182 shares and had 353,182 shares remaining
to convert under the revolving credit facility. The remaining number of shares
represents approximately 2.0% of the 17,813,704 shares of our common stock
outstanding on May 4, 2004.

As of May 4, 2004, all other selling security holders named in this
prospectus are offering up to 1,096,079 shares of common stock through this
prospectus, subject to exercise of warrants issued to them in a private
placement that was exempt from registration under Section 4(2) and Rule 506 of
the Securities Act of 1933.

The following table sets forth, as of the date of this prospectus, the name
of each selling security holder, the number of selling security holders
(excluding Laurus), to our knowledge, the aggregate number of shares owned by
each selling security holder, and the number of shares each selling security
holder will own after the completion of the offering made pursuant to this
prospectus. For purposes of establishing ownership and shares offered, we have
assumed the exercise of all of the outstanding Warrants under this offering:

Total Number
Of Shares To Total Shares Percentage of
Be Offered For to Be Owned Shares Owned
Name Of Shares Owned Selling Upon Upon
Selling Prior To This Shareholders Completion of Completion of
Stockholder Offering Account This Offering This Offering (6)

Charles H. Lloyd (1) 50,000 25,000 25,000 0.13%
Lunar Enterprises 66,667 0 66,667 0.34%
Craig Haffner 66,666 33,333 33,333 0.17%
Alex Duncan 95,166 0 95,166 0.49%
Arthur Benson (2) 128,470 64,235 64,235 0.33%
Curt Dean Blake (3) 61,224 30,612 30,612 0.16%
John Gross 61,224 30,612 30,612 0.16%
Edward Cuthbert 102,040 51,020 51,020 0.26%
J. Mark Grosvenor (4) 1,330,376 665,188 665,188 3.42%
Christopher McKellar (5) 392,158 196,079 196,079 1.01%
------------------------------------------------------------------------------------------
2,353,991 1,096,079 1,257,912
------------------------------------------------------------------------------------------

(1) Mr. Lloyd acted as Chief Financial Officer and Chief Operating Officer of
SpaceDev, Inc., and Chief Executive Officer of Integrated Space Systems, Inc.,
our wholly owned subsidiary, during the period from November 1999 to June 2002.
In addition to the Warrants, Mr. Lloyd owns 25,000 shares of our common stock
and holds options to purchase 800,000 shares of our common stock, 50,000 of
which expire in 2004 and 750,000 shares of which expire in 2005.
(2) Mr. Arthur Benson is the brother of our Chief Executive Officer, James W.
Benson. In addition to the Warrants, Arthur Benson holds 64,235 shares of our
common stock.
(3) Mr. Blake is a current member of our board of directors. In addition to the
Warrants, Mr. Blake holds 30,612 shares of our common stock and options to
purchase an additional 125,706 shares of our common stock.
(4) Mr. Grosvenor was a member of our board of directors. Mr. Grosvenor was
appointed to the board of directors after he acquired Warrants and common shares
in our private placement offering. In addition to the Warrants, Mr. Grosvenor
holds 665,188 shares of our common stock.
(5) Mr. McKellar is the owner of our principal business facilities. Upon
sale of the building to Mr. McKellar, we executed a leaseback of the building
for a term of 10 years. In addition to the Warrants, Mr. McKellar holds 196,079
shares of our common stock.
(6) For purposes of calculating percentage of ownership, we assumed the exercise
of all of the remaining warrants, the remaining shares underlying the
Convertible Note and the Laurus Warrants. We did not assume exercise of all
other outstanding derivative securities. Ownership is based on the total
outstanding shares of common stock on May 6, 2004 plus shares issuable upon
exercise of the Warrants, the Convertible Note and the Laurus Warrant, or
19,462,965 shares.

All costs, expenses and fees incurred in connection with the registration
of the selling security holders' shares will be borne by us. All brokerage
commissions, if any, attributable to the sale of shares by selling security
holders will be borne by selling security holders.

PLAN OF DISTRIBUTION

The selling security holders, and any of their donees, pledgees, assignees
and other successors-in-interest, may, from time to time, sell any or all of
their shares of common stock being offered under this prospectus on any stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales, which may include block

transactions, may be at fixed or negotiated prices. The selling security holders
may use any one or more of the following methods when selling shares:

o ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;

o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal
to facilitate the transaction;

o purchases by a broker-dealer as principal and resales by the broker-dealer
for its own account;

o an exchange distribution in accordance with the rules of the applicable
exchange;

o privately negotiated transactions;

o broker-dealers may agree with the selling security holder to sell a
specified number of shares at a stipulated price per share;
a combination of any of these methods of sale; or

o any other method permitted by applicable law, except that Laurus has agreed
that it has not engaged and will not engage or cause, advise, ask or assist
any person or entity, directly or indirectly, or engage, in short sales or
our common stock, which are contracts for the sale of shares of stock that
the seller does not own, or certificates which are not within the seller's
control, so as to be available for delivery at the time when, under
applicable rules, delivery must be made.

The sale price to the public may be:

o the market price prevailing at the time of sale;

o a price related to the prevailing market price;

o at negotiated prices; or

o a price the selling security holder determines from time to time.

Laurus has agreed, pursuant to the Securities Purchase Agreement, that it
has not engaged and will not engage or cause, advise, ask or assist any person
or entity, directly or indirectly, to engage, in short sales of our common
stock.

Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holder (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holder does not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.

The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. Commissions
received by these broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Any broker-dealers or agents that are not
deemed to be underwriters may not sell shares offered under this prospectus
unless and until we set forth the names of the underwriters and the material
details of their underwriting arrangements in a supplement to this prospectus

or, if required, in a replacement prospectus included in a post-effective
amendment to the registration statement of which this prospectus is a part.

In the event sales are made to broker-dealers as principals, we would be
required to file a post-effective amendment to the registration statement of
which the prospectus forms a part. In such post-effective amendment, we would
be required to disclose the names of any participating broker-dealers and the
compensation arrangements relating to such sales. In addition, if any shares of
common stock or warrants offered for sale pursuant to this prospectus are
transferred, subsequent holders could not use this prospectus until a
post-effective amendment is filed, naming such holder.

The selling security holders, alternatively, may sell all or any part of
the shares offered under this prospectus through an underwriter. To our
knowledge, the selling security holders have not entered into any agreement with
a prospective underwriter, and we cannot assure you as to whether any such
agreement will be entered into. If any selling security holder informs us that
it has entered into such an agreement or agreements, any material details will
be set forth in a supplement to this prospectus or, if required, in a
replacement prospectus included in a post-effective amendment to the
registration statement of which this prospectus is a part.

This prospectus does not cover the sale or other transfer of the
Convertible Note, the Laurus Warrant or the Warrants. If the selling security
holders transfer any such securities prior to conversion or exercise, the
transferee of those derivative securities may not sell the shares of common
stock issuable upon conversion or exercise of those derivative securities under
the terms of this prospectus unless we amend or supplement this prospectus to
cover such sales.

For the period a holder holds the Convertible Note and/or the Laurus
Warrant, with respect to Laurus, or the Warrants, with respect to all other
selling security holders, the holder has the opportunity to profit from a rise
in the market price of our common stock. The terms on which we could obtain
additional capital during the period in which those derivative securities remain
outstanding may be adversely affected. The holders of the derivative securities
are most likely to voluntarily convert or exercise those derivative securities
when the conversion price or exercise price is less than the market price for
our common stock. However, we cannot assure you as to whether any of those
derivative securities will be converted or exercised.

We have agreed with Laurus to keep the registration statement of which this
prospectus constitutes a part effective until the earlier of three years or the
termination of the Securities Purchase Agreement.

USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares of our common
stock offered by Laurus under this prospectus. Upon exercise of the Warrant, we
will receive proceeds from the Warrant holder; however, upon selling the common
stock underlying the Secured Convertible Note and/or the Warrant, the selling
security holder will receive all proceeds directly.

DESCRIPTION OF BUSINESS

FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
our General Registration Statement on Form 10SB12G/A filed January 28, 2000.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We undertake no obligation to publicly update any of the
forward-looking statements after the date of this prospectus to conform such
statements to actual results or to changes in our expectations.

Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to us; our dependence on single-source
or a limited number of suppliers; our ability to protect our proprietary
technology; market conditions influencing prices or pricing; an adverse outcome
in potential litigation, claims and other actions by or against us,
technological changes and introductions of new competing products; the current
recession; terrorist attacks or acts of war, particularly given the acts of
terrorism against the United States on September 11, 2001 and subsequent
military responses by the United States; mission disasters such as the loss of
the space shuttle Columbia on February 1, 2003 during its re-entry into earth's
atmosphere; ability to retain key personnel; changes in market demand; exchange
rates; productivity; weather; and market and economic conditions in the areas of
the world in which we operate and market our products. These are factors that we
think could cause our actual results to differ materially from expected and
historical events.

GENERAL

SpaceDev, Inc. (the "Company," "SpaceDev," "we," "us" or "our") is engaged
in the conception, design, development, manufacture, integration and operations

of space technology systems, products and services. We are currently focused on
the commercial development of low-cost micro-satellites, nano-satellites and
related subsystems, hybrid rocket propulsion as well as the associated
engineering technical services to government, aerospace and other commercial
enterprises. Our products and solutions are sold directly to these customers and
include sophisticated micro- and nano-satellites, hybrid rocket-based orbital
Maneuvering and orbital Transfer Vehicles ("MTVs") as well as safe sub-orbital
and orbital hybrid rocket-based propulsion systems. We are also developing
commercial hybrid rocket motors and small high performance space vehicles and
subsystems.

Our approach is to provide smaller spacecraft -(generally 250 kg mass and
less) and compatible small hybrid propulsion space systems to commercial,
university and domestic government customers. We are developing smaller
spacecraft and miniaturized subsystems using proven, lower cost, high-quality
off-the-shelf components. Our space products are modular and reproducible, which
allows us to create affordable space solutions for our customers. By utilizing
our innovative technology and experience, and space-qualifying commercial
industry-standard hardware, software and interfaces, we provide increased
reliability at reduced costs.

We have been awarded, have successfully concluded or are successfully
concluding contracts from such esteemed government, university and commercial
customers as the Air Force Research Laboratory ("AFRL"), The Boeing Company, the
California Space Authority ("CSA"), the Jet Propulsion Laboratory ("JPL"),
Lockheed Martin, the National Reconnaissance Office ("NRO"), and the University
of California at Berkeley ("UCB") via NASA.

We were incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev stock,
SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its name
to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. We became a publicly traded company in
October 1997 and are trading on the Nasdaq Over-the-Counter Bulletin Board
("OTCBB") under the symbol of "SPDV."

In February 1998, we acquired Integrated Space Systems ("ISS"), in San
Diego. ISS was fully integrated into SpaceDev. Most of the ISS employees were
former launch vehicle engineers and managers who worked for General Dynamics in
San Diego. As SpaceDev employees, they primarily develop products based on
hybrid rocket motor technology.

In August 1998, we acquired the patents and intellectual property produced
by American Rocket Company ("AMROC"). The acquisition provided us access to a
large cache of hybrid rocket documents, designs and test results. AMROC
specialized in hybrid rocket technology (solid fuel plus liquid oxidizer) for
small sounding rockets and launch vehicles.

In late 1998, we bid and won a government-sponsored research and
development contract, which was directly related to our strategic commercial
space interests. We competed with seven other industry teams and we were one of
five firms selected by Jet Propulsion Laboratory ("JPL") to perform a mission
and spacecraft feasibility assessment study for the proposed 200-kg Mars
MicroMissions. The final report was delivered to JPL in March 1999 and, as a
result, we are now able to offer lunar and Mars commercial deep-space missions
based on this innovative space system design.

In mid-1999, we won an R&D contract from the National Reconnaissance Office
("NRO") to study small hybrid-based "micro" kick-motors for small-satellite
orbital transfer applications. During the contract, we successfully developed
the Secondary Payload Orbital Transfer Vehicle ("SPOTV") design concept. We
subsequently created a prototype, which lead to the development of our
capability to apply the SPOTV concept to subsequent MTV programs.

In November 1999, we won a $4.9 million turnkey mission contract by the Space
Sciences Laboratory ("SSL") at UCB. We were competitively selected by UCB/SSL to
design, build, integrate, test and operate, for one year, a small NASA-sponsored
scientific, Earth-orbiting spacecraft called CHIPSat. CHIPSat is the first and
only successful mission of NASA's low-cost University-Class Explorer ("UNEX")
series to date. CHIPSat launched as a secondary payload on a Delta-II rocket on
January 12, 2003. The satellite achieved 3-axis stabilization, meaning it was
pointing and tracking properly, with all individual components and systems
successfully operating and is continuing to work well in orbit after one year.
In 2000, we reviewed the contract status at year-end and determined that the
total estimated costs at the end of the program would exceed the likely revenue.
As a result, we accrued a loss of approximately $860,000 based on the expected
contract modification of $600,000, which was approved on June 15, 2001. On
November 28, 2001, a second contract modification was signed with UCB, which
added approximately $1.2 million to the contract as well as an increase in
contract scope. This increased the total contract revenue to approximately $6.8
million and reduced the total expected loss on the contract to approximately
$460,000. During 2002, an additional contract modification for approximately
$400,000 was signed, which also increased the contract value and increased the
scope of the contract to the current value of the CHIPSat project of
approximately $7.4 million, thereby increasing the total expected loss to
approximately $514,000. In retrospect, some of the CHIPSat expenses creating the
loss could have been recorded as research and development costs associated with
our ongoing satellite design and development programs. As of December 31, 2003,
the total contract costs were expended. Revenues for the years ending 2003 and
2002 were approximately $356,000 and $1.7 million, respectively. The original
support contract expired on December 31, 2003. CHIPSat is still operating
successfully and providing UCB with new and interesting data. UCB requested to
extend the program and we recently negotiated a new time and materials contract
in the form of a purchase order with UCB for continuing support of this
project.

On March 22, 2000, the California Spaceport Authority and the California
Space and Technology Alliance ("CSTA") notified us that we had been awarded a
grant of approximately $100,000 to be used for test firing our hybrid rocket
motors. California's Western Commercial Space Center also awarded us
approximately $200,000 to help build and equip its satellite and space vehicle
manufacturing facilities. These facilities were completed in January 2001.

In July 2000, the NRO granted us two separate follow-on competitive awards
of approximately $400,000 each for further hybrid rocket engine design, test,
evaluation, and development. Our work for the NRO has helped fund two innovative
hybrid rocket motor products:

o a family of small versatile orbital Maneuver and Transfer
Vehicles ("MTVs") using clean, safe hybrid rocket propulsion technology; and,

o a protoflight hybrid propulsion module for a 50-kg class
micro-satellite.

Both of those contracts were successfully completed.

In September 2001, we were awarded a contract for a proprietary hybrid
propulsion research program valued in excess of $1 million. As a part of that
program, we are competing with another party to design a space propulsion
system. The entire contract, which will be awarded based upon the submitted
designs, is valued at approximately $2.2 million. We believe that the award
could lead to a long-term market for our hybrid propulsion technology. Due to
the highly competitive, confidential and market-sensitive nature of the
contract, we are unable to release more detailed information on the project
until the contract has been awarded in full. However, we do believe this new
contract is indicative of an increased demand for our hybrid motor technology
and expertise in the space industry. Work on this project generated
approximately $300,000 and $1.2 million of revenue in 2001 and 2002,
respectively.

On April 4, 2002, SpaceDev, Inc., an Oklahoma corporation, was formed for
the purpose of investigating and developing commercial space products in the
state of Oklahoma. Plans for development of this business in Oklahoma are
currently on hold.

On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for the Air Force Research Lab ("AFRL"). We
received an award for Phase II of the contract on March 28, 2003, and will use
the project to further expand our product line to satisfy commercial and
government space transportation requirements. The first two phases of the
contract (including an additional add-on option) are worth up to approximately
$2.5 million, of which $100,000 was awarded for Phase I, and approximately $1.4
million was awarded for Phase II. AFRL Phase II is a cost-plus contract. In
addition to the Phase I and Phase II awards, there is an option worth
approximately $1 million. The option has been awarded and work will begin once
certain milestones are met to the satisfaction of the AFRL project manager.

On July 9, 2003, we were awarded a Phase I contract to develop micro- and
nano-satellite bus and subsystem designs. This AFRL SBIR contract, valued at
approximately $100,000, will enable us to explore the further miniaturization of
our unique and innovative microsat subsystems. It will also enable us to explore
ways to reduce the time and cost to build small satellites through further
standardization in order to help define de facto standards for payload hardware
and software interfaces. The contract is fixed price, milestone-based and should
be completed within one year. We believe that this SBIR will move into Phase II
valued at approximately $750,000 of carry-forward work for us; however, there
can be no assurance that such work will be awarded to us. Revenues for the year
ending December 31, 2003 were approximately $40,000.

On July 9, 2003, we were awarded a Phase I Small Business Innovation Research
("SBIR") contract by Air Force Research Lab ("AFRL") to design and begin the
development of the SpaceDev Streaker(TM) small launch vehicle ("SLV"). SpaceDev
Streaker(TM) will be designed to responsively and affordably lift up to 1,000
pounds to Low Earth Orbit ("LEO"). The SpaceDev Streaker(TM) SLV concept is
based on a proprietary combination of technologies to increase the performance
of hybrid rocket motor technology. Hybrid rocket motors are a combination of
solid fuel and liquid oxidizer, and can be relatively safe, clean,
non-explosive, and storable, and can be throttled, shut down and restarted.
This contract is valued at approximately $100,000, is a fixed price,
milestone-based agreement, which should be completed within one year. We believe
that this SBIR will move into Phase II valued at approximately $750,000 of
carry-forward work for us, plus an additional $750,000 of funds provided by
Congress. This money will be used to develop and test fire our large Common
Core Booster for the SpaceDev Streaker(TM) launch vehicle. We believe that
there may be some interest by Congress in providing additional matching funding
to expand and accelerate the scope of the work; however, there can be no
assurance that such work will be awarded to us. Revenues for the year ending
December 31, 2003 were approximately $50,000.

Also on July 9, 2003, we were awarded a second contract by the Missile Defense
Agency to explore the use of micro-satellites ("microsats") in national
missile defense. Our microsats are operated over the Internet and are capable
of pointing and tracking targets in space or on the ground. This study explored
fast response microsat launch and commissioning; small, low-power passive
sensors; target acquisition and tracking; formation flying and local area
networking within a cluster of microsats; and an extension of our proven use of
the Internet for on-orbit command, control and data handling. The contract was
successfully concluded on February 27, 2004. The total contract value was
$800,000 with approximately $481,000 of revenue realized in the year ending
December 31, 2003 and approximately $319,000 of revenue realized in the first
quarter of 2004. The total value of our microsatellite studies for MDA was over
$1 million in 2003. This second contract is being considered an investigatory
phase by MDA.

On July 24, 2003, we were awarded a contract by Lunar Enterprise of California
("LEC") for a first phase project to begin developing a conceptual mission and
spacecraft design for a lunar lander program. The unmanned mission will be
designed to put a small dish antenna near the south pole of the Moon. From that
location it will be in near-constant sunlight for solar power generation, and
should be able to perform multi-wavelength astronomy while communicating with
ground stations on Earth. The contract value was $100,000 and was completed by
November 2003. We believe that there is a possibility for a follow-on phase of
$140,000 to further analyze launch opportunities, spacecraft design, trajectory
possibilities, potential landing areas, available technologies for a small radio
astronomy system, and communications and data handling requirements. This
phase, if awarded, would be targeted for a mid-2004 completion. Although this
project is currently unfunded, if the project were to proceed past the analysis
stage, the total mission cost could exceed $50-$75 million. Again, we can give
no assurance that the contract will be awarded to us. Revenues for the year
ending December 31, 2003 were approximately $70,000.

On October 2, 2003, we were awarded an exclusive, follow-on contract to provide
the hybrid rocket motor systems and components for SpaceShipOne. We provide our
facilities, resources and a team of launch vehicle and hybrid propulsion
engineers & technical personnel in continued support of the SpaceShipOne
program. The contract called for us to use our best efforts to satisfy the
requirements of the SpaceShipOne program, based on our experience with the prior
phases. We are to provide two sets of re-usable flight test hardware, including
a bulkhead, commonly known as the SpaceDev bulkhead, machined in the flight
configuration, a main oxidizer valve of the current design and associated
interfaces and plumbing to the SpaceDev bulkhead, a motor control system,
igniter housings, pressure transducers, and thermocouples as required for input
to the motor control system. In addition, we are to produce and assemble test
motors, including but not limited to, all expendable or semi-reusable materials
as defined by our baseline design motor. We are also to provide on-site
engineering test support and post-test analysis. Provisions are made in the
contract for minimum monthly payments in the event of customer schedule slippage
as well as additional levels of support via engineering change orders, if
required. The total contract value is estimated at $429,000. Approximately
$115,000 of revenue was realized in the year ending December 31, 2003, with
approximately $35,000 from engineering change orders and the remaining $80,000
from the contract.

On March 31, 2004, we were awarded a $43,362,271, five-year, cost-plus-fixed fee
indefinite delivery/indefinite quantity contract to conduct a micro satellite
distributed sensing experiment, an option for a laser communications experiment,
and other micro satellite studies and experiments as required in support of the
Advanced Systems Deputate of the Missile Defense Agency. This effort will be
accomplished in a phased approach. The total five-year contract has a ceiling
amount of $43,362,271. The principal place of performance will be Poway,
California. We expect to complete the work under the contract before February
2009. Government contract funds will not expire at the end of the current
government fiscal year. The micro satellite distributed sensing experiment is
intended to design and build up to six responsive, affordable, high performance
micro satellites to support national missile defense. The milestone-based,
multiyear, multiphase contract has an effective start date of March 1, 2004.
The first phase is expected to be completed this year and will result in
detailed mission and microsat designs. The estimated first phase revenue is
$1.1 million. The overall contract calls for us to analyze, design, develop,
fabricate, integrate, test, operate and support a networked cluster of three
formation-flying boost phase and midcourse tracking microsatellites, with an
option to design, develop, fabricate, integrate, test, operate and support a
second cluster of three formation flying microsats to be networked on-orbit with
high speed laser communications technology. The second phase is anticipated to
begin September 1, 2004 and run through 2005.

BUSINESS STRATEGY

Our strategy is based on the belief that advancements in technology and the
application of standard processes will make access to space much more practical
and affordable. We believe these factors will cause growth in certain areas of
space commerce and will create new space markets and increased demand for our
products.

Our business strategy is to:

o Introduce commercial business practices into the space arena, use
off-the-shelf technology in innovative ways and standardize hardware and
software to reduce costs and to increase reliability and profits;

o Start with small, practical and profitable projects, and leverage
credibility into larger and ever more bold initiatives - utilizing partnerships
where appropriate;

o Bid, win and leverage government programs to fund our Research and
Development ("R&D") and product development efforts;

o Integrate our smaller, low cost commercial spacecraft and hybrid
space transportation systems to provide one-stop turnkey payload and/or data
delivery services to target customers;

o Apply our low cost space products to new applications and to
create new users, new markets and new revenue streams;

o Produce and fly commercial missions, in conjunction with partners
and investors, throughout the inner solar system and be "first to market" in the
commercial beyond earth orbit "space"; and

o Join or establish a team to build a safe, affordable sub-orbital,
passenger space plane to help initiate the space tourism business.

We believe that our business model, emphasizing smaller satellites,
commercial approaches, technological simplicity, architectural and interface
standardization and horizontal integration (i.e., "whole product"), provides the
following advantages:

o Enables small-space customers to contract for end-to-end mission
solutions, reducing the need for and complexity of finding other contractors for
different project tasks;

o Lowers total project costs and therefore provides greater value
and increases return on investment for us and our customers; and

o Creates barriers to entry for and competition from competitors.

PRODUCTS AND SERVICES; MARKET

We currently have three primary lines of space products and services on
which we believe a sound foundation and profitable, cash generating business can
be built:

o Our Products - Microsatellites & Nanosatellites, BD-II Spacecraft
Bus, MTV (orbital maneuvering and transfer vehicle) and Hybrid Propulsion
Systems;

o Our Subsystem Products - MFC (miniature flight computer), MS-VOS
(micro space vehicle operating system), PC-DS (power conditioning and
distribution system) and MTS (miniature S-band transponder); and,

o Our Services - Mission Analysis and Design, Spacecraft Subsystem
Design, Microsatellite and Nanosatellite Launches and Mission Control and
Operations.

These products and services are being marketed and sold directly into
domestic government, university and commercial markets. Our business is not
seasonal to any significant extent; however, our business follows normal
industry trends such as increased demand during bullish economic periods, or
slow-downs in demand during periods of recession.

In addition, we are working with partners to create new markets that can
generate new space-related service, media, tourism and commercial revenue
streams. While we believe that certain space market opportunities are still
several years away, we are currently working with industry-leading partners to
develop unique enabling technology for the potentially very large sub-orbital
manned space plane tourism market; and, creating a new unmanned Beyond Earth
Orbit commercial market with spacecraft derived from our NASA JPL Mars
MicroMission mission design contract.

Our Products
-------------

Microsatellites & Nanosatellites - We design and build small, light,
high-performance, reliable and affordable micro- and nanosatellites. The primary
benefit of micro- and nanosatellites is lower cost. Since we can dramatically
reduce manufacturing costs and the costs to launch the satellites to earth-orbit
and deep space, we can pass those cost savings on to our customers. Small,
inexpensive satellites were once the exclusive domain of scientific and amateur
groups; however, smaller satellites are now a viable alternative to larger, more
expensive ones, as they provide cost-effective solutions to traditional
problems. We design and build low cost space-mission solutions involving
micro-satellites (generally less than 100 kg) and even smaller satellites (less
than 50 kg). Our approach is to provide smaller spacecraft and compatible low
cost, safe hybrid propulsion space systems to a growing market of commercial,
domestic government and university customers.

BD-II (Boeing Delta-II compatible) spacecraft bus - We have a qualified
microsatellite bus available to sell as a standard, fixed-price product to
government and commercial customers needing an affordable satellite for small
payloads. We developed this product in 1999, when we were selected as the
mission designer, spacecraft bus provider, integrator and mission operator of
the University of California, Berkeley ("UCB") Space Sciences Laboratory's
("SSL") Cosmic Hot Interstellar Plasma Spectrometer ("CHIPS") mission. CHIPSat
was launched at 4:45 PM PST on January 12, 2003 from Vandenberg Air Force Base
in California. The satellite achieved 3-axis stabilization with all individual
components and systems successfully operating and continues to work well in
orbit.

Orbital Maneuvering and Transfer Vehicle ("MTV") - Our MTV system is a family of
small, affordable, elegantly simple, throttleable, and restartable propulsion
and integrated satellite products. Our MTV can be used as a standard propulsion
module to transport a customer's payload. The MTV provides the change in
velocity and maneuvering capabilities to support a wide variety of applications
for on-orbit maneuvering, proximity operations, rendezvous, inspection, docking,
surveillance, protection, inclination changes and orbital transfer.

Hybrid Rocket Propulsion System - We provide a wide variety of safe, clean,
simple, reliable, inexpensive hybrid propulsion systems to safely and
inexpensively enable satellites and on-orbit delivery systems to rendezvous and
maneuver on-orbit and deliver payloads to sub-orbital altitudes. Hybrid rocket
propulsion is a safe and low-cost technology that has tremendous benefits for
current and future space missions. Our hybrid rocket propulsion technology
features a simple design, is restartable, is throttleable and is easy to
transport, handle and store. We acquired some of our expertise in hybrid
propulsion technology from AMROC.

Our Subsystem Products
------------------------

Miniature Flight Computer ("MFC") - Our MFC is a high performance 300
million instructions per second ("MIPS") general-purpose flight computer for a
wide variety of space vehicles. It is cost-effective, has about ten times the
performance-to-power ratio of current flight computers and only uses 2 to 6
watts of power, depending on its tasks. Our MFC has successfully passed
manufacturing and environmental testing for low earth orbit ("LEO") missions and
is ready for civil, military and commercial spacecraft and launch vehicle
applications.

Micro Space Vehicle Operating System ("MS-VOS") - Our MS-VOS is a small,
fast, modular and layered operating system, similar to the operating systems of
microcomputers. The modular nature of our MS-VOS and our other space products
allow us to design and build affordable space solutions for our customers. We
use industry-standard interfaces to increase reliability while reducing cost.
Our MS-VOS combines standard protocols like TCP/IP, software components like
VxWorks(R) and application software to effect real time command and control,
scriptable autonomous vehicle control, scriptable data acquisition and
telemetry.

Mission Control and Operations Software ("MC-OS") - Our MC-OS performs
satellite command and control and data acquisition. The MC-OS satellite command
and control is managed via user commands, batched command scripts and timed
command scripts. Data acquisition is accomplished by mapping the input data
stream (bytes, words or floats) to MC-OS variables. The mapping is accomplished
by selecting a frame offset and data type for each MC-OS variable. Other MC-OS
components include file transfer protocol ("FTP") for file transfer between the
ground station and satellite, a system security module which assigns users a
password, command level and logs all user commands to disk, and a status window
for monitoring MC-OS status.

Power Conditioning and Distribution System ("PC-DS") - Our PC-DS controls
critical failsafe spacecraft functions, including battery charge control, bus

voltage regulation, load power switching, current monitoring & limiting for the
spacecraft and individual loads, and hardware load-shedding protection for
spacecraft contingency management, and allows direct ground control of power
switches. Our PC-DS is capable of keeping the spacecraft alive independent of
any other spacecraft computers.

Our Miniature S-Band Transmitter ("MST") and Miniature S-Band Receiver
("MSR") are a cost-effective solution for low cost and low mass spacecraft. The
MST and MSR feature lightweight state-of-the-art electronic circuitry designed
to meet today's requirements for power efficient space-based communications
hardware. The weight of the transmitter and receiver are 2.5-oz and 32-oz,
respectively. These units leverage years of communications design heritage and
have been in orbit since the January 12, 2003 launch of CHIPSat, the first
mission to be funded through NASA's University-Class Explorer ("UNEX") Program.
The MST and MSR designs provide flexibility to meet customer requirements and
options. Both units are designed to operate in most present day thermal, launch,
and on-station low-Earth-orbit ("LEO") spacecraft environments.

Our Services
-------------

Mission Analysis and Design - We provide end-to-end mission design and
analysis, including the design of the mission and its science, commerce or
technology demonstration goals, the design of an appropriate space vehicle
(satellite or spacecraft), prototype development, construction and testing of
the spacecraft, integration of one or more payloads (instruments, experiments or
technologies) into the spacecraft, integration of the spacecraft onto the launch
vehicle (rocket), the launch and the mission control and operations during the
life of the mission. Many of our products and services are now qualified and
capable to assist with missions that orbit the earth, travel to another
planetary body, or cruise through space taking measurements and transmitting
valuable data back to Earth.

Spacecraft and Subsystem Design - We also provide reliable, affordable
access to space through innovative solutions currently lacking in the
marketplace. Our approach is to provide smaller spacecraft - generally 250 kg
mass and less - and compatible hybrid propulsion space systems to commercial,
university and government customers. The small spacecraft market is supported by
the evolution and enabling of microelectronics, common hardware & software
interface standards, and smaller launch vehicles. Reduction of the size and mass
of traditional spacecraft electronics has reduced the overall spacecraft size,
mass, and volume over the past 10 to 15 years. For example, our Miniature Flight
Computer ("MFC") is only 24 cubic inches and provides 300 million instructions
per second ("MIPS") of processing power versus a competitor's more "traditional"
solution that requires about 63 cubic inches and only provides 10 MIPS.

Microsatellite & Nanosatellite Launches - To support the growth in customer
demand within the small satellite market, we are working with several launch
providers to identify and market affordable launch opportunities and to provide
customers with a complete on-orbit data delivery service that combines our
spacecraft and hybrid propulsion products. These innovative, low-cost, and
turnkey launch solutions will allow us to provide one-stop shopping for launch
services, spacecraft, payload accommodation, total flight system integration and

test and mission operations. The customer only needs to provide the payload, and
we perform all the tasks required for the customer to get to orbit and to get
their data.

Mission Control and Operations - Our mission control and operations package
is uniquely Internet-based and allows for the operation and control of missions
from anywhere in the world that has access to the Internet. The Cosmic Hot
Interstellar Plasma Spectrometer Satellite ("CHIPSat") is the first U.S. mission
to use end-to-end satellite operations with TCP/IP and FTP. While this concept
has been analyzed and demonstrated by the NASA OMNI team, CHIPSat is the first
to implement the concept as the only means of satellite communication. A
formation flying cluster or constellation of TCP/IP-based micro-satellites can
be designed to communicate directly with each other. Providing any one
satellite/node in this network is in line-of-sight with any ground station at
any given time, the entire constellation would always maintain ground station
connectivity, thus creating a network on orbit and on the web, a direct
extension of CHIPSat's elegantly simple TCP/IP mission operations architecture.

COMPONENTS AND RAW MATERIALS

Although we may experience a shortage of certain parts and components
related to our products, we have many alternative suppliers and distributors and
are not dependent on any individual supplier or distributor. Furthermore, we
have not experienced difficulty in our ability to obtain our parts or component
materials, nor do we expect this to be an issue in the future.

COMPETITION

We compete for sales of our products and services based on price,
performance, technical features, contracting approach, reliability,
availability, customization and, in some situations, geography. Our primary
competition for low-cost propulsion systems using clean, safe, commercially
available hybrid rocket motor technology comes from Cesaroni Technology
Incorporated in Canada and their affiliates. While Lockheed Martin has
demonstrated large-scale hybrid rocket capability, and there are a number of
smaller enterprises, especially academic-based organizations, in the domestic
market currently investigating various aspects of hybrid rocket technology, to
date we have seen limited competitive pressures arising from these
organizations.

The primary domestic competition for unmanned earth-orbiting micro-
-satellites, unmanned deep space micro-spacecraft and micro-satellite subsystems
as well as software systems comes from other small companies such as AeroAstro
or MicroSat Systems. The most established international competitor is Surrey
Satellite Technology Limited ("SSTL") in the United Kingdom. Swedish Space
Corporation is also able to compete in the small-satellite arena, particularly
in the European market. In addition to private companies, there are a limited
number of universities in the United States that have the capability to produce
reasonably simple micro-satellites. These include Weber State in Utah and
Arizona State University ("ASU") in Phoenix.

While we believe that our product and service offerings provide a wide
breadth of solutions for our customers and prospective customers, some of our
competitors compete across many of our product lines. Several of our current and

potential competitors have greater resources, including technical and
engineering resources. We are not aware of any established large companies
(e.g., Northrop Grumman, Lockheed Martin, Boeing), which have expressed
corporate goals to design and build inexpensive micro-spacecraft for a mission,
which would be our direct competition.

REGULATION

Our business activities are regulated by various agencies and departments
of the U.S. government and, in certain circumstances, the governments of other
countries. Several government agencies, including NASA and the U.S. Air Force,
maintain Export Control Offices to ensure that any disclosure of scientific and
technical information ("STI") complies with the Export Administration
Regulations and the International Traffic in Arms Regulations ("ITAR"). Exports
of our products, services and technical information require either Technical
Assistance Agreements ("TAAs") or licenses from the U.S. Department of State,
depending on the level of technology being transferred. This includes recently
published regulations restricting the ability of U.S.-based companies to
complete offshore launches, or to export certain satellite components and
technical data to any country outside the United States. The export of
information with respect to ground-based sensors, detectors, high-speed
computers, and national security and missile technology items are controlled by
the Department of Commerce. The government is very strict with respect to
compliance and has served notice that failure to comply with the ITAR and/or the
Commerce Department regulations may subject guilty parties to fines of up to $1
million and/or up to 10 years imprisonment per violation. Our failure to comply
with any of the foregoing regulations could have serious adverse effects as
dictated by the rules associated with compliance to the ITAR regulations. Also,
our ability to successfully market and sell into international markets may be
severely hampered due to ITAR regulation requirements. Our conservative position
is to consider any material beyond standard marketing material to be regulated
by ITAR regulations.

In addition to the standard local, state and national government
regulations that all businesses must adhere to, the space industry has specific
regulations. In the U.S., command and telemetry frequency assignments for space
missions are primarily regulated by the Federal Communications Commission
("FCC") for our domestic commercial products. Our products geared toward
domestic government customers are regulated by the National Telecommunications
Information Agency ("NTIA") and any of our products sold internationally, if
any, are regulated by the International Telecommunications Union ("ITU"). All
launch vehicles that are launched from a launch site in the United States must
pass certain launch range safety regulations that are administered by the U.S.
Air Force. In addition, all commercial space launches that we might perform
require a license from DOT. Satellites that are launched must obtain approvals
for command and frequency assignments. For international approvals, the FCC and
NTIA obtain these approvals from the ITU. These regulations have been in place
for a number of years to cover the large number of non-government commercial
space missions that have been launched and put into orbit in the last 15 to 20
years. Any commercial deep space mission that we might perform would be subject
to these regulations. Presently, we are not aware of any additional or unique
government regulations related to commercial deep space missions.

We are also required to obtain permits, licenses, and other authorizations
under federal, state, local and foreign statutes, laws or regulations or other
governmental restrictions relating to the environment or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof. Presently, we do not have a requirement to obtain any
special environmental licenses or permits.

We may need to utilize the Deep Space Network ("DSN") on some of our
missions. The DSN is an international network of antennas that supports
interplanetary spacecraft missions and radio and radar astronomy observations
for the exploration of the solar system and the universe. The network also
supports selected Earth-orbiting missions. The network is a facility of NASA,
and is managed and operated for NASA by the Jet Propulsion Laboratory ("JPL").
The Telecommunications and Mission Operations Directorate ("TMOD") manages the
program within JPL. Coordination for the use of this facility is arranged with
the Telecommunications and Mission Operations Command ("TMOC").

THE LAURUS MASTER FUND, LTD. REVOLVING CREDIT FACILITY

On June 3, 2003, we entered into a Security Agreement, Secured Convertible
Note, Registration Rights Agreement and Common Stock Purchase Warrant, with
Laurus Master Fund, Ltd., or Laurus. In this prospectus, we refer to these
agreements, as the Agreement, which we filed on Form 8-K dated June 18, 2003.
Pursuant to the Agreement, we received a $1 million revolving credit facility in
the form of a three-year Convertible Note secured by our assets. The net
proceeds from the Convertible Note shall be used for our general working capital
needs. Advances on the Convertible Note may be repaid at our option, in cash or
through the issuance of our shares of common stock. The Convertible Note carries
an interest rate of WSJ Prime plus 0.75% on any outstanding balance. In
addition, we are required to pay a collateral management payment of 0.55% of the
average aggregate outstanding balance during the month plus an unused line
payment of 0.20% per annum. The outstanding balance on the revolving credit
facility at December 31, 2003 was $748,893, of which approximately $13,600 had
been accrued for interest.

The Company filed a registration statement on Form SB-2 on July 25, 2003 of
which this prospectus is a part, in connection with this transaction. The Form
SB-2 was declared effective on August 6, 2003. With the securities registered
for public resale, the Company has an option to pay amounts outstanding under
the revolving credit facility by converting shares of its common stock at the
fixed conversion price of $0.55 per share on the first $1 million of principal,
as long as the then current market price is more than 118% of the fixed
conversion price.

first $1 million to $0.85 for the next $500,000 and then to 103% of the then
fair market value of our common stock ("Adjusted Fixed Conversion Price").

Availability of funds under the revolving credit facility will be based on
our accounts receivables, except as waivers are provided by Laurus. An initial
three (3) month waiver was offered by Laurus, under which Laurus permitted a
credit advance up to $300,000, which amount would otherwise have exceeded
eligible accounts receivable during the period. Laurus subsequently extended the
waiver for an additional six (6) months, under which Laurus permitted a credit
advance up to $1 million, which amount would otherwise have exceeded eligible
accounts receivable during the period. The revolving credit facility is secured
by all of the assets of the Company.

In conjunction with this transaction, Laurus was paid a fee of $20,000 for
the first year (and the Company will be required to pay a continuation fee of
$10,000 for each year thereafter), which fee was expensed as additional interest
expense. In addition, Laurus received a warrant to purchase 200,000 shares of
the Company's common stock, as stated herein. The warrant exercise price is
computed as follows: $0.63 per share for the purchase of up to 125,000 shares;
$0.69 per share for the purchase of an additional 50,000 shares; and $0.80 per
share for the purchase of an additional 25,000 shares. The warrant exercise
price may be paid in cash, in shares of the Company's common stock, or by a
combination of both. The warrant expiration date is June 3, 2008. The warrant
exercise price and the number of shares underlying the warrant are subject to
adjustments for stock splits, combinations and dividends.

In addition to the initial warrant, the Company is obligated to issue an
additional five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten dollars ($10) in principal of the Convertible Note converted into common
stock, if and when over $1 million is converted under the revolving credit
facility. The value of the warrant will be determined, if and when issued, and
will be treated as additional interest expense and will be amortized over the
remaining term of the Convertible Note, unless sooner terminated. No more than
an aggregate of 100,000 shares of the Company's common stock may be purchased by
Laurus under such additional warrants.

On March 31, 2004, we negotiated an amendment to our Secured Convertible
Note dated June 3, 2003 with the Laurus Master Fund to add a fixed conversion
price at $0.85 per share for the next $500,000 converted under the revolving
credit facility after the initial $1 million conversion. In exchange for the
amendment, Laurus granted us a six-month waiver to utilize the full revolving
credit facility in advance of eligible accounts. At December 31, 2003, Laurus
had converted 415,000 shares under the revolving credit facility, which
represented approximately $228,000 of debt converted to equity. The Company
expensed approximately $126,500 for non-cash loan fee expenses in 2003. Fair
market value of the stock was determined by discounting the closing market price
on the date of the conversion by 20%.

We may terminate our agreements with Laurus before the end of the initial
three-year term and Laurus will release its security interests upon payment to
Laurus of all obligations, if we have: (i) provided Laurus with an executed
release of all claims which we may have under the agreements; and, (ii) paid to
Laurus an early payment fee in an amount equal to (x) four percent (4%) of the
Capital Availability Amount if such payment occurs prior to the first
anniversary of the Initial Term (i.e., June 3, 2004); (y) three percent ( 3%) of
the Capital Availability Amount if such payment occurs after the first
anniversary and prior to the second anniversary of the Initial Term; and, (z)
two percent (2%) of the Capital Availability Amount if such payment occurs after
the second anniversary and prior to the end of the Initial Term. The early
payment fee is also due and payable by us to Laurus if we terminate our
Agreement after the occurrence of an Event of Default, as define in the
agreements.

EMPLOYEES

At May 4, 2004 , we employed approximately twenty-four (24) persons
full and part-time, most of whom are aerospace, mechanical and electrical
engineers. We expect to hire other personnel as necessary for product
development, quality assurance, sales and marketing, finance and administration.
In addition, due to the nature of our business, we anticipate that it may become
necessary to lay off employees whose work is no longer required to maintain
operations in order to prevent cost overruns. We do not have any collective
bargaining agreements with our employees and we believe our employee-relations
are good.

INTELLECTUAL PROPERTY

We rely in part on patents, trade secrets and know-how to develop and
maintain our competitive position and technological advantage. We intend to
protect our intellectual property through a combination of license agreements,
trademarks, service marks, copyrights, trade secrets and other methods of
restricting disclosure and transferring title. There can be no assurance that
such applications will be granted. We have and intend to continue entering into

confidentiality agreements with our employees, consultants and vendors; enter
into license agreements with third parties; and, generally, seek to control
access to and distribution of our intellectual property.

In August 1998, we acquired a license to intellectual property (including
patents and trade secrets) from an individual who had acquired them from the
former AMROC, which specialized in hybrid rocket technology. We are obligated to
issue warrants to this individual to purchase a minimum of 100,000 and a maximum
of 3,000,000 shares of our common stock over ten years beginning at the
inception of the agreement, depending on our annual revenues related to sales of
hybrid technology-based products. To date, we have issued warrants to purchase a
total of 100,000 shares of our common stock under the agreement.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation our General Registration Statement on Form 10SB12G/A filed
January 28, 2000 as well as any or all of our recent filings including prior
year 10-KSB and quarterly 10-QSB filings.

In addition to historical information, the following discussion and other parts
of this document may contain forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy and completeness of the forward-looking statements. We
undertake no obligation to publicly update any of the forward-looking statements
after the date of this report to conform such statements to actual results or to
changes in our expectations.

Actual results could differ materially from those anticipated by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, the level of sales to key
customers; the economic conditions affecting our industry; actions by
competitors; fluctuations in the price of raw materials; the availability of
outside contractors at prices favorable to the Company; our dependence on
single-source or a limited number of suppliers; our ability to protect our
proprietary technology; market conditions influencing prices or pricing; an
adverse outcome in potential litigation, claims and other actions by or against
us; technological changes and introductions of new competing products; the
current recession; terrorist attacks or acts of war, particularly given the acts
of terrorism against the United States on September 11, 2001 and subsequent
military responses by the United States and coalition forces; mission disasters
such as the loss of the space shuttle Columbia on February 1, 2003 during its
re-entry into earth's atmosphere; ability to retain key personnel; changes in
market demand; exchange rates; productivity; weather; and market and economic
conditions in the areas of the world in which we operate and market our
products. These are factors that we think could cause our actual results to
differ materially from expected and historical events.

OVERVIEW

We are engaged in the conception, design, development, manufacture, integration
and operations of space technology systems, products and services. We are
currently focused on the commercial and military development of low-cost
micro-satellites, nano-satellites and related subsystems, hybrid rocket
propulsion for space, launch and human flight vehicles as well as associated
engineering and technical services primarily to government agencies, and
specifically the Department of Defense. Our products and solutions are sold,
mainly on a project-basis, directly to these customers and include sophisticated
micro- and nano-satellites, hybrid rocket-based launch vehicles, Maneuvering and
orbital Transfer Vehicles ("MoTVs") as well as safe sub-orbital and orbital
hybrid rocket-based propulsion systems. Although we believe there will be a
commercial market for our micro-satellite and nano-satellite products and
services in the long-term, the early adopters of this technology appears to be
the military and our "products" are considered to be the outcome of specific
projects. We are also developing commercial hybrid rocket motors for possible
use in small launch vehicles, targets and sounding rockets and small high
performance space vehicles and subsystems for commercial customers.

We were incorporated under the laws of the State of Colorado on December 23,
1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado was
originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. We became a publicly traded company in
October 1997 and are trading on the Nasdaq Over-the-Counter Bulletin Board
("OTCBB") under the symbol of "SPDV."

SELECTION OF SIGNIFICANT CONTRACTS

Also on July 9, 2003, we were awarded a second contract by the Missile Defense
Agency ("MDA") to explore the use of micro-satellites ("microsats") in national
missile defense. Our microsats are operated over the Internet and are capable
of pointing and tracking targets in space or on the ground. This study explored
fast response microsat launch and commissioning; small, low-power passive
sensors; target acquisition and tracking; formation flying and local area
networking within a cluster of microsats; and an extension of our proven use of
the Internet for on-orbit command, control and data handling. The contract was
successfully concluded on February 27, 2004. The total contract value was
$800,000 with approximately $481,000 of revenue realized in the year ending
December 31, 2003 and approximately $319,000 of revenue realized in the first
quarter of 2004. The total value of our microsatellite studies for MDA was over
$1 million in 2003. This second contract is being considered an investigatory
phase by MDA. (See Note 11. Subsequent Events to the Consolidated Financial
Statements.)

On July 9, 2003, we were awarded a Phase I contract to develop micro- and
nano-satellite bus and subsystem designs. This AFRL SBIR contract, valued at
approximately $100,000, will enable us to explore the further miniaturization of
our unique and innovative microsat subsystems. It will also enable us to
explore ways to reduce the time and cost to build small satellites through
further standardization in order to help define de facto standards for payload
hardware and software interfaces. The contract is fixed price, milestone-based
and should be completed within one year. We believe that this SBIR will move
into Phase II valued at approximately $750,000 of carry-forward work for us;
however, there can be no assurance that such work will be awarded to us.
Revenues for the year ending December 31, 2003 were approximately $40,000.

On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for the AFRL. We received an award for
Phase II of the contract on March 28, 2003, and will use the project to further
expand our product line to satisfy commercial and government space
transportation requirements. The first two phases of the contract (including an
additional add-on option) are worth up to approximately $2.5 million, of which
$100,000 was awarded for Phase I, and approximately $1.4 million was awarded for
Phase II. AFRL Phase II is a cost-plus contract. We anticipate that to
complete AFRL Phase II, additional time and funding will be required. We are
currently negotiating with the AFRL for a small extension of Phase II in order
to complete the work, which we anticipate will be granted in the second quarter
of 2004. In addition to the Phase I and Phase II awards, there is an option
worth approximately $1 million pending initiation. The option has been awarded
and work will begin once certain milestones are met to the satisfaction of the
AFRL project manager. The additional funding to complete AFRL Phase II may come
from the $1 million option; thereby, requiring a reduction in the original scope
of the option. We anticipate a successful resolution to the AFRL II contract
extension. Revenues for the year ending December 31, 2003 were approximately
$29,600 for Phase I and $997,000 for Phase II.

On June 18, 2001, we entered into a relationship with two individuals (doing
business as EMC Holdings Corporation ("EMC")) whereby EMC was to provide certain
consulting and advisory services to us. EMC received the first installment of
500,000 shares of our common stock on June 26, 2001. Total expense for the
initial stock issuance through September 30, 2001 was approximately $455,000.
Pursuant to a demand for arbitration filed by us on November 7, 2001, we sought
the return of all or a portion of the shares issued to EMC. Following a
three-day arbitration in May and June 2002, on July 17, 2002, an interim award
was issued in favor of us against EMC, ordering the return of the initial
installment of our 500,000 shares and denying EMC's own claim for $118,000. On
October 22, 2002, a tentative final award was issued in our favor including an
award of approximately $83,000 in attorney and arbitration fees to us. The
tentative final ruling became effective on October 29, 2002, and has been
submitted to the Superior Court of California, Orange County, for entry of
judgment. Because collection of the attorney and arbitration fees award is not
assured, we expensed all of our fees related to this matter. Any recovery of
the fees will be recorded as income in the period they are received; however, at
this time, we do not expect any recovery and in June 2003, we ceased efforts to
recover the awarded fees, as it was determined that the cost to pursue
collection exceeded the likelihood of collection. The return of our 500,000
shares, as provided in the interim award issued on July 17, 2002, was recorded
in the third quarter of 2002 as a reversal of the original expense recorded.
Because the original expense was not recorded as an extraordinary item, the
reversal of the expense did not qualify as an extraordinary item.

In September 2001, we were awarded a contract for a proprietary propulsion
research program (for what is now called Scaled Composites' SpaceShipOne) valued
at approximately $1.6 million. Total revenue was extended to $1.8 million in
April 2002 and the contract expired on July 31, 2003, after all work on Phase II
was completed. As a part of this commercial propulsion program, we competed
with another vendor to design a hybrid propulsion system. On September 19,
2003, we won the competition and were awarded an exclusive contract for the
proprietary components and technology to power the hybrid rocket motor. The new
total contract value is estimated to be approximately $650,000. Revenues from
this contract during the year ending December 31, 2003 were approximately
$80,000 and we anticipate that the contract will continue providing revenue
opportunity for us through 2004. In addition, there have been several time and
materials engineering work orders issued to support the ongoing program, during
2003 we received approximately $35,000 in revenue from these work orders and
expect continuation of this work during 2004.

In April 2001, we were awarded one of four $1.0 million contracts from NASA's
Jet Propulsion Laboratory in Pasadena, California. As part of a Boeing-led team,
we participated in a study of the options for a potential Mars sample return
mission in 2011. The contract ran from April through October 2001. Our revenue
from this contract in 2002 was approximately $7,000 and there was no revenue
from this contract in 2003.

In November 1999, we won a $4.9 million turnkey mission contract by the Space
Sciences Laboratory ("SSL") at UCB. We were competitively selected by UCB/SSL
to design, build, integrate, test and operate, for one year, a small
NASA-sponsored scientific, Earth-orbiting spacecraft called CHIPSat. CHIPSat is
the first and only successful mission of NASA's low-cost University-Class
Explorer ("UNEX") series to date. CHIPSat launched as a secondary payload on a
Delta-II rocket on January 12, 2003. The satellite achieved 3-axis
stabilization, meaning it was pointing and tracking properly, with all
individual components and systems successfully operating and is continuing to
work well in orbit after one year. In 2000, we reviewed the contract status at
year-end and determined that the total estimated costs at the end of the program
would exceed the likely revenue. As a result, we accrued a loss of
approximately $860,000 based on the expected contract modification of $600,000,
which was approved on June 15, 2001. On November 28, 2001, a second contract
modification was signed with UCB, which added approximately $1.2 million to the
contract as well as an increase in contract scope. This increased the total
contract revenue to approximately $6.8 million and reduced the total expected
loss on the contract to approximately $460,000. During 2002, an additional
contract modification for approximately $400,000 was signed, which also
increased the contract value and increased the scope of the contract to the
current value of the CHIPSat project of approximately $7.4 million, thereby
increasing the total expected loss to approximately $514,000. In retrospect,
some of the CHIPSat expenses creating the loss could have been recorded as
research and development costs associated with our ongoing satellite design and
development programs. As of December 31, 2003, the total contract costs were
expended. Revenues for the years ending 2003 and 2002 were approximately
$356,000 and $1.7 million, respectively. The original support contract expired
on December 31, 2003. CHIPSat is still operating successfully and providing UCB
with new and interesting data. UCB requested to extend the program and we
recently negotiated a new time and materials contract in the form of a purchase
order with UCB for continuing support of this project.

In February 1998, our operations were expanded with the acquisition of
Integrated Space Systems, Inc. ("ISS"), a California corporation founded for the
purpose of providing engineering and technical services related to space-based
systems. The ISS employee base, acquired upon acquisition, largely consisted of
former commercial Atlas launch vehicle engineers and managers who worked for
General Dynamics and expanded our then current employee base to 20 employees.
ISS was purchased for approximately $3.6 million, paid in Rule 144 restricted
common shares of SpaceDev. Goodwill of approximately $3.5 million was
capitalized and was to be amortized over a period of 60 months, based on the
purchase price exceeding the net asset value of approximately $164,000. As a
result of a change in corporate focus, on November 15, 2001, we determined that
the unamortized balance of goodwill from ISS, which was approximately $923,000,
had become impaired and it was written off. While the ISS segment did provide
small hybrid propulsion space systems and engineering services on separate
contracts (mainly with government agencies), the engineering service contracts
had expired and, therefore, would not be producing revenue or cash flow to
support future operations. We determined that all future business, contracts
and proposals would be sought after only in the SpaceDev name, making it a more
efficient way for us to manage and track multiple contracts and work on many
different business ventures at the same time within the same operating segment.
All activities have been integrated into SpaceDev, Inc. and we filed for
dissolution of ISS in December 2003.

RESULTS OF OPERATIONS

Please refer to the consolidated financial statements, which are a part of this
report, for further information regarding the results of operations.

YEAR ENDED DECEMBER 31, 2003 -VS.- YEAR ENDED DECEMBER 31, 2002

During the year ending December 31, 2003, we had net sales of approximately
$2,960,000 as compared to net sales of approximately $3,370,000 for the same
period in 2002. Sales declined primarily due to government delays in finalizing
the follow-on contracts for AFRL and MDA and to customer delays on SpaceShipOne.
Sales in 2003 reflected the substantial completion of CHIPSat and the completion
of the original SpaceShipOne contract, AFRL Phase I and MDA Phase I, while a new
exclusive proprietary propulsion contract (SpaceShipOne), began on October 2,
2003, a new contract with MDA began on July 9, 2003, a new contract with AFRL
began on July 9, 2003 and a new contract with Lunar Enterprises began on July
24, 2003. The total value of the MDA, AFRL and Lunar Enterprises contracts were
$800,000, $1.4 million and $100,000, respectively. Revenues for the year ending
December 31, 2003 were comprised of approximately $29,600 and $997,000 from AFRL
Phase I and II, respectively, $397,000 and $115,000 from the original and new
exclusive proprietary propulsion contracts (SpaceShipOne), respectively,
$250,000 and $481,000 from MDA Phase I and II, respectively, $356,000 from the
CHIPSat program, $100,000 from the contract by Lunar Enterprises of California
and approximately $220,400 from all other programs. During the same period of
2002, sales were comprised of approximately $1.7 million from the CHIPSat
program, approximately $1.2 million from the original SpaceShipOne propulsion
development program, approximately $300,000 from the completion of our
outstanding government grants, approximately $70,000 from Phase I of the AFRL
project and approximately $130,000 from all other programs.

For the year ending December 31, 2003, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately
$2,415,000, or 82% of net sales, as compared to approximately $3,348,000 or 99%
of net sales, during the same period in 2002. The decrease in cost of sales was
primarily due to a lower overall cost structure, combined with the
implementation of stronger cost controls and project monitoring. Also, we
altered our cost allocation method in the second quarter of 2003 as we completed
CHIPSat, our main fixed price contract at the time, and began work on our new
AFRL and MDA cost plus contracts. We continue to focus efforts on developing
project management skills and reports to assist in the efficient and effective
management of our projects. The gross margin percentage for the year ending
December 31, 2003 was 18% of net sales, an increase of 16% of net sales, as
compared to 2% of net sales for the period in 2002.

We experienced an increase of approximately $1,364,000 in operating expenses
from approximately $66,000, or 2% of net sales, in the year ending December 31,
2002 to approximately $1,430,000, or 48% of net sales, for the year ending
December 31, 2003. Operating expenses include general and administrative
expenses ("G&A"), marketing and sales expenses and research and development
expenses as well as stock and stock option based compensation expenses. In
2002, we experienced a one-time reversal for the EMC transaction (see EMC
Holdings Corporation transaction in MD&A Overview Section above). The increase
in operating expenses for the year ending would have been approximately
$905,000, rather than the stated $1,360,000 increase, without the one-time EMC
reversal. The following comparisons are based on total operating expenses
excluding the effects of the one-time EMC reversal.

- Marketing and sales expenses accounted for approximately 15% of the
increase in operating expenses, from approximately $258,000, or 8% of net sales,
for the year ending December 31, 2002, to approximately $395,000, or 13% of net
sales, during the same period in 2003, mainly due to our decision to expand our
marketing and sales department and add a Vice President of Marketing and Product
Development. Although our Vice President of Marketing and Product Development
is no longer with us, our CEO, Mr. Benson is leading our marketing & sales
efforts and most of his expenses are being charged to this department.

- Research and development ("R&D") expenses accounted for approximately 31%
of the increase in operating expenses. We began incurring R&D expenses of
approximately $281,000, or 10% of net sales, during the year ending December 31,
2003. Approximately $192,000 of R&D was in connection with our hybrid rocket
propulsion design system and technologies and the remaining $89,000 was part of
our satellite bus design and development.

- Approximately 1% of the increase in operating expenses came from stock and
stock option based compensation expense. During the year ending December 31,
2003, we had an increase in stock and stock option based compensation expense
from approximately ($452,000), or (14%) of net sales, in 2002 to approximately
$9,000 or 0% of net sales during the same period in 2003. This increase was
mainly due to the reversal of stock compensation from the EMC arbitration ruling
as noted above.

- G&A expenses accounted for approximately 53% of the increase in operating
expenses. The increase in G&A expenses from approximately $261,000 for the year
ending December 31, 2002 to approximately $746,000 for the same period in 2003
was primarily due to new rent charges of approximately $291,000 (we owned the
building in 2002 and incurred interest expense on loans but not rental payments)
plus one-time revolving credit facility expenses of approximately $42,000 and an
increase in G&A labor expense with the hiring of our Chief Financial Officer,
offset by a reduction in G&A labor expense of $92,000 primarily due to the loss
of our Vice President of Operations.

Non-operating expense/(income) consists of interest expense, non-cash debt
discount expense and deferred gain on the sale of our building, as well as,
other loan fees and expenses.

- Interest expense for the year ending December 31, 2003 and 2002 was
approximately $91,000, or 3% of net sales, and $263,000, or 8% of net sales,
respectively. The decrease was due to the building sale on January 31, 2003,
which eliminated building debt and reduced overall interest on the notes
associated with the building. We continue to pay interest expense on certain
capital leases and settlement notes. In addition, we accrued interest expense
related to our related party note, convertible debentures and our revolving
credit facility. In the years ending December 31, 2003 and 2002, the accrued
interest on our related party note was approximately $47,000 and $45,000
respectively. We also accrued and paid approximately $18,000 of interest on our
convertible notes and accrued approximately $14,000 of interest, $42,000 of fees
and $126,000 of non-cash loan fees on our revolving credit facility for the year
ending December 31, 2003.

- In conjunction with our convertible notes, we recorded a convertible note
debt discount of $475,000 related to warrants that accompanied the convertible
debt issue in 2002; however, since we made a partial repayment and the note
holders converted the remaining balance and forfeited half of their warrants,
the debt discount amount was reduced from $475,000 to $237,500. The reduction
is exclusively attributable to forfeiture of half of the original warrants.
During the year ending December 31, 2003, the convertible debt was eliminated.
A debt discount adjustment of approximately $234,000 was made and the ending
balance of $112,500 was recorded on the statement of operations for the year.

- We recognized approximately $107,500 of the deferred gain on the sale of
the building during the year ending December 31, 2003 and we will continue to
amortize the remaining deferred gain of approximately $1,065,000 into
non-operating income over the remainder of the lease. In relation to the gain
we received on the building, we also accrued an income tax payable expense of
$40,000 at March 31, 2003 of which none remained at December 31, 2003. The
reduction of the income tax payable was due to a change in estimate based on the
loss we experienced during the year.

- We realized loan fees related to our revolving credit facility and
expenses related to the conversion of notes to common stock below fair market
value of approximately $258,000 for the year ending December 31, 2003. We
anticipate additional expenses related to similar note to equity conversions in
the quarters ahead.

During the year ending December 31, 2003, we incurred a net loss of
approximately $1,246,000, or 42% of net sales, compared to a net loss of
approximately $376,000, or 11% of net sales, for the same period in 2002.
During the year ending December 31, 2003, we incurred an EBITDA (earnings before
interest taxes depreciation and amortization) of approximately <$723,000>, or
<24 %> of net sales, compared to an EBITDA of approximately $372,000, or 10 % of
net sales, for the year ending in 2002.

The following table reconciles EBITDA to net loss for the twelve-months ending
December 31, 2003 and 2002, respectively:

FOR THE TWLEVE-MONTHS ENDING DECEMBER 31, 2003 DECEMBER 31, 2002

(UNAUDITED) (UNAUDITED)
------------------ ------------------
NET LOSS (INCOME). . . . . . . . . . . $(1,246,067) $(376,160)
-------------------------------------- ------------------ ------------------

Interest Expense . . . . . . . . . . . 91,493 263,480
Non-Cash Interest exp. (Debt Discount) 112,500 125,000
Gain on Building Sale. . . . . . . . . (107,498) 0
Loan Fee - Equity Compensation. . . . 257,882 0
Provision for income taxes . . . . . . 1,600 1,600
Depreciation and Amortization. . . . . 166,971 357,692
-------------------------------------- ------------------ ------------------
EBITDA . . . . . . . . . . . . . . . . $(723,119) $371,612
-------------------------------------- ------------------ ------------------

EBITDA should not be considered as an alternative to net income (as an indicator
of operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations). We believe that EBITDA
provides an important additional perspective on our operating results, our
ability to service our long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern. The increase in the net
loss was mainly due to our quarterly losses in the first and second quarters of
2003 and less depreciation on our building, which we sold in January 2003. The
first two quarterly losses were spurred by reductions in revenues due to the
substantial completion of CHIPSat and the delay in starting our new AFRL and MDA
projects; however, revenues for the four quarters in 2003 showed continued
progress, as did the loss by quarter.

LIQUIDITY AND CAPITAL RESOURCES

CASH POSITION FOR YEAR ENDED DECEMBER 31, 2003 -VS.- YEAR ENDED DECEMBER 31,
2002

Net increase in cash during the year ending December 31, 2003 was approximately
$565,000, compared to a net decrease of approximately $184,000 for the same
period in 2002. Net cash used in operating activities totaled approximately
$1,029,000 for the year ending December 31, 2003, an increase of approximately
$323,000 as compared to approximately $707,000 used in operating activities
during the same period in 2002, mainly due to the increase in our net loss.

Net cash provided by investing activities totaled approximately $3,111,000 for
the year ending December 31, 2003, compared to $48,000 provided by investing
activities during the same period in 2002. The increase in cash provided by
investing activities is attributable to the sale of the building on January 31,
2003.

Net cash used in financing activities totaled approximately $1,517,000 for the
year ending December 31, 2003, which is a decrease of approximately $1,992,000
from the approximately $475,000 provided by financing activities during the same
period in 2002. This is primarily attributable to the repayment of notes
payable associated with the building sale and advances on our new revolving
credit facility.

At December 31, 2003, our cash, which includes cash reserves and cash available
for investment, was approximately $592,000, as compared to approximately $28,000
at December 31, 2002, an increase of approximately $564,000, mainly due to
advances on our revolving credit facility.

As of December 31, 2003, our backlog of funded and non-funded business was
approximately $2.0 million, as opposed to approximately $4.0 million as of
December 31, 2002. As of March 31, 2004, our backlog of funded and non-funded
business grew to approximately $45 million due to the follow-on, five-year
contract from MDA for up to $43,362,271. We expect approximately $2 million in
revenue from the MDA program in 2004. Although the MDA contract was awarded to
us, there can be no assurance that the contract will be continued through all
phases, and if continued, that it will generate the amounts anticipated.

During the year ending December 31, 2003, we won the AFRL Phase II contract
worth approximately $1.4 million, negotiated increases of approximately $1.0
million to the AFRL Phase II Contract as a deferred option still open, completed
our first proprietary propulsion contract (SpaceShipOne) and was awarded a new
exclusive proprietary propulsion contract for SpaceShipOne, completed
significant milestones on CHIPSat, completed MDA's Phase I project and obtained
a new contract for a new $800,000 project, obtained two AFRL SBIR Phase I grants
and were awarded a $100,000 contract by Lunar Enterprises.

Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of $2,190,000 and $1,372,000 as of December 31, 2003 and
2002, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$818,000 in 2003 from $1,372,000 at December 31, 2002 to $2,190,000 at December
31, 2003.

At December 31, 2003, the Company has federal and state tax net operating loss
and capital loss carryforwards of approximately $4,230,000 and $1,847,000,
respectively. The federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized. The State of California has
suspended the utilization of net operating loss for 2002 and 2003.

RESULTS OF OPERATIONS

Please refer to the consolidated financial statements, which are a part of
this prospectus for further information regarding the results of operations.

Year Ended December 31, 2002 -Vs.- Year Ended December 31, 2001
-------------------------------------------------------------------------

During the year ended December 31, 2002, we had net sales of $3.4 million
as compared to net sales of $4.1 million in 2001. Sales in 2002 were comprised
of approximately $1.7 million from the CHIPSat program, approximately $1.2
million from a contract for a proprietary propulsion development program,
approximately $300,000 from the completion of our outstanding State Grants,
approximately $70,000 from Phase I of the AFRL project and approximately
$130,000 from all other programs. In 2001, sales were comprised of approximately
$3.2 million from the CHIPSat program, approximately $328,000 from a contract
for a proprietary propulsion development program, approximately $228,000 from
research and development performed for the Office of Space Launch ("OSL"),
approximately $216,000 from the Boeing Mars Sample Return and Mars Assent
Vehicle projects, and approximately $164,000 from all other programs.

For the year 2002, we had costs of sales (direct and allocated costs
associated with individual contracts) of approximately $3.3 million as compared
to approximately $2.4 million in 2001. This increase was primarily due to
additional project costs as a result of project delays and scope changes. The
gross margin percentage for the year ended December 31, 2002 was 2% as compared
to 41% for the same period in 2001. The decrease was due to additional project
costs due to contract delays and an allocation of certain G&A expenses to cost
of goods sold.

We experienced a decrease in operating expenses from approximately $3.2
million in 2001 to approximately $66,000 for 2002. Operating expenses include

general and administrative expenses and research and development expenses.
General and administrative expenses consisted primarily of salaries for
administrative personnel, fees for outside consultants, insurance, legal and
accounting fees and other overhead expenses. The reduction of approximately $3.1
million in the operating expenses was due in part to the arbitration ruling
reversal of the EMC stock issuance of 500,000 shares and a resulting credit of
$455,000 in 2002 that was expensed in 2001. See "Legal Proceeding" above.
Other issues involving the reduction in operating expenses can be attributed to
a reduction of research and development costs from $198,400 in 2001 to none for
the same period in 2002, a write-off of $923,000 in 2001 related to the
impairment of the unamortized balance of goodwill from the ISS acquisition, the
amortization expense related to goodwill for ISS of $520,000 incurred in 2001
compared to none in 2002, the expense of $150,000 for a contingent liability due
to Technical & General Guarantee Company Limited expensed in 2001 compared to
none in 2002, an issuance of 80,000 stock options that had a value of $67,000
for the acquisition of Explorespace.com that was expensed as advertising in 2001
compared to no equivalent expense in 2002, as well as, a deduction in salaries
of approximately $190,000 from 2001 to 2002 due to changes in personnel. In
addition, we began a system of more fully absorbing costs into projects,
effectively shifting approximately $600,000 of expenses that were recorded as
operating expenses in 2001 to cost of goods sold in 2002.

Interest expense for the periods ending December 31, 2002 and 2001 was
approximately $263,000 and $303,000, respectively. We paid interest expense on
certain capital leases and mortgages. In addition, we accrued interest expense
related to our related party notes and convertible debentures. In 2002, we
accrued a convertible debt discount related to warrants that accompanied the
convertible debt issue of approximately $475,000, of which $125,000 was expensed
in 2002 and the remainder will be amortized over the remaining life of the
notes.

During the year ended December 31, 2002, we incurred a net loss of
approximately $400,000, compared to a net loss of approximately $1.9 million for
the same period in 2001. The decrease in the net loss was due to our reduction
in operating expenses by approximately $3.2 million. As discussed above, the
decrease was primarily attributable to non-cash expenses, including impairment
of the un-amortized balance of goodwill from ISS, goodwill expense in 2001,
stock issued to EMC in 2001 and then recovered by us in 2002, the note payable
to T&G, the stock options issued for the acquisition of ExploreSpace.com, and
research and development costs.

CRITICAL ACCOUNTING STANDARDS

Our revenues transitioned in 2003 from being primarily fixed-price contracts,
where revenues are recognized using the percentage-of-completion method of
contract accounting based on the ratio of total costs incurred to total
estimated costs, to cost-plus fixed fee contracts, where revenues are recognized
as costs are incurred and services are performed. Losses on contracts are
recognized when they become known and reasonably estimable (see Notes to the
Consolidated Financial Statements). Actual results of contracts may differ from
management's estimates and such differences could be material to the
consolidated financial statements. Professional fees are billed to customers on
a time-and-materials basis, a fixed-price basis or a per-transaction basis.
Time-and-materials revenues are recognized as services are performed. Deferred
revenue represents amounts collected from customers for services to be provided
at a future date. Research and development costs are expensed as incurred.

In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, "Accounting for Stock-Based Compensation." We adopted SFAS No. 123 in
1997. We have elected to measure compensation expense for our stock-based
employee compensation plans using the intrinsic value method prescribed by APB
Opinion 25, "Accounting for Stock Issued to Employees" and have provided pro
forma disclosures as if the fair value based method prescribed in SFAS No. 123
has been utilized. (See Notes to the Consolidated Financial Statements.) We
have valued our stock, stock options and warrants issued to non-employees at
fair value in accordance with the accounting prescribed in SFAS No. 123, which
states that all transactions in which goods or services are received for the
issuance of equity instruments shall be accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.

SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based Compensation
was published by Financial Accounting Standards Board on December 31, 2002. The
effective date of FASB No. 148 is December 15, 2002. SFAS No. 123 prescribes a
"fair value" methodology to measure the cost of stock options and other equity
awards. Companies may elect either to recognize fair value stock-based
compensation costs in their financial statements or to disclose the pro forma
impact of those costs in the footnotes. We have chosen the latter approach.
The immediate impact of SFAS No. 148 is more frequent and prominent disclosure
of stock-based compensation costs, starting with financial statements for the
year ended December 31, 2002 for companies whose fiscal year is the calendar
year. SFAS No. 148 also provides some flexibility for the transition, if a
company chooses the fair-value cost recognition of employee stock options.

Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting in accordance with SFAS No.
144. Goodwill and other intangible assets were created upon the acquisition of
our subsidiaries. Intangible assets are amortized over their assets' estimated
future useful lives on a straight-line basis over three-to-five years. Goodwill
and other intangibles are periodically reviewed for impairment based on an
assessment of future operations to ensure they are appropriately valued in
accordance with SFAS No. 142. Since November 2001, there has been no
amortization of goodwill. (See Notes to the Consolidated Financial Statements.)

CASH POSITION AND REMOVAL OF GOING CONCERN

Our auditors expressed in their formal auditors' opinion dated February 11, 2004
(except for Note 11 as to which the date is April 2, 2004) that in their
opinion, based on their audit, our consolidated financial statements referred to
herein present fairly, in all material respects, the consolidated financial
position of SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2003, and the
consolidated results of our operations and our cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America. In previous years, including the opinion of Nation Smith
dated February 13, 2003 herein, our auditors expressed an opinion that our
financial position raised substantial doubt about our ability to continue as a
going concern. After an analysis of our newly awarded $43,362,271 contract from
MDA, our projections (including revenue projections) for the next several
quarters and other relevant factors, our auditors concluded there is no longer
substantial doubt as to the Company's ability to continue as a going concern,
and has, therefore, not included the going concern language in its report dated
February 11, 2004 (except for Note 11 as to which the date is April 2, 2004) for
the year ended December 31, 2003. We believe that this was appropriate and
reflects our improved financial condition, our ability to forecast more
accurately and further validation of customer demand for our technology,
products and services. Our ability to continue as a going concern depends upon
our ability to ultimately implement our plans, which includes (but is not
limited to) generating substantial new revenue from MDA by successfully
performing under the newly awarded contract and continuing to attract and
successfully complete other government and commercial contracts, development of
a project management expertise to profitably execute on new business contracts
and reduce the working capital deficit by raising additional capital. We are
working with our revolving credit facility provider and investigating the
possibility of raising additional capital to further support operations as new
contracts and business opportunities materialize. The prospective funding, as
well, as new business opportunities, can come from a variety of sources,
including public or private equity markets, state and federal grants and
government and commercial customer program funding. However, there can be no
assurance that we will be able to obtain such funding or contracts as needed or,
if such funding or contracts are available, that we can obtain then on terms
favorable to the Company. The likelihood of our success must be considered in
light of the expenses, difficulties and delays frequently encountered in
connection with the developing businesses, those historically encountered by us,
and the competitive environment in which we operate.

On January 31, 2003, we closed escrow on the sale of our facility in Poway,
California and entered into a ten-year leaseback. The selling price of the
facility was $3.2 million. The total debt repayment from the transaction was
approximately $2.4 million. The approximate net proceeds to us for working
capital purposes was approximately $636,000. However, due to delays in closing
new business and previous customer schedule slips in 2002 and early 2003, we
remain in a tight cash position.

At the end of 2002, we raised $475,000 from certain of our directors and
officers by issuing 2.03% convertible debentures. The convertible debentures
entitled the holder to convert the principal and unpaid accrued interest into
our common stock when the note matured. The original maturity on the notes was
six (6) months from issue date; however, on March 19, 2003, the maturity date
was extended to twelve (12) months from issue date. The convertible debentures
were exercisable into common shares at a conversion price that equals the 20-day
average asking price less 10%, which was established when the debentures were
issued, or the initial conversion price. Concurrent with the issuance of the
convertible debentures, we issued warrants to purchase up to 1,229,705 shares of
our common stock to the subscribers. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, or the
initial conversion price on the debentures. On September 5, 2003, we repaid
one-half of the convertible notes, with the condition that the note holders
would convert the other half. Also, as a condition of the partial repayment,
the note holders were required to relinquish one-half of the 1,229,705 warrants
previously issued. As additional consideration for the transaction, the note
holders were offered 5% interest on their notes, rather than the stated 2.03%.
All the note holders accepted the offer and the convertible notes were retired
in 2003.

During the year ending December 31, 2003, we raised approximately $426,000 from
accredited investors by selling 861,267 units of our common stock and common
stock purchase warrants under in a private placement offering ("PPO") made under
Section 4(2) of the Securities Act of 1933, and Rule 506, to accredited
investors only . We subsequently closed the PPO. (See Note 8 of the Consolidated
Financial Statements.)

We have sustained ourselves over the last few years with a mixture of government
and commercial contracts and capital raised in the private market. In
particular, we anticipated and received an award for AFRL Phase II on March 28,
2003. AFRL Phase II is a cost-plus contract, which has required us to incur
certain costs in advance of regular contract reimbursements from AFRL. Although
we have needed a certain amount of cash to fund advance payments on the
contract, we have been entitled, as a small business concern, to recover our
costs on a weekly basis and we established the Laurus Master Fund revolving
credit facility at the end of the second quarter of 2003 to support our advance
payment needs. In addition, we anticipated and received the initial
investigatory contract from the MDA to explore the use of micro-satellites in
national missile defense. On February 29, 2004, we concluded the study to
explore a mission with a fast response microsat launch and commissioning; small,
low-power passive sensors; formation flying and local area networking within a
cluster of microsats; and an extension of our proven use of the Internet for
on-orbit command, control and data handling. The purchase order was valued at
$800,000 and was a cost plus fixed fee agreement. The final retention payment
of approximately $33,000 will be made after the final report is approved by MDA.
In anticipation that the new $43,362,271 contract would be awarded to us, we
agreed to begin work on the MDA program on March 1, 2004. MDA agreed to make
the effective date of the agreement March 1, 2004, when it was awarded. Again,
our newly awarded $43,362,271 MDA contract is a phased contract and we can give
no assurance that the entire contract will be realized by us, even though we
have begun work on the next phase and we currently anticipate the successful
completion of future phases.

On March 31, 2004, we negotiated an amendment to our Secured Convertible Note
dated June 3, 2003 with the Laurus Master Fund to add a fixed conversion price
at $0.85 per share for the next $500,000 converted under the revolving credit
facility after the initial $1 million conversion. In exchange for the
amendment, Laurus granted us a six-month waiver to utilize the full revolving
credit facility in advance of eligible accounts. At December 31, 2003, Laurus
had converted 415,000 shares under the revolving credit facility, which
represented approximately $228,000 of debt converted to equity.

We expect to begin showing a positive cash flow in the first part of 2004. We
anticipate that with the projected increase in revenue and backorders from near
term contracts, combined with our fiscally responsible budget and project
controls for 2004, that net positive cash flow from operations will be
sufficient to fund both operations and capital expenditures in 2004. There is
no assurance, however, that we will achieve or sustain any positive cash flow or
profitability now or thereafter.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that SFAS, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." Further, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases,"
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or described their applicability under
changed conditions. This pronouncement requires gains and losses from
extinguishment of debt to be classified as an extraordinary item only if the
criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," have
been met. Further, lease modifications with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as
sale-leaseback transactions. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions of SFAS No. 145 related to Statement 13 shall be
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have a material impact on our
consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of SFAS 146 did not have a material impact on
our consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
adoption of this Statement did not have a material effect on the consolidated
financial statements of the Company.

In November 2002, FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 elaborates on previously
existing disclosure requirements for most guarantees. It also clarifies that at
the time a company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under the guarantee and must disclose that information in its financial
statements. The provisions related to recognizing a liability at inception of
the guarantee for the fair value of the guarantor's obligations does not apply
to product warranties or to guarantees accounted for as derivatives. FIN No. 45
also requires expanded disclosures regarding product warranty expense. The
initial recognition and initial measurement provisions apply on a prospective
basis to guarantees issued or modified after December 31, 2002. The adoption of
this Statement did not have a material effect on the consolidated financial
statements.

In January 2003, FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51." This interpretation provides
guidance on: 1) the identification of entities for which control is achieved
through means other than through voting rights, known as "variable interest
entities" (VIEs); and 2) which business enterprise is the primary beneficiary
and when it should consolidate the VIE. This new model for consolidation applies
to entities: 1) where the equity investors (if any) do not have a controlling
financial interest; or 2) whose equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, this interpretation requires
that both the primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. This interpretation is
effective for all new VIEs created or acquired after January 31, 2003. For VIEs
created or acquired prior to February 1, 2003, the provisions of the
interpretation must be applied no later than the beginning of the first interim
or annual reporting period beginning after June 15, 2003. Certain disclosures
are effective immediately. The adoption of this Statement did not have an
effect on the consolidated financial statements.

In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 requires that contracts with comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of this Statement did not have an effect on the consolidated
financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this Statement did not have a material
effect on the consolidated financial statements.

FORWARD-LOOKING STATEMENTS AND RISK ANALYSIS

During the first three months of 2004, we submitted four bids for government
programs, continued our work with the US Congress to identify directed funding
for our programs and are actively working to win several significant commercial
programs. We believe that we will win some of these programs, which would enable
us to continue to grow and broaden our business base, although there can be no
assurance that these contracts will be awarded to us.

To date, we have maintained a mix of government and commercial business. In
2003, we had about 82% government or government-related work. In 2002, we had
about 64% government and government-related work. In 2005, we expect the ratio
to be about 90% government or government-related work. We will continue to do
both government and commercial business and anticipate the mix of government
revenues to continue to be above 70% for the next several years as we increase
our government and commercial marketing efforts for both of our product lines.
Currently, we are focusing on the domestic U.S. government market, which we
believe is only about one-half of the global government market for our
technology, products and services. Although we are interested in exploring
international revenue and contract opportunities, we are restricted by export
control regulations, e.g., International Traffic in Arms Regulations ("ITAR"),
which may limit our ability to develop market opportunities outside the United
States.

While we do not expect a reduction of government sales, a majority of our
government work is contract related. We are beginning to develop commercial
products with the long-term idea and vision of becoming a product-oriented
company; however, in the short-term, a majority of our revenue is expected to
come from government cost plus fixed fee and firm fixed price contracts. Our
definition of short-term is the next three to five years and long-term is five
to ten years and beyond. We anticipate winning contracts in both the government
and commercial market segments, although there can be no assurance that the
contracts will be awarded to us. If they are not awarded to us, based on
current trends and proposals, we believe that we can offset fluctuations in one
market segment with contracts from the other; however, our inability to win
business in both markets would have a negative effect on our business operations
and financial condition.

We believe that we will experience an accelerated growth in sales over the next
few years. At this time, over 90% of the forecasted sales for 2004 are under
contract or near contract award. There is no guarantee and there can be no
assurance that we will win enough new business to achieve our targeted growth
projection or to achieve a positive cash flow position. Additionally, there is
no guarantee that awarded contracts will not be altered or terminated prior to
us recognizing our projected revenue from them. Many contracts have "exit
ramps", i.e., provides the customer the right to terminate the contract for any
of a variety of reasons, including but not limited to non-performance by us. We
do not believe that any of our contracts will be terminated; however, there can
be no assurance that they will not be terminated in the future. Finally, we do
not believe that significant capital expenditures will be required to achieve
this increase in sales; however, additional capital will be required to support
and sustain our growth.

During the year ended December 31, 2003, we raised approximately $654,000
through a combination of private sales of our stock (approximately $426,000) and
conversions on our revolving credit facility (approximately $228,000). During
the year ended December 31, 2002, we raised approximately $475,000 from our
convertible debt offering, of which $237,500 plus interest was repaid in 2003.
To execute our strategy of growing our Company with small, capable, low-cost
micro- and nano-satellites, hybrid propulsion products and new commercial
revenue sources, we require additional funding and/or the win of both
significant government and commercial programs. We believe investor or customer
funding of $5 to $15 million may be required, which could come from a
combination of private and/or public equity placements or government and
commercial customers. At this time, we do not have any ongoing private or
public equity offerings.

The amount of capital we need to raise is dependent upon many factors. For
example, the need for additional capital will be greater if (i) we do not enter
into agreements with our customers on the terms we anticipate; (ii) our net
operating deficit increases because we incur significant unanticipated expenses;
or (iii) we incur additional costs from modifying our microsatellite products or
our hybrid-related propulsion systems to meet changed or unanticipated market,
regulatory, or technical requirements. If these or other events occur, there is
no assurance that we could raise additional capital on favorable terms, on a
timely basis or at all. If additional capital is not raised, it could have a
significant negative effect on our business operations and financial condition.

Our ability to execute a public offering or otherwise obtain funds is subject to
numerous factors beyond our control, including, without limitation, a receptive
securities market and appropriate governmental clearances. No assurances can be
given that we will be profitable or once profitable maintain profitability, or
that any additional public offering will occur, that we will be successful in
obtaining additional funds from any source or be successful in implementing an
acceptable exit strategy on behalf of our investors. Moreover, additional
funds, if obtainable at all, may not be available on terms acceptable to us when
such funds are needed or may be on terms which are significantly adverse to our
current shareholders. The unavailability of funds when needed would have a
material adverse effect on us.

Our business partially depends on activities regulated by various agencies and
departments of the U.S. government and other companies and agencies that rely on
the federal government. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial, and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial, or other services could have a material adverse
effect on our business, results of operations, and financial condition.
Furthermore, we may experience a small increase in operating costs, such as
costs for transportation, insurance, and security as a result of the activities
and potential activities. The U.S. economy in general is being adversely
affected by the terrorist activities and potential activities, and any economic
downturn could adversely impact our results of operations, impair our ability to
raise capital, or otherwise adversely affect our ability to grow our business.
Conversely, because of the nature of our products, there may be opportunities
for us to offer solutions to the government that may address some of the
problems that the country faces at this time.

DESCRIPTION OF PROPERTY

Subsequent to year-end, we entered into a 25,000 square foot lease for our
facility in Poway, California that includes a small Spacecraft Assembly and Test
facility ("SAT") with an 1,800 square foot Class 100,000 clean room, avionics
development lab, machine shop, mechanical assembly lab, and mission operations
center. Key uses of the Poway facility are program and project conferences and
meetings, engineering design, engineering analysis, spacecraft assembly,
avionics labs and software labs and media outreach. We also have a Mission
Control Center in the Poway building, which is currently being used to monitor
the CHIPSat mission. Our facility allows for efficient design, assembly and test
of our products, thereby providing us a cost effective means to produce quality,
low cost products.

We purchased our headquarter facility, which houses our engineering,
manufacturing and administration, in the Poway Industrial Park complex in
December 1998. We subsequently sold our facility on January 31, 2003, wherein we
entered into a ten (10) year leaseback of the facility. [See Notes to our
audited condensed consolidated financial statements for the fiscal year ended
December 31, 2002 for additional information.] The selling price of the facility
was $3.2 million. The total debt repayment from the transaction was
approximately $2,407,000. The approximate net proceeds to us for working capital
purposes was $636,000. Mr. Benson provided a guarantee for the leaseback.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

James W. Benson, our Chief Executive Officer and Chairman of the Board of
Directors, and Susan Benson, our former Corporate Secretary, are husband and
wife. Mr. Benson has personally guaranteed the building lease on our facility.

One of our independent directors, Robert S. Walker, is a principal of Wexler &
Walker Public Policy Associates, a Washington-based, full-service government
relations firm founded in 1981. Wexler & Walker principals have served in
Congress, in the White House and federal agencies, as congressional staff, in
state and local governments and in political campaigns. Wexler & Walker is a
leader on the technology issues of the twenty-first century. During 2003 and
2002, we incurred consulting fees with Hill and Knowlton, Inc., an affiliate of
Wexler & Walker, in an aggregate amount of approximately $0 and $56,000,
respectively.

In December 2001, we entered into a consulting agreement with one of our
independent directors, Curt D. Blake, pursuant to which Mr. Blake agreed to
perform certain services for us and identify and qualify significant investors
and potential acquisition targets for us. Under the agreement, Mr. Blake was to
receive compensation, in cash and non-statutory stock options, for his services.
In addition, Mr. Blake was to receive a cash finder's fee plus a common stock
grant for all monies raised as a result of introductions made by him. However,
as a result of the independence rules imposed by the Sarbanes-Oxley Act of 2002,
Mr. Blake voluntarily terminated his agreement with us on November 25, 2002. We
made no payments to Mr. Blake in 2003 and 2002, other than reimbursement of
Board-related travel expenses.

In September and October 2002, certain of our officers provided personal
interest-free short-term loans to support our working capital needs. The
officer loans were paid with the proceeds from imminently pending contract
payments and the proceeds of the convertible note program sales.

From October 14, 2002 through November 14, 2002, we sold an aggregate of
$475,000 of 2.03% convertible debentures to two of our directors, officers and
Mr. Skarupa, a former officer. Mr. Benson purchased $375,000 of Series A
Subordinated Convertible Notes and Mr. Shaffer purchased $50,000. The total
funding was completed on November 14, 2002. The convertible debentures entitled
the holder to convert the principal and unpaid accrued interest into our common
stock when the note matured. The notes originally were set to mature six (6)
months from issue date and were subsequently extended to twelve (12) months from
issue date on March 19, 2003. Unless paid, extended or re-negotiated, the
convertible debentures are exercisable into a number of our common shares at a
conversion price that equals the 20-day average asking price less 10%, which was
established when the note was issued, or the initial conversion price.
Concurrent with the issuance of the convertible debentures, we issued to the
subscribers, warrants to purchase up to 1,229,705 shares of our common stock.
These warrants are exercisable for three (3) years from the date of issuance at
the initial exercise price, which equals to the 20-day average asking price less
10% which was established when the note was issued, or the initial conversion
price. Upon issuance, the warrants were valued using the Black-Scholes pricing
model based on the expected fair value at issuance and the estimated fair value
was recorded as debt discount. See Note 8(c) to our Consolidated Financial
Statements for discussion of the terms of the warrants. The debt discount was
being amortized as additional interest expense over the term of the convertible
debentures. On September 5, 2003, we repaid one-half of the convertible notes,
with the condition that the note holders would convert the other half. Also, as
a condition of the partial repayment, the note holders were required to
relinquish one-half of the previously issued warrants. Finally, as additional
consideration for the transaction, the note holders were offered 5% interest on
their notes, rather than the stated 2.03% for a total of $18,161 of interest
expense. All the note holders accepted the offer and the convertible notes were
retired. As of December 31, 2003, we recorded a credit of $88,408, as debt
discount recovery; therefore, for the year ending December 31, 2003, the debt
discount expense was $112,500. The Company also expensed $131,411 for non-cash
loan fee expense related to the convertible note. Fair market value of the
stock was determined by discounting the closing market price on the date of the
transaction by 20%, based on the nature of the restricted securities.

MARKET FOR COMMON EQUITY & RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Our common stock has been traded on the Over-the-Counter Bulletin Board
("OTCBB") since August 1998 under the symbol "SPDV" or "SPDV.OB." The following
table sets forth the trading history of our common stock on the OTCBB for each
quarter as reported by Yahoo Finance Historical Prices (www.finance.yahoo.com).
The quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.

QUARTERLY QUARTERLY
QUARTER ENDING HIGH LOW
--------- ----- -----
3/31/2002 $0.65 $0.48
6/30/2002 $0.64 $0.43
9/30/2002 $0.52 $0.30
12/31/2002 $0.50 $0.29
3/31/2003 $0.55 $0.41
6/30/2003 $0.75 $0.33
9/30/2003 $1.80 $0.55
12/31/2003 $1.15 $0.81
3/31/2004 $1.85 $0.92

HOLDERS

As of March 4, 2004, there were over 200 holders of record of our common stock.
We estimate the total number of beneficial owners of our common stock to be in
excess of 2,500 holders. We believe that the number of beneficial owners is
substantially greater than the number of record holders because a significant
portion of our outstanding common stock is held in broker "street names" for the
benefit of individual investors.

DIVIDENDS

We have never paid a cash dividend on our Common Stock. Payment of dividends is
at the discretion of the Board of Directors. The Board of Directors plans to
retain earnings, if any, for operations and does not intend to pay dividends in
the foreseeable future.

DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

Our management and directors' business activities are under the control of our
Board of Directors. Our Chief Executive Officer, James W. Benson, Vice President
of Engineering, Randall K. Simpson, and Chief Financial Officer, Richard B.
Slansky, manage the Company's daily operations. Our Board currently consists of
seven directors. Stuart Schaffer and Scott McClendon were added to the Board of
Directors in 2002. J. Mark Grosvenor was added and resigned from the Board of
Directors in 2003. Below are our executive officers and directors.

NAME POSITION HELD
-------------------------------------------- ------------------------------------

James W. Benson. . . . . . . . . . . . . . . Chief Executive Officer,
13855 Stowe Drive. . . . . . . . . . . . . . Director, Chairman of the Board
Poway, California 92064

Richard B. Slansky . . . . . . . . . . . . . Corporate Secretary, Chief Financial
13855 Stowe Drive. . . . . . . . . . . . . . Officer
Poway, CA 92064

Randall K. Simpson . . . . . . . . . . . . . Vice President, Engineering
13855 Stowe Drive
Poway, California 92064

Stuart Schaffer. . . . . . . . . . . . . . . Director
13855 Stowe Drive
Poway, CA 92064

Wesley T. Huntress*. . . . . . . . . . . . . Director
13855 Stowe Drive
Poway, California 92064

Curt Dean Blake* . . . . . . . . . . . . . . Director
13855 Stowe Drive
Poway, California 92064

General Howell M. Estes, III (USAF Retired)* Director
13855 Stowe Drive
Poway, California 92064

Robert S. Walker*. . . . . . . . . . . . . . Director
13855 Stowe Drive
Poway, California 92064

Scott McClendon *. . . . . . . . . . . . . . Director
13855 Stowe Drive
Poway, California 92064

* Denotes Independent Director

The following is a summary of the business experience of our officers and
directors as well as other key employees.

James W. Benson, age 59, is our founder and has served as our Chief Executive
Officer and Chairman of the Board since inception, and started the trend of
successful computer entrepreneurs moving into the entrepreneurial space arena.
In 1984, Mr. Benson founded Compusearch Corporation (later renamed Compusearch
Software Systems), in McLean, Virginia. The company was based on the first
development of software algorithms and applications for personal computers and
networked servers to create full text indexes of massive government procurement
regulations and to provide instant full text searches for any word or phrase;
the first instance of large scale, commercial implementation of PC-based full
text searching, which later grew to encompass such systems as worldwide web
search engines. Seeing related opportunities in document and image management,
Mr. Benson started the award-winning ImageFast Software Systems in 1989, which
later merged with Compusearch. In 1995, Mr. Benson sold Compusearch and
ImageFast, and retired at age fifty. After months of research, Mr. Benson
started SpaceDev, Inc., a Nevada corporation, which was acquired by us in
October 1997. Mr. Benson holds a Bachelor of Science degree in Geology from the
University of Missouri. He founded the non-profit Space Development Institute,
and introduced the $5,000 Benson Prize for Amateur Discovery of Near Earth
Objects. He is also Vice-Chairman and private sector representative on NASA's
national Space Grant Review Panel, and is a member of the American Society of
Civil Engineers subcommittee on Near Earth Object Impact Prevention and
Mitigation.

Randall K. Simpson, age 57, is our Vice President of Engineering and joined us
in January 2004. Mr. Simpson has over 30 years of diversified experience in
business development, product definition, engineering development and support
for aerospace, commercial and international customers. From October 2000 to
January 2004, Mr. Simpson served as AVP of Program Management for Alvarion,
Inc., a high technology commercial communications firm. From March 1997 to
September 2000, Mr. Simpson was Vice President of Engineering for Cubic Defense
Systems, an engineering and production company providing military training
ranges, laser instrumentation products, space avionics and battlefield
communications equipment. From November 1992 to February 1997, Mr. Simpson
was Program Director for Advanced Test Systems and Engineering Director for GDE
Systems, which develops, integrates and produces test equipment for advanced
electronic aircraft, munitions, space launch, satellite and telecommunications
systems. Mr. Simpson began his career at General Dynamics/Convair where he held
various positions. Mr. Simpson received both his BSEE and MSEE from San Diego
State University.

Richard B. Slansky, age 47, is our Chief Financial Officer and Corporate
Secretary and joined us on February 10, 2003. Mr. Slansky served as interim
Chief Executive Officer and Chief Financial Officer of Quick Strike Resources,
Inc., an IT training, services and consulting firm, from July 2002 to February
2003. Previously, Mr. Slansky served as Chief Financial Officer, Vice President
of Finance, Administration and Operations and Corporate Secretary for Path 1
Network Technologies, Inc., a company focused on merging broadcast and cable
quality video transport with IP networks from May 2000 to July 2002. Before his
tenure at Path 1, Mr. Slansky served as President, Chief Financial Officer and
member of the Board of Directors of Nautronix, Inc., a marine
electronics/engineering services company, from January 1999 to May 2000. Prior
to Nautronix, Mr. Slansky served as Chief Financial Officer of Alexis
Corporation, an international pharmaceutical research products technology
company, from August 1995 to January 1999. He also served as President and
Chief Financial Officer of C-N Biosciences, formerly Calbiochem, from July 1989
to July 1995. Mr. Slansky is currently serving on the Board of Directors of two
privately held high technology companies and one closely held, private real
estate company. Mr. Slansky earned a bachelor's degree in economics and science
from the University of Pennsylvania's Wharton School of Business and a master's
degree in business administration in finance and accounting from the University
of Arizona.

Stuart Schaffer, age 44, was appointed to our Board of Directors on May 17,
2002. Mr. Schaffer is currently VP Marketing, for Overture Performance
Marketing -- a business unit of Overture Services, which is a subsidiary of
Yahoo! Mr. Schaffer was our vice president of product development and marketing
from May 2002 to August 2003. From 1998 to 2001, Mr. Schaffer acted as vice
president of marketing for Infocus Corporation, a fully reporting company, where
he managed all aspects of the marketing mix for market-share leading digital
projection business throughout the Americas region. In that position, Mr.
Schaffer revitalized the Proxima brand, managed a multi-million dollar annual
advertising, communications and program budgets, directed multiple outside and
in-house agencies, led product marketing teams in defining and delivering both
mobile and conference room digital projector product lines, developed channel
strategies and programs for both value-added and volume channels, served as
primary press spokesperson for the company, established a market intelligence
structure focused on developing customer and industry knowledge and spearheaded
merger teams to ensure the smooth transition of the merger between the Infocus
and Proxima marketing organizations. Prior to Infocus, Mr. Schaffer worked for
the Hewlett-Packard Company from 1985 to 1998, where he held various positions
in Business Development, Marketing and Business Planning. Mr. Schaffer has
worked with the Leukemia & Lymphoma Society, on a volunteer basis, as an
Assistant Coach and Mentor. Mr. Schaffer has an MBA from Harvard University and
a BS degree in physics from Harvey Mudd College.

Wesley T. Huntress, age 62, was elected to our Board of Directors as an
independent director at our annual shareholder meeting held June 30, 1999. Dr.
Huntress is currently Director of the Geophysical Laboratory at the Carnegie
Institution of Washington in Washington, DC, where he leads an interdisciplinary
group of scientists in the fields of high-pressure science, astrobiology,
petrology and biogeochemistry. Prior to his appointment at Carnegie, Dr.
Huntress served the Nation's space program as the Associate Administrator for
Space Science at NASA from October 1993 through September 1998 where he was
responsible for NASA's programs in astrophysics, planetary exploration, and
space physics. During his tenure, NASA space science produced numerous major
discoveries, and greatly increased the launch rate of missions. These
discoveries include the discovery of possible ancient microbial life in a Mars
meteorite; a possible subsurface ocean on Jupiter's moon Europa; the finding
that gamma ray bursts originate at vast distances from the Milky Way and are
extraordinarily powerful; discovery of massive rivers of plasma inside the Sun;
and a wealth of announcements and images from the Hubble Space Telescope, which
have revolutionized astronomy as well as increased public interest in the
cosmos. Dr. Huntress also served as a Director of NASA's Solar System
Exploration Division from 1990 to 1993, and as special assistant to NASA's
Director of the Earth Science and Applications from 1988 to 1990. Dr. Huntress
came to NASA Headquarters from Caltech's Jet Propulsion Laboratory ("JPL"). Dr.
Huntress joined JPL as a National Research Council resident associate after
receiving is B.S. in Chemistry from Brown University in 1964 and his Ph.D. in
Chemical Physics from Stanford in 1968. He became a permanent research
scientist at JPL in 1969. He and his JPL team gained an international
reputation for their pioneering studies of chemical evolution in interstellar
clouds, comets and planetary atmospheres. At JPL Dr. Huntress served as
co-investigator for the ion mass spectrometer experiment in the Giotto Halley's
Comet mission, and as an interdisciplinary scientist for the Upper Atmosphere
Research Satellite and Cassini missions. He also assumed a number of line and
research program management assignments while at JPL, and spent a year as a
visiting professor in the Department of Planetary Science and Geophysics at
Caltech.

Curt Dean Blake, age 47, was appointed to our Board of Directors as an
independent director on September 5, 2000. Mr. Blake is CEO of GotVoice, Inc.,
a startup company in the voicemail consolidation and messaging business. From
1999 to 2002, Mr. Blake provided consulting services to various technology
companies, including Apex Digital, Inc. and SceneIt.com. Mr. Blake acted as the
Chief Operating Officer of the Starwave Corporation from 1993 until 1999, where
he managed business development, finance, legal and business affairs, and
operations for the world's most successful collection of content sites on the
Internet. During that time, he developed business strategies, financial models,
and structured and negotiated venture agreements for Starwave's flagship site,
ESPN Sportszone, at that time the highest traffic destination site on the
Internet. He also developed and negotiated venture agreements with the NBA, NFL,
Outside Magazine and NASCAR to create sites around these brands. Mr. Blake
negotiated sale of controlling interest in Starwave Corporation to Disney/ABC.
Prior to Starwave, Mr. Blake worked at Corbis from 1992 to 1993, where he led
the acquisitions and licensing effort to fulfill Bill Gates' vision of creating
the largest taxonomic database of digital images in the world. Mr. Blake acted
as General Counsel to Aldus Corporation from 1989 to 1992, where he was
responsible for all legal matters of the $125 million public corporation and its
subsidiaries. Prior to that, Mr. Blake was an attorney at Shidler, McBroom,
Gates and Lucas, during which time he was assigned as onsite counsel to the
Microsoft Corporation, where he was primarily responsible for the domestic
OEM/Product Support and Systems Software divisions. Mr. Blake has an MBA and JD
from the University of Washington.

General Howell M. Estes, III (USAF Retired), age 63, was appointed to our Board
of Directors as an independent director on April 2, 2001. General Estes retired
from the United States Air Force in 1998 after serving for 33 years. At that
time he was the Commander-in-Chief of the North American Aerospace Defense
Command ("CINCNORAD") and the United States Space Command ("CINCSPACE"), and the
Commander of the Air Force Space Command ("COMAFSPC") headquartered at Peterson
AFB, Colorado. In addition to a Bachelor of Science Degree from the Air Force
Academy, he holds a Master of Arts Degree in Public Administration from Auburn
University and is a graduate of the Program for Senior Managers in Government at
Harvard's JFK School of Government. Gen. Howell Estes is the President of Howell
Estes & Associates, Inc., a wholly owned consulting firm to CEOs, Presidents and
General Managers of aerospace and telecommunications companies worldwide. He
serves as Vice Chairman of the Board of Trustees at The Aerospace Corporation.
He served as a consultant to the Defense Science Board Task Force on SPACE
SUPERIORITY and more recently as a commissioner on the U.S. Congressional
Commission to Assess United States National Security Space Management and
Organization (the "Rumsfeld Commission").

Robert S. Walker, age 62, was appointed to our Board of Directors as an
independent director on April 2, 2001. Mr. Walker has acted as Chairman of
Wexler & Walker Public Policy Associates in Washington, D.C. since January 1997.
As a former Congressman (1977-1997), Chairman of the House Science Committee,
Vice Chairman of the Budget Committee, and a long-time member of the House
Republican leadership, Walker became a leader in advancing the nation's space
program, especially the arena of commercial space, for which he was the first
sitting House Member to be awarded NASA's highest honor, the Distinguished
Service Medal. Bob Walker is a frequent speaker at conferences and forums. His
main issues include the breadth and scope of space regulation today, and how
deregulation could unleash the telecommunications, space tourism, broadcast and
Internet industries. Mr. Walker currently sits on the boards of directors of
Aerospace Corporation, a position he has held since March 1997. Wexler & Walker
is a Washington-based, full-service government relations firm founded in 1981.
Wexler & Walker principals have served in Congress, in the White House and
federal agencies, as congressional staff, in state and local governments and in
political campaigns. Wexler & Walker is a leader on the technology issues of the
twenty-first century. During 2002, we incurred consulting fees with Hill and
Knowlton, Inc., an affiliate of Wexler & Walker, in an aggregate amount of
approximately $56,000. No fees were paid to Wexler & Walker in 2003.

Scott McClendon, age 65, was appointed to our Board of Directors as an
independent director on July 19, 2002. McClendon currently sits on the Board of
Directors for Overland Storage, Inc., a public company, where he acts as
chairman of the Board. He became the chairman after serving as president and
chief executive officer from October 1991 to March 2001. Prior to joining
Overland Storage, Inc., Mr. McClendon was employed by Hewlett-Packard Company
for over 32 years in various positions of engineering, manufacturing, sales and
marketing. In addition to SpaceDev and Overland Storage, Mr. McClendon is
currently serving on the Board of Directors of Procera Networks, Inc., a public
company, and Sicommnet, Inc., privately held high technology company. Mr.
McClendon received a Bachelor of Science degree in electrical engineering in
June 1960, and a Master of Science degree in electrical engineering in June 1962
from Stanford University School of Engineering.

SIGNIFICANT EMPLOYEES

Jeff Janicik, age 36, is our director of engineering and was primarily
responsible for managing the success of the CHIPSat project. He also oversees
all flight system / component marketing and research activity. Mr. Janicik has
over 14 years experience in program management, engineering and instruction in
aerospace. Before coming to us in January 2000, Mr. Janicik spent ten years as
a project manager, engineer and instructor in the field of aerospace working for
the United States Air Force in designing low-cost, streamlined approaches for
the X-40A and X-37 program at Air Force SMC/TE, and set the precedent for future
space vehicle demos with extensive research of safety, technical and operational
issues. Mr. Janicik has an Aerospace Engineering degree from the University of
Notre Dame and a Master's Degree in Mechanical Engineering from the University
of California, Davis, which he received while serving as an active duty officer
in the United States Air Force.

One of our independent directors currently sits on the board of directors of
another Reporting Company. "Reporting Companies" include companies with a class
of securities registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended (the "1934 Act") or subject to the requirements of Section
15(d) of the 1934 Act, or any company registered as an investment company under
the Investment Company Act of 1940, as amended (the "1940 Act").

COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE

We have a standing audit committee comprised of Messrs. Blake, McClendon and Dr.
Huntress. In 2004, we established a nominating and governance committee
comprised of Messrs. Estes, Walker and Dr. Huntress and a compensation committee
comprised of Messrs. Blake, Estes and McClendon. The Company does not maintain
any pension, retirement or other arrangements other than as disclosed in the
following table for compensating its Directors. Our Board of Directors took
action eight (8) times during the last fiscal year: seven (7) times at regular
or special meetings attended by all of the members of the Board either
personally or telephonically, and one (1) time by unanimous written consent. Our
Audit Committee took separate action four (4) times during the last fiscal year,
each time at a regular or special meeting attended by all of the members of the
committee either personally or telephonically.

ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE OFFICER COMPENSATION

During the fiscal years ended December 31, 2001, 2002 and 2003, the Company
granted options to certain of its officers as compensation for their services
pursuant to the Company's Stock Option Plan. Total compensation paid to
officers of the Company for its past three fiscal years is set forth below:

Long Term Compensation
----------------------
Annual Compensation Awards Payouts
---------------------- ---------- ---------

Name Year Salary ($) Bonus ($) Other Annual Restricted Securities LTIP All Other
And Compensation Stock Underlying Payouts Compensation
Principal ($) Award(s) Options ($) ($)
Position(1) ($) / SARs #

-----------------------------------------------------------------------------------------------------------------
James W 2001 147,923 - - - - - -
Benson, 2002 141,325 - - - 10,000(2) - -
CEO (2) 2003 150,000 - - - - - -
-----------------------------------------------------------------------------------------------------------------
Richard B. 2001 - - - - - - -
Slansky, 2002 - - - - - - -
CFO 2003 94,625 - 1,183 - 355,000(3) - -
-----------------------------------------------------------------------------------------------------------------

(1) The table includes information as to the Chief Executive Officer and
highest paid officers of the Company for the last fiscal year, including persons
whose information would have been required but for the fact that they were not
serving as officers of the Company at its fiscal year end. For purposes of the
table, only persons whose total annual salary and bonus exceeded $100,000 have
been included.

(2) Mr. Benson was awarded 10,000 options in 2001 as a part of an annual
award of options to our employees.

(3) Mr. Slansky was awarded up to 385,000 options in 2003 as part of his
employment agreement, with 25,000 vested immediately, 180,000 vesting in
six-month increments over five years and the remaining based on performance
criteria established by the CEO. The timeframe for certain performance criteria
lapsed in 2003 and 30,000 options not earned were forfeited; thereby, reducing
Mr. Slansky's potential securities underlying options to a maximum of 355,000,
as illustrated above.

During the last fiscal year and as of December 31, 2003, the Company granted
stock options to executive officers as set forth in the following table:

OPTION/SAR GRANTS IN LAST FISCAL YEAR

Individual Grants
------------------
Name Number of Securities % of Total Options/SARs Exercise of Base Expiration
Underlying Granted to Employees in Price ($/Sh) Date
Options/SARs Fiscal Year
Granted (#)
------------------ -------------------- ---------------------- ---------------- -----------

James W. Benson 0 0 0 0

Richard B. Slansky 355,000 29% 0.51 2/10/2009
------------------ -------------------- ---------------------- ---------------- -----------

As of December 31, 2003, the Company had vested and unvested securities
underlying stock options to executive officers as set forth in the following
table:

Option/SAR Grants Ended December 31, 2003

Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs Options/SARs at
at FY-End (#) FY- End ($)
----------------------------------------------------------------------------------------------------

Exercisable/ Exercisable/
Name . . . . . . . Shares Acquired on Value Realized ($) Unexercisable Unexercisable(1)

Exercise (#)
------------------ ------------------ ------------- ------------------- ------------------
James W. Benson 0 $0 506,666/ 506,312/
------------------ ------------------ ------------- ------------------- ------------------
2,003,334 3,157
------------------ ------------------ ------------- ------------------- ------------------
Richard B. Slansky 0 $0 83,000 42,330/
------------------ ------------------ ------------- ------------------- ------------------
272,000 138,720
------------------ ------------------ ------------- ------------------- ------------------

(1) For purposes of determining whether options are "in-the-money," we
defined fair market value as the five-day weighted average of the closing price
of our common stock on the Over-The-Counter Bulletin Board as of March 4, 2004,
or $1.05 per share. All the options listed on the table are "in-the-money",
except unvested options on 2,000,000 of Mr. Benson's shares.

DIRECTOR COMPENSATION

At our annual meeting on July 16, 2000, our Board of Directors adopted a
compensation plan for independent directors whereby they receive options for
attending meetings of the Board as follows: each such director shall receive an
option to purchase 5,000 shares for each of two telephonic meetings attended per
year, and an option to purchase 10,000 shares for each of two meetings attended
in person per year. These directors will not receive additional compensation
for attending meetings in excess of those described above. In addition to the
above, independent directors will receive $5,000 in options on the date of
election or appointment. All such options will be issued pursuant to our 1999
Incentive Stock Option Plan at fair market value as of the date of the meeting
attended, will vest 50% on the first anniversary date of the date of grant and
50% on the second anniversary date of the date of grant and will expire on the
five-year anniversary of the grant date. The following table sets forth the
remuneration paid to our directors during the fiscal year ended December 31,
2003. We do not pay directors who are also officers of the Company additional
compensation for their service as directors.

On March 25, 2004, our Board of Directors modified our compensation plan for
independent directors whereby they will receive options for attending meetings
of the Board as follows: each director shall receive an option to purchase
6,000 shares for each telephonic meeting attended and an option to purchase
12,000 shares for each meeting attended in person, with a cap of options on
36,000 shares per year. Our directors will also receive compensation for
attending committee meetings as follows: each director shall receive an option
to purchase 5,000 shares for each Audit Committee meeting attended, each
director shall receive an option to purchase 2,500 shares for each Compensation
Committee meeting attended and each director shall receive an option to purchase
2,500 shares for each Nominating/Governance Committee meeting attended, which
options shall not be subject to a cap. In addition to the above, independent
directors will receive 5,000 options on the date of election or appointment. All
such options will be issued pursuant to the Plan at fair market value as of the
date of the meeting attended, will vest 50% on the first anniversary date of
the date of grant and 50% on the second anniversary date of the date of
grant and will expire on the three-year anniversary of the grant date.

Cash Compensation Security Grants

Annual Meeting Consulting Number of Number of
Retainer Fees Fees/Other Shares Securities
Fees Fees Underlying
Options/SARs

Name
-------------------------- -------- ------- --------- --------- --------------
James W. Benson . . . . . - - - - -
-------------------------- -------- ------- --------- --------- --------------
J. Mark Grosvenor (1) . . . . - - - - -
-------------------------- -------- ------- --------- --------- --------------
Stuart Schaffer . . . . . . . - - - - -
-------------------------- -------- ------- --------- --------- --------------
Wesley T. Huntress. . . . . . - - - - 30,000
-------------------------- -------- ------- --------- --------- --------------
Curt Dean Blake . . . . . . . - - - - 20,000
-------------------------- -------- ------- --------- --------- --------------
General Howell M. Estes, III. - - - - 30,000
-------------------------- -------- ------- --------- --------- --------------
Robert S. Walker. . . . . . . - - - - 30,000
-------------------------- -------- ------- --------- --------- --------------
Scott McClendon . . . . . . . - - - - 30,000
-------------------------- -------- ------- --------- --------- --------------

(1) Mr. Grosvenor was issued options to purchase 19,615 shares of our common
stock upon joining the Board of Directors on May 6, 2003. Mr. Grosvenor
forfeited the right to those options when he resigned from the Board on
September 15, 2003. Mr. Grosvenor continues to be an investor in the Company
with ownership of 665,188 shares and warrants to purchase 665,188 shares.

EMPLOYMENT AGREEMENTS

On November 21, 1997, we entered into a five-year employment agreement with our
CEO, Mr. Benson. This agreement provides for compensation of salary and stock as
well as stock options. This agreement also prohibits Mr. Benson from competing
with us, disclosing any confidential information, or soliciting any of our
employees or customers for one year after termination of employment. Our Board
of Directors revised Mr. Benson's employment agreement at its meeting on July
16, 2000. This employment contract supercedes the previous agreement. The term
of this revised employment contract is for a period of five (5) years from July
16, 2000. The revised agreement provides for the grant of options to purchase
up to 4,000,000 shares of our common stock upon the occurrence of certain
events, of which options to purchase 500,000 shares are currently vested.

On May 17, 2002, we entered into an "at-will" employment agreement with Mr.
Schaffer. The agreement provided for Mr. Schaffer's compensation of salary,
benefits and options to purchase up to 450,000 shares of our common stock. On
July 2, 2003, we entered into a Confidential Separation Agreement and General
Release with Mr. Schaffer. The agreement provided for Mr. Schaffer to receive
salary and benefits until August 8, 2003 and for the resignation of Mr. Schaffer
as an officer, but not as a director. In exchange for a release of claims and
other promises set forth in the agreement, Mr. Schaffer retained certain
exercise rights on his vested options of 90,000 shares until the earlier of (i)
eighteen (18) months from his resignation as a member of our Board of Directors
or other subsequent consulting relationship with us, or (ii) July 19, 2008.

On May 31, 2002, we entered into a Confidential Separation Agreement and General
Release of Claims with Mr. Lloyd, our former Chief Operating Officer and Chief
Financial Officer. The agreement provided for the resignation of Mr. Lloyd as
an officer and director of SpaceDev, Inc. and Integrated Space Systems, Inc.,
effective June 14, 2002. In exchange for a release of claims and other promises
set forth in the agreement, Mr. Lloyd received $36,000 and an extension of the
exercise period of each of his non-statutory stock options for a five-year
period from the original date of grant. Until May 31, 2003, the agreement also
prohibits Mr. Lloyd from soliciting our employees, inducing any customer away
from us or representing himself on our behalf.

On February 14, 2003, we entered into an "at-will" employment agreement with Mr.
Slansky. The agreement provided for Mr. Slansky's compensation of salary,
benefits and options to purchase up to 385,000 shares of our common stock. The
agreement also provided for severance under certain termination provisions and
prohibits Mr. Slansky from soliciting our employees or competing with us, if he
were to leave the Company.

On November 17, 2003, we entered into an "at-will" employment relationship with
Mr. Dario ("Dan") DaPra to become our Vice President of Engineering. Our offer
letter provided for Mr. DaPra's compensation of salary, benefits and options to
purchase up to 250,000 shares of our common stock. The offer letter also
provided for severance under certain termination provisions and prohibits Mr.
DaPra from soliciting our employees or competing with us. Mr. DaPra resigned on
March 5, 2004 and subsequently entered into a Confidential Separation Agreement
and General Release with us. The Agreement provides for Mr. DaPra to receive
one-half pay through April 30, 2004 in lieu of severance, and to retain options
on 40,000 shares of our stock with the ability to exercise those options until
October 31, 2004.

EMPLOYEE BENEFITS

At our 1999 Annual Stockholder Meeting, the shareholders adopted an Incentive
Employee Stock Option Plan under which its Board of Directors may grant our
employees, directors and affiliates Incentive Stock Options, Supplemental Stock
Options and other forms of stock-based compensation, including bonuses or stock
purchase rights. Incentive Stock Options, which provide for preferential tax
treatment, are only available to employees, including officers and affiliates,
and may not be issued to non-employee directors. The exercise price of the
Incentive Stock Options must be 100% of the fair market value of the stock on
the date the option is granted. Pursuant to our plan, the exercise price for the
Supplemental Stock Options will not be less than 85% of the fair market value of
the stock on the date the option is granted. We are required to reserve an
amount of common shares equal to the number of shares, which may be purchased as
a result of awards made under the Plan at any time.

At the 2000 Annual Stockholder Meeting, the shareholders approved an amendment
to the Stock Option Plan of 1999, increasing the number of shares eligible for
issuance under the Plan to 30% of the then outstanding common stock and allowing
the Board of Directors to make annual adjustments to the Plan to maintain a 30%
ratio to outstanding common stock at each annual meeting of the Board of
Directors. The Board, at its annual meetings in 2001 and 2002, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet the Company's needs. As of December 31,
2003, 4,184,698 shares were authorized for issuance under the Plan, 3,124,807 of
which are currently subject to outstanding options and awards and options on
37,000 shares were exercised in 2003. The Stock Option Plan of 1999 was
registered with the U.S. Securities & Exchange Commission on Form S-8.

During 2003, we issued non-statutory options to purchase 140,000 shares to our
independent directors for attendance at our 2003 Board of Directors meetings.
In addition to the Stock Option Plan of 1999, our shareholders adopted the 1999
Employee Stock Purchase Plan, which authorized our Board of Directors to make
twelve consecutive offerings of our common stock to our employees. The 1999
Employee Stock Purchase Plan has been instituted and the first employees
enrolled in the plan in August 2003. The first shares of common stock were
issued under the Plan in February 2004. We also offer a variety of health,
dental, vision, 401(k) and life insurance benefits to our employees in
conjunction with our co-employment partner, Administaff.

EQUITY COMPENSATION PLAN INFORMATION

--------------------------- ------------------- --------------------------
(a) (b) (c)
--------------------------- ------------------- --------------------------
Plan category. . . . . . . . . . . . Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding outstanding future issuance under
issuance options, warrants options, warrants equity compensation plans
and rights and rights (excluding securities
reflected in column (a))
Equity
compensation plans . . . . . . . . . 3,124,807 $ 0.93 1,022,891
approved by
security holders
Equity . . . . . . . . . . . . . . . 2,500,000 $ 2.00 0
compensation plans
not approved by
security holders
Total. . . . . . . . . . . . . . . . 5,624,807 $ 1.47 1,022,891
------------------------------------ --------------------------- ------------------- --------------------------

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table provides information as of March 4, 2004 concerning the
beneficial ownership of the Company's common stock by (i) each director, (ii)
each named executive officer, (iii) each shareholder known by us to be the
beneficial owner of more than 5% of the Company's outstanding Common Stock, and
(iv) the directors and officers as a group. Except as otherwise indicated, the
persons named in the table have sole voting and investing power with respect to
all shares of Common Stock owned by them.

Title of Name and Address of Amount and Percent of
Class Beneficial Owner Nature of Class(1)
Beneficial
Ownership(1)
---------- ---------------------- ------------ -----------

..0001 par James W. Benson, CEO 9,748,373(2) 49.56%
value and Chairman
common 13855 Stowe Drive
stock Poway, California 92064

..0001 par Richard B. Slansky 180,357(3) 0.92%
value 13855 Stowe Drive
common Poway, California 92064
stock

..0001 par J. Mark Grosvenor 1,330,376(4) 6.76%
value 13855 Stowe Drive
common Poway, California 92064
stock

..0001 par Curt Dean Blake 128,430(5) 0.65%
value Director
common 13855 Stowe Drive
stock Poway, California 92064

..0001 par Wesley T. Huntress Jr. 80,515(6) 0.41%
value Director
common 13855 Stowe Drive
stock Poway, California 92064

..0001 par General Howell M. 54,167(7) 0.28%
value Estes III, Director
common 13855 Stowe Drive
stock Poway, California 92064

..0001 par Robert S. Walker 54,167(8) 0.28%
value Director
common 13855 Stowe Drive
stock Poway, California 92064

..0001 par Stuart Schaffer, Director 218,206(9) 1.11%
value 13855 Stowe Drive
common Poway, California 92064
stock

..0001 par Scott McClendon 15,230(10) 0.08%
value Director
common 13855 Stowe Drive
stock Poway, California 92064

..0001 par Officers and Directors as 11,809,821(11) 60.04%(1)
value a group (10 Persons)
common
stock
------------------------------------------------------------------------------------------------

(1) Where persons listed on this table have the right to obtain additional
shares of our common stock through the exercise of outstanding options or
warrants or the conversion of convertible securities within 60 days from March
4, 2004, these additional shares are deemed to be beneficially owned for the
purpose of computing the amount and percentage of common stock owned by such
persons. Percentages are based on total outstanding shares on March 4, 2004
plus options and warrants that will become exercisable within 60 days of March
4, 2004, for a total of 19,670,844 shares.

(2) Represents 8,257,647 shares held directly by Mr. Benson and his wife,
Susan Benson, (including 486,647 shares as part of the Company's convertible
debt repayment when he converted $187,500 of his debt into shares in 2003);
497,413 shares transferred from SD Holdings, LLC to Space Development Institute,
a 501(c)(3) corporation; plus vested options on 506,666 shares; and, warrants on
486,647 shares (Mr. Benson forgave half of his warrants on 973,294 shares as
part of the convertible debt repayment). In addition, Mr. Benson has unvested
options on 2,003,334 shares. In 2003, 8,245,000 shares were transferred from SD
Holdings, LLC, an entity previously controlled by Mr. Benson, directly to Mr.
Benson and his children. Mr. Benson's children now hold 1,312,000 shares. Mr.
Benson disclaims ownership of shares held by his children.

(3) Mr. Slansky owns 40,895 shares of which 38,462 shares he purchased for
cash in a private transaction with Mr. Skarupa, the Company's former Vice
President of Operations; 38,462 warrants which were also purchased from Mr.
Skarupa; and, vested options on 101,000 shares. Mr. Slansky also holds 254,000
unvested options.

(4) Mr. Grosvenor owns 665,188 shares of our common stock plus 665,188
vested warrants that he purchased in our private placement. On May 6, 2003, Mr.
Grosvenor was granted options on 19,615 shares, which he forfeited upon his
resignation from the Board on September 15, 2003.

(5) Mr. Blake owns 30,612 shares of our common stock plus 30,612 vested
warrants that he purchased in our private placement. Mr. Blake also owns 67,206
vested options, which he received as compensation for his participation on our
Board of Directors. In addition, Mr. Blake has unvested options on 22,500
shares.

(6) Mr. Huntress owns 8,868 shares of our common stock. Mr. Huntress also
owns 71,647 vested options, which he received as compensation for his
participation on our Board of Directors. In addition, Mr. Huntress has unvested
options on 30,000 shares.

(7) General Estes III owns 54,167 vested options, which he received as
compensation for his participation on our Board of Directors. In addition,
General Estes III has unvested options on 32,500 shares.

(8) Mr. Walker owns 54,167 vested options, which he received as compensation
for his participation on our Board of Directors. In addition, Mr. Walker has
unvested options on 27,500 shares.

(9) Mr. Schaffer owns 64,103 warrants, however in 2003 as part of the
Company's convertible debt repayment, Mr. Schaffer forgave 64,103 warrants and
converted $25,000 of his debt to the Company into 64,103 shares. Mr. Schaffer
also owns 90,000 vested options, which he received as part of his compensation
package as Vice President of Product Development and Marketing.

(10) Mr. McClendon owns 15,230 vested options, which he received as
compensation for his participation on our Board of Directors. In addition, Mr.
McClendon has unvested options on 30,230 shares.

(11) Officers and directors as a group include our seven Board members, one
of whom is also an officer of the Company, Messrs. Grosvenor, Slansky and
Simpson. Mr. Simpson holds no beneficially owned shares but holds unvested
options on 250,000 shares, which are not included in the calculation.

DESCRIPTION OF SECURITIES

COMMON STOCK

We are authorized to issue up to 50,000,000 shares of our $.0001 par value
common stock, of which 17,813,704 shares are issued and outstanding as of May
4, 2004 . The Board of Directors may issue additional shares of Common
Stock without the consent of the holders of Common Stock.

Voting Rights
--------------

Each outstanding share of Common Stock is entitled to one vote. The
holders of Common Stock do not have cumulative voting rights, which means that
the holders of more than 50% of such outstanding shares voting for the election
of directors can elect all of our directors, if they so choose.

No Preemptive Rights
----------------------

Holders of Common Stock are not entitled to any preemptive rights.

Dividends and Distributions
-----------------------------

Holders of Common Stock are entitled to receive such dividends as may be
declared by the directors out of funds legally available therefore and to share
pro rata in any distributions to holders of Common Stock upon liquidation or
otherwise. However, we have not paid cash dividends on our Common Stock, and do
not expect to pay such dividends in the foreseeable future.

WARRANTS

The Warrants, excluding the Laurus Warrant, are exercisable immediately
upon issuance for the purchase of one additional share of Common Stock at an
exercise price equal to the price paid for the Common Stock, and expire on the
third anniversary date of the date of issuance.

TRANSFER AGENT AND REGISTRAR

We use Continental Stock Transfer and Trust, 17 Battery Place, 8th Floor,
New York, NY 10004, as our transfer agent for our Common Stock. Corporate Stock
Transfer can be contacted via telephone at (212) 845-3215. To exercise

your Warrants, you must submit a notice of exercise to us, and we will have the
underlying Common Stock issued to you via the transfer agent.

DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES

Our Articles of Incorporation provide that our directors, officers,
employees or agents shall be indemnified as to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, as long as the director, officer, employee or agent acted in good
faith and in a manner reasonably believed to be in the best interests of the
corporation. No indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his/her duty.

In addition, our Articles of Incorporation and Bylaws obligate us to
indemnify our directors and officers against expenses and other amounts
reasonably incurred in connection with any proceeding arising from the fact that
such person is or was an agent of ours. Our Articles of Incorporation and
Bylaws also authorize us to purchase and maintain insurance on behalf of any of
our directors or officers against any liability asserted against that person in
that capacity, whether or not we would have the power to indemnify that person.

We have been advised that in the opinion of the Securities and Exchange
Commission indemnification for liabilities arising under the Securities Act is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to court of appropriate jurisdiction. We will then be governed by the
court's decision.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

The Sarbanes-Oxley Act of 2002 ("Act") established the Public Company
Accounting Oversight Board ("PCAOB") and charged it with the responsibility of
overseeing the audits of public companies that are subject to the federal
securities laws. Under the Act, the PCAOB's duties include the establishment of
a registration system for public accounting firms. The PCAOB has proposed rules
for the registration process, which will require approval of the U.S. Securities
Commission ("SEC") prior to enforcement. Within 180 days after SEC approval, all
public accounting firms will be required to register with the PCAOB if they wish
to prepare or issue audit reports on U.S. public companies, or to play a
substantial role in the preparation or issuance of such reports. Once
registered, public accounting firms will be required to file periodic reports
with the PCAOB. At this time, the cost of compliance with these new rules cannot
be determined, and, as a result of the recent legislation, the cost of
professional liability insurance for public accounting firms has dramatically
increased. We were informed by our independent auditor, Nation Smith Hermes

Diamond, Accountants and Consultants, P.C. ("Nation Smith"), that it would not
register with the PCAOB and, as a result, would not be able to continue to act
as our independent auditor once the rules were in effect. Nation Smith did not
resign its position as a result of any disagreements with us on accounting or
financial disclosure issues.

Effective June 2, 2003, we confirmed with our auditors, Nation Smith Hermes
Diamond, P.C., "Nation Smith"), that Nation Smith would no longer be
representing us as our accountants, except to provide consent herein. As of
that date, we informed Nation Smith that we were engaging a new audit firm as
our accountants.

Nation Smith last reported on Registrant's financial statements as of
February 13, 2003. The report, which covered the two fiscal years ended December
31, 2002, was an unqualified report modified for going concern. While Nation
Smith expressed concern as to the Registrant's ability to remain a going
concern, neither the report nor the financial statements for the periods
contained any other adverse opinion or disclaimer of opinion, nor were they
modified as to audit scope or accounting principles.

Our Board of Directors ratified the change of independent accountants on
June 3, 2003.

During our fiscal year 2002 and the subsequent interim period through July
25, 2003, there were no disagreements with Nation Smith on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved, to Nation Smith's satisfaction,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report.

During fiscal year 2002 and the subsequent interim period through July 25,
2003, there have been no reportable events (as defined in Regulation S-B Item
304(a)(1)(v)).

During fiscal year 2002 and the subsequent interim period through July 25,
2003, Nation Smith did not advise us that the internal controls necessary for us
to develop reliable financial statements do not exist.

During fiscal year 2002 and the subsequent interim period through July 25,
2003, Nation Smith did not advise us that any information had come to their
attention which had led them to no longer be able to rely on management's
representation, or that had made Nation Smith unwilling to be associated with
the financial statements prepared by management.

During fiscal year 2002 and the subsequent interim period through July 25,
2003, Nation Smith did not advise us that the scope of any audit needed to be
expanded significantly or that more investigation was necessary.

During fiscal year 2002 and the subsequent interim period through July 25,
2003, Nation Smith did not advise us that there was any information which the
accountants concluded would materially impact the fairness and reliability of
either (i) a previously issued audit report or the underlying financial
statements, or (ii) the financial statements issued or to be issued covering

the fiscal period(s) subsequent to the date of the most recent financial
statements covered by an audit report (including information that, unless
resolved to the accountant's satisfaction, would prevent it from rendering an
unqualified audit report on those financial statements.

We requested that Nation Smith furnish us with a letter addressed to the
SEC stating whether or not it agrees with the above statements. A copy of such
letter, dated June 4, 2003, was filed as Exhibit 16.1 to our Form 8-K filing of
the same date.

We engaged PKF, Certified Public Accountants, A Professional Corporation
("PKF"), as our new independent accountants on June 2, 2003 for the fiscal year
ending December 31, 2003, and to review our quarterly financial statements for
the periods ending June 30, 2003 and September 30, 2003. Prior to June 2, 2003,
we had not consulted with PKF regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial statements, and no
written report or oral advice was provided to us by PKF concluding there was an
important factor to be considered by us in reaching a decision as to an
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of
Regulation S-B, or a reportable event, as that term is defined in Item
304(a)(1)(iv) of Regulation S-B.

EXPERTS

The financial statements included in the Prospectus have been audited by
PKF International, independent certified public accountants, for the year ending
December 31, 2003 and Nation Smith Hermes Diamond, P.C., independent certified
public accountants, for the year ending December 31, 2002 and 2001, to the
extent and for the periods set forth in their reports appearing elsewhere herein
and are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.

Weintraub Dillon PC, our independent legal counsel, has provided an opinion
on the validity of our common stock.
74

LEGAL PROCEEDINGS
On June 18, 2001, we entered into a relationship with two individuals (doing
business as EMC Holdings Corporation ("EMC")), whereby EMC was to provide
certain consulting and advisory services to us in exchange for our common stock.
EMC received the first installment of 500,000 shares of our common stock on June
26, 2001. Total expense for the initial stock issuance through September 30,
2001 was valued at approximately $455,000. Pursuant to a demand for arbitration
filed by us on November 7, 2001, we sought the return of all or a portion of the
shares issued to EMC. EMC filed its own claim with the American Arbitration
Association on November 13, 2001, alleging that we owed EMC $118,000 in fees,
plus damages.

A three-day arbitration hearing was held in May and June 2002 with respect to
claims arising out of consulting and advisory service agreements between EMC and
us. On July 17, 2002, an interim award was issued in favor of us against EMC,
ordering the return of the initial installment of 500,000 shares and denying
EMC's claim for $118,000. On October 22, 2002, a status conference was held and
a tentative final award was issued again in the favor of us. Included in this
tentative final ruling was an award of approximately $83,000 in attorney and
arbitration fees to us. The tentative final ruling became effective on October
29, 2002, and was submitted to the Superior Court of California, Orange County,
for entry of judgment.

Because collection of the attorney and arbitration fees award is not assured, we
expensed all of our fees related to this matter. Any recovery of fees will be
recorded as income in the period they are received. The return of the 500,000
shares, as provided in the interim award issued on July 17, 2002, was recorded
in the third quarter of 2002 as a reversal of the original expense recorded.
See "Results of Operations" below. In June 2003, we ceased efforts to recover
the awarded fees, as it was determined that the cost to pursue collection
exceeded the likelihood of collection.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy any document we file at
the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the Commission at 1-800-SEC-0330 for information on the
operation of the Public Reference Room. Our filings with the Commission are also
available to the public at the Commission's Web site at http://www.sec.gov. Our
common stock is quoted on The Over-the-Counter Bulletin Board (OTCBB). Our
reports, proxy statements and other information are also available to the public
on the OTCBB's Web site at http://www.otcbb.com.

This prospectus is part of a registration statement on Form SB-2 filed with
the Commission under the Securities Act. This prospectus may omit some of the
information contained in the registration statement. You should refer to the
registration statement for further information with respect to our company and
the securities offered under this prospectus. Any statement contained in this
prospectus concerning the provisions of any document filed as an exhibit to the
registration statement or otherwise filed with the Commission is not necessarily
complete, and in each case you should refer to the copy of the document filed
for more complete information.

SPACEDEV, INC.
AND SUBSIDIARIES
CONTENTS

CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT AUDITORS F-2 to F-3

FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4 to F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Deficit F-7 to F-9
Consolidated Statements of Cash Flows F-10 to F-11
Notes to Consolidated Financial Statements F-12 to F-32

F-1

Report of Independent Auditors

Board of Directors and Stockholders
SPACEDEV, INC.

We have audited the accompanying consolidated balance sheet of SPACEDEV, INC.
AND SUBSIDIARIES (see Note 1(c) to the consolidated financial statements) as of
December 31, 2003, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.

In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.

/s/ PKF

San Diego, California
February 11, 2004 (except for Note 11 for which the date is April 2, 2004)

F-2

Report of Independent Auditors

Board of Directors and Stockholders
SPACEDEV, INC.

We have audited the accompanying consolidated balance sheet of SPACEDEV, INC.
AND SUBSIDIARIES (see Note 1(c) to the consolidated financial statements) as of
December 31, 2002, and the related consolidated statements of operations,
stockholders' deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

In our opinion, based on our audit the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2002,
and the consolidated results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(b) to
the consolidated financial statements, the Company incurred a net loss of
$376,160 for the year ended December 31, 2002, and had a working capital deficit
of $197,381 as of December 31, 2002. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1(b). The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

Nation Smith Hermes Diamond P.C.

/s/ Nation Smith Hermes Diamond

San Diego, California
February 13, 2003

F-3

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, . . . . . . . . . . . . . . . . . . . . . 2003 2002
------------------------------------------------------- ---------- ----------
ASSETS

CURRENT ASSETS
Cash (Note 10(a)) . . . . . . . . . . . . . . . . . $ 592,006 $ 27,648
Accounts receivable (Note 10(b)). . . . . . . . . . 187,062 82,325
Inventory . . . . . . . . . . . . . . . . . . . . . 9,961 1,729
Receivable for assets held for sale (Note 2). . . . - 3,150,124
Costs in excess of billings and estimated earnings. - 281,175
Work in Progress. . . . . . . . . . . . . . . . . . 110,490 -

Total current assets . . . . . . . . . . . . . . . . . 899,519 3,543,001
------------------------------------------------------- ---------- ----------

FIXED ASSETs - Net (Notes 1(g) and 2). . . . . . . . . 137,532 141,488

CAPITALIZED SOFTWARE COSTS. . . . . . . . . . . . . . - 103,508

OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . 47,768 23,960
------------------------------------------------------- ---------- ----------

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . $1,084,819 $3,811,957
------------------------------------------------------- ---------- ----------
------------------------------------------------------- ---------- ----------

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 2002
--------------------------------------------------------------------- ------------- -------------

LIABILITIES AND STOCKHOLDERSDEFICIT

CURRENT LIABILITIES
Current portion of notes payable (Note 4(a)). . . . . . . . . . . $ 41,464 $ 2,431,134
Current portion of capitalized lease obligations (Note 9(a)). . . 10,332 32,783
Notes payable - related party (Note 4(b)) . . . . . . . . . . . . 80,000 174,665
Convertible debt notes payable (Note 5) . . . . . . . . . . . . . - 127,075
Accounts payable and accrued expenses . . . . . . . . . . . . . . 311,606 598,480
Accrued payroll, vacation and related taxes . . . . . . . . . . . 84,001 174,188
Customer deposits and deferred revenue (Note 1(f)). . . . . . . . - 69,402
Revolving line of credit (Note 4(c)). . . . . . . . . . . . . . . 748,893
Provision for anticipated loss (Note 10(c)) . . . . . . . . . . . - 11,044
Employee Stock Purchase Plan (Note (7(b)) . . . . . . . . . . . . 5,498 -
Other accrued liabilities (Note 9(b)) . . . . . . . . . . . . . . 248,530 121,611
--------------------------------------------------------------------- ------------- -------------

TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . 1,530,324 3,740,382
--------------------------------------------------------------------- ------------- -------------

NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(A)) . . . . . . . . . 46,127 89,052

CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(A)) . 5,253 8,431

NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(B)) . 505,522 563,831

DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2). . . . . . . . . . . . 1,065,221 1,172,720

DEFERRED REVENUE (NOTE 1(F)) . . . . . . . . . . . . . . . . . . . . 5,000 5,000
--------------------------------------------------------------------- ------------- -------------

TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . 3,157,447 5,579,416
--------------------------------------------------------------------- ------------- -------------

COMMITMENTS AND CONTINGENCIES (NOTES 9)

STOCKHOLDERSDEFICIT
Convertible preferred stock, $.0001 par value, 10,000,000 shares
authorized, no shares issued or outstanding (Note 8(a)). . . . . - -
Common stock, $.0001 par value; 50,000,000 shares authorized, and
16,413,260 and 14,447,640 shares issued and outstanding,
respectively (Note 8(b)) . . . . . . . . . . . . . . . . . . . . 1,641 1,447
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 9,243,507 8,302,803
Additional paid-in capital - stock options (Note 8(d)) . . . . . . 750,000 750,000
Deferred compensation (Note 8(d)). . . . . . . . . . . . . . . . . (250,000) (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (11,817,776) (10,571,709)
--------------------------------------------------------------------- ------------- -------------

TOTAL STOCKHOLDERSDEFICIT. . . . . . . . . . . . . . . . . . . . . . (2,072,628) (1,767,459)
--------------------------------------------------------------------- ------------- -------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT. . . . . . . . . . . . . $ 1,084,819 $ 3,811,957
--------------------------------------------------------------------- ------------- -------------
--------------------------------------------------------------------- ------------- -------------

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,. . . . . . . . . . . . . . . 2003 2002
------------------------------------------------------ ------------ ------------ ----------- ----

NET SALES . . . . . . . . . . . . . . . . . . . . . . $ 2,956,322 100% $3,370,118 100%
------------------------------------------------------ ------------ ------------ ----------- ----

Cost of sales . . . . . . . . . . . . . . . . . . . . 2,414,997 82% 3,348,671 99%
Anticipated loss on uncompleted contract (Note 10(c)) - (58,941) -2%
------------------------------------------------------ ------------ ------------ ----------- ----

TOTAL COST OF SALES . . . . . . . . . . . . . . . . . 2,414,997 82% 3,289,730 98%
------------------------------------------------------ ------------ ------------ ----------- ----

GROSS MARGIN. . . . . . . . . . . . . . . . . . . . . 541,325 18% 80,388 2%
------------------------------------------------------ ------------ ------------ ----------- ----

OPERATING EXPENSES
Marketing and sales expense. . . . . . . . . . . . 394,974 13% 257,648 8%
Research and development . . . . . . . . . . . . . 281,280 10% - 0%
Stock and stock option based compensation. . . . . 9,170 0% 2,938 0%
General and administrative . . . . . . . . . . . . 745,993 25% 260,882 8%
EMC - stock based compensation (Note 8(b)) . . . . - 0% (455,000) -14%

TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . . 1,431,417 48% 66,468 2%
------------------------------------------------------ ------------ ------------ ----------- ----

INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . . . (890,092) -30% 13,920 0%
------------------------------------------------------ ------------ ------------ ----------- ----

NON-OPERATING EXPENSE/(INCOME)
Interest expense . . . . . . . . . . . . . . . . . 91,492 3% 263,480 8%
Non-cash interest expense debt discount (Note 5) . 112,500 4% 125,000 4%
Gain on Building Sale (Note 4(a)). . . . . . . . . (107,499) -4% - 0%
Loan Fee - Equity Compensation (Note 4(c) & 5) . . 257,882 9% - 0%
------------------------------------------------------ ------------ ------------ ----------- ----
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . . . 354,375 12% 388,480 12%
------------------------------------------------------ ------------ ------------ ----------- ----

LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . . (1,244,467) -42% (374,560) -11%
Income tax provision (Notes 1(j) and 6) . . . . . . . 1,600 0% 1,600 0%
------------------------------------------------------ ------------ ------------ ----------- ----
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . $(1,246,067) -42% $ (376,160) -11%
------------------------------------------------------ ------------ ------------ ----------- ----
------------------------------------------------------ ------------ ------------ ----------- ----
NET LOSS PER SHARE:
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (0.08) $ (0.03)
------------------------------------------------------ ------------ ------------ ----------- ----

Weighted-Average Shares Outstanding . . . . . . . . 16,092,292 14,744,423
------------------------------------------------------ ------------ ------------ ----------- ----

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

Common Stock
--------------
Shares Amount
-------------- --------

BALANCE AT JANUARY 1, 2002. . . . . . . . . . . . . . . . . . . . . . . 14,817,580 $ 1,481
Common stock issued for cash (Note 8(b)). . . . . . . . . . . . . . . . 153,060 15
Reversal of common stock issued for services (Note 8 (b)) . . . . . . . (493,000) (49)
Warrants issued for convertible debt program (Note 5 and 8(c)). . . . . - -

Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
----------------------------------------------------------------------- -------------- --------

BALANCE AT DECEMBER 31, 2002. . . . . . . . . . . . . . . . . . . . . . 14,477,640 1,447
Common stock issued for cash (Note 8(b)). . . . . . . . . . . . . . . . 861,267 86
Common stock issued from notes on revolving credit facility (Note 4(c)) 415,000 42
Common stock issued for services (Note 8(b)) . . . . . . . . . . . . . 7,500 1
Common stock issued from convertible debt program (Note 5 and 8(c)) . . 614,853 61
Common stock issued from employee stock options (Note 7(b)) . . . . . . 37,000 4

Warrants issued for convertible debt program (Note 5 and 8(c)). . . . . - -

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
----------------------------------------------------------------------- -------------- --------

BALANCE AT DECEMBER 31, 2003. . . . . . . . . . . . . . . . . . . . . . 16,413,260 $ 1,641

The accompanying notes are an integral part of these consolidated financial
statements.

F-7

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

Additional
Additional Paid-In
Paid-in Capital - Deferred
Capital Stock Options Compensation

BALANCE AT JANUARY 1, 2002 . . . . . . . . . . . . . . . . . . . . . . . $ 8,204,831 $ 750,000 $ (250,000)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . 74,985 - -
Reversal of common stock issued for services (Note 8 (b)). . . . . . . . (452,013) - -
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . 475,000 - -

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
------------------------------------------------------------------------ ------------ -------------- --------------

BALANCE AT DECEMBER 31, 2002 . . . . . . . . . . . . . . . . . . . . . . 8,302,803 750,000 (250,000)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . 425,856 - -
Common stock issued from notes on revolving credit facility (Note 4(c)) 354,679 - -
Common stock issued for services (Note 8(b)). . . . . . . . . . . . . . 9,169 - -
Common stock issued from convertible debt program (Note 5 and 8(c)). . . 368,850 - -
Common stock issued from employee stock options (Note 7(b)). . . . . . . 19,650 - -

Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . (237,500)
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -

------------------------------------------------------------------------ ------------ -------------- --------------

BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . $ 9,243,507 $ 750,000 $ (250,000)

The accompanying notes are an integral part of these consolidated financial
statements.

F-8

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

Accumulated
Deficit Total

BALANCE AT JANUARY 1, 2002 . . . . . . . . . . . . . . . . . . . . . . . $(10,195,549) $(1,489,237)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . - 75,000
Reversal of common stock issued for services (Note 8(b)). . . . . . . . - (452,062)
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . - 475,000
-
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (376,160) (376,160)
------------------------------------------------------------------------ ------------- ------------
-
BALANCE AT DECEMBER 31, 2002 . . . . . . . . . . . . . . . . . . . . . . (10,571,709) (1,767,459)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . - 425,942
Common stock issued from notes on revolving credit facility (Note 4(c)) - 354,721
Common stock issued for services (Note 8(b)). . . . . . . . . . . . . . - 9,170
Common stock issued from convertible debt program (Note 5 and 8(c)). . . - 368,911
Common stock issued from employee stock options (Note 7(b)). . . . . . . - 19,654

Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . - (237,500)
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,246,067) (1,246,067)
-

BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . $(11,817,776) $(2,072,628)

The accompanying notes are an integral part of these consolidated financial
statements.

F-9

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,. . . . . . . . . . . . . . . . . . . . . . 2003 2002
-------------------------------------------------------------------- ------------ ----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,246,067) $(376,160)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 166,971 357,692
Contributed assets. . . . . . . . . . . . . . . . . . . . . . - (16,251)
(Gain) loss on disposal of assets . . . . . . . . . . . . . . (107,499) 7,410
Non-cash interest expense - convertible debt program. . . . . 131,411 125,000
Non-cash loan fees. . . . . . . . . . . . . . . . . . . . . . 126,471 -
Common stock issued for compensation and services . . . . . . 9,170 (452,062)
Change in operating assets and liabilities: . . . . . . . . . - -

Accounts receivable . . . . . . . . . . . . . . . . . . . . (104,737) 208,290
Work in Progress. . . . . . . . . . . . . . . . . . . . . . (110,490) -
Prepaid and other current assets. . . . . . . . . . . . . . (33,888) 10,168
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . (8,232) (1,729)
Convertible debt notes payable. . . . . . . . . . . . . . . 130,661 -
Costs in excess of billings and estimated earnings. . . . . 281,175 (281,175)
Accrued interest revolving line of credit . . . . . . . . . 13,601 -
Accounts payable and accrued expenses . . . . . . . . . . . (286,874) 202,641
Accrued payroll, vacation and related taxes . . . . . . . . (90,187) 15,936
Customer deposits and deferred revenue. . . . . . . . . . . (69,402) (158,319)
Employee Stock Purchase Plan. . . . . . . . . . . . . . . . 5,498 -
Billings in excess of costs incurred and estimated earnings - (302,553)
Provision for anticipated loss. . . . . . . . . . . . . . . (11,044) (91,241)
Accrued interest - related party. . . . . . . . . . . . . . 47,023 45,265
Other accrued liabilities . . . . . . . . . . . . . . . . . 126,919 115
-------------------------------------------------------------------- ------------ ----------

NET CASH (USED IN) OPERATING ACTIVITIES . . . . . . . . . . . . . . (1,029,520) (706,973)

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of building. . . . . . . . . . . . . . . . . 3,150,124 50,000
Purchases of fixed assets. . . . . . . . . . . . . . . . . . . . (39,292) (1,900)
-------------------------------------------------------------------- ------------ ----------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . . . . . . . . 3,110,832 48,100

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) from convertible debt program. . . . . . . . (257,736) 475,000
Principle payments on notes payable. . . . . . . . . . . . . . . (2,432,595) (65,785)
Principal payments on capitalized lease obligations. . . . . . . (35,764) (37,330)
Payments on notes payable - related party. . . . . . . . . . . . (199,997) (66,667)
Proceeds from revolving credit facility. . . . . . . . . . . . . 963,542 -
Proceeds on notes payable - related party. . . . . . . . . . . . - 94,666
Proceeds from issuance of common stock . . . . . . . . . . . . . 445,596 75,000

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . . . . . . . . (1,516,954) 474,884

Net increase/(decrease) in cash . . . . . . . . . . . . . . . . . . 564,358 (183,989)

CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . 27,648 211,637
-------------------------------------------------------------------- ------------ ----------

CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . $ 592,006 $ 27,648
-------------------------------------------------------------------- ------------ ----------
-------------------------------------------------------------------- ------------ ----------

The accompanying notes are an integral part of these consolidated financial
statements.

F-10

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 2002
-------------------------------------------------------------------------------------------------- ------- --------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,726 $249,385
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,600 $ 1,600

NONCASH INVESTING AND FINANCING ACTIVITIES:

During 2003 and 2002, the Company issued 7,500 and 7,000 shares of
restricted shares of stock for employee awards and services and for summer &
student interns and recorded expenses of $9,170 and $2,900, respectively.

During 2003 and 2002, the Company issued 861,267 and 153,060 shares of
restricted shares of stock under the Company's Private Placement Memorandum for
cash of $425,942 and $75,000, respectively.

During 2003, the Company eliminated its convertible debt by repaying half
of the notes in cash ($237,500) and having the note holders convert the other
half into 614,853 shares of the Company's common stock. The Company recorded
additional loan fees of $131,411 and charged these fees to equity.

During 2003, the Company issued 415,000 shares of its common stock to the
Laurus Master Fund from conversions of its convertible debt notes under its
revolving credit facility with Laurus; thereby realizing a corresponding
reduction in debt of $228,250. The Company recorded additional loan fees of
$126,471 and charged these fees to equity.

During 2003, the Company issued 37,000 shares of stock converted from
employee stock options for $19,654 in cash.

During 2002, the Company recovered 500,000 shares of stock for a credit of
$455,000 upon final judgment of the outstanding litigation against EMC Holdings,
Inc. The expense for this matter was recorded during 2001.

During 2003 and 2002, the Company financed $10,135 and $20,472,
respectively, in fixed assets through various capital lease obligations.

The accompanying notes are an integral part of these consolidated financial
statements.

F-11

SPACEDEV, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows.

(a) Nature of operations

SPACEDEV, INC. (the "Company") is engaged in the conception, design,
development, manufacture, integration and operations of SPACE TECHNOLOGY
SYSTEMS, products and services. The Company is currently focused on the
development of low-cost micro-satellites, nano-satellites and related
subsystems, hybrid rocket propulsion as well as associated engineering and
technical services, primarily to government agencies, and specifically to the
United States Department of Defense. The Company's products and solutions are
sold, mainly on a project-basis, directly to these customers and include
sophisticated micro- and nano-satellites, hybrid rocket-based orbital
Maneuvering and orbital Transfer Vehicles ("MoTVs") as well as safe sub-orbital
and orbital hybrid rocket-based propulsion systems. The Company believes there
will be an evolving and developing commercial market for its space technology
systems (e.g., its micro-satellite and nano-satellite products and services) in
the long-term. In the short-term, the early adopters of this technology appear
to be in the United States Department of Defense and the Company's "products"
are considered to be the outcome of specific projects. The Company is also
designing and developing commercial hybrid rocket motors and small high
performance space vehicles and subsystems for commercial customers (e.g., Scaled
Composites' SpaceShipOne) and military customers (e.g., the Air Force Research
Laboratory.

The Company was incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI"). SpaceDev, LLC of Colorado
was originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed on August 22, 1997. On October 22, 1997, PDGI issued 8,245,000 of its
$.0001 par value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common stock owned by SpaceDev, LLC. Upon the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its name to SD
Holdings, LLC on December 17, 1997. (See Notes 8(a) and 8(b).) For accounting
purposes, the transaction was accounted for as a reverse merger with the Company
as the acquirer. Since SpaceDev had minimal assets prior to the merger, the
transaction was accounted for as the sale of the Company's common stock for net
assets of $1,232. The Company became publicly traded in October 1997 and is
currently trading on the Over-the-Counter Bulletin Board ("OTCBB") under the
symbol of "SPDV."

In February 1998, the Company's operations were expanded with the acquisition of
Integrated Space Systems, Inc. ("ISS"), a California corporation founded for the
purpose of providing engineering and technical services related to space-based
systems. The ISS employee base, acquired upon acquisition, largely consisted of
former Atlas and General Dynamics personnel and enlarged its then current
employee base to 20 employees. ISS was purchased for approximately $3.6
million, paid in Rule 144 restricted common shares of SpaceDev. Goodwill of
approximately $3.5 million was capitalized and was to be amortized over a period
of sixty (60) months, based on the purchase price exceeding the net asset value
of approximately $164,000. As a result of a change in corporate focus, on
November 15, 2001, the Company determined that the unamortized balance of
goodwill from ISS, which was approximately $923,000, had become impaired and it
was written-off. While the ISS segment did provide small hybrid propulsion
space systems and engineering services on separate contracts (mainly with
government agencies), the engineering service contracts had expired and,
therefore, would not be producing revenue or cash flow to support future
operations. The Company determined that all future business, contracts and
proposals would be sought after only in the SpaceDev name, making it a more
efficient way for it to manage and track multiple contracts and work on many
different business ventures at the same time within the same operating segment.
The Company filed for dissolution of ISS in December 2003, since all activities
have been integrated into SpaceDev, Inc.

F-12

(b) Prior year going concern

The Company's auditors, PKF, expressed in their formal auditors' opinion dated
February 11, 2004 (except for Note 11 as to which the date is April 2, 2004),
that in their opinion, based on their audit, the Company's consolidated
financial statements referred to herein present fairly, in all material
respects, the consolidated financial position of SPACEDEV, INC. AND SUBSIDIARIES
as of December 31, 2003, and the consolidated results of our operations and our
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. In previous years,
including the opinion issued by the Company's previous auditors, Nation Smith,
dated February 13, 2003, they expressed an opinion that our financial position
raised substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements as of December 31,
2003 have been prepared assuming the Company will continue as a going concern.
However, in 2002, the Company had a working capital deficit of $197,381 and
incurred a net loss of $376,160 for the year ended December 31, 2002. The
working capital deficit, together with the total net loss, raised, at that time,
substantial doubt about the Company's ability to continue as a going concern.
Subsequent to December 2003, the Company was awarded a $43,362,271 contract from
MDA and after analysis of the Company's projections (including revenue
projections) for the next several quarters and other relevant factors, the
Company's current auditors, PKF, concluded there is no longer substantial doubt
as to the Company's ability to continue as a gong concern, and has, therefore,
not included the going concern language in its report dated February 11, 2004
(except for Note 11 as to which the date is April 2, 2004) for the year ended
December 31, 2003. Management believes that this was appropriate and reflects
the Company's improved financial condition, its ability to forecast more
accurately and further validate customer demand for the Company's technology,
products and services. Management still intends to obtain new commercial and
government contracts, continue to utilize (and possibly expand) its revolving
credit facility and possibly raise some additional equity capital in a public or
private offering or fund-raising effort. Regardless, management may seek
additional capital through a combination of public and private debt or equity
placements in the future. There can be no assurance that existing contracts
will be completed successfully or that new contracts or additional debt or
equity financing that may be needed to fund operations will be available or, if
available, obtained in sufficient amounts necessary to meet the Company's needs.
Management does believe that current contracts will be sufficient to fund the
Company through 2004.

The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern.

The consolidated financial statements include the accounts of the Company and
its wholly-owned inactive subsidiary SpaceDev Oklahoma and former wholly-owned
inactive subsidiary Integrated Space Systems, Inc., a California corporation.
The Company filed for dissolution of Integrated Space Systems in December 2003,
since all activities have been integrated into SpaceDev, Inc.

F-13

(d) Use of estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions, including estimates of anticipated contract costs and
revenues utilized in the earnings recognition process, that affect the reported
amounts in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.

(e) Software Development Costs

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes the direct costs and allocated overhead
associated with the development of software products. Initial costs are
capitalized as development costs prior to the design of a detailed program or
working model. Costs incurred subsequent to the product release and development
costs performed under contract are charged to operations. Beginning in the
second quarter 2002, and completing in 2003, capitalized software costs were
being amortized over their estimated useful life of eighteen months using the
straight-line method. Periodically and at least annually, management performs a
review for impairment in accordance with SFAS No. 144. As of December 31, 2003,
the Company had fully amortized the capitalized software costs.

(f) Revenue recognition

The Company's revenues in 2003 were derived primarily from United States
government cost plus fixed fee (CPFF) contracts compared to a predominance of
fixed price contracts in 2002. Revenues from the CPFF contracts during 2003 are
recognized as expenses are incurred compared to revenues from fixed price
contracts in 2002, which were recognized using the percentage-of-completion
method. Estimated contract profits are taken into earnings in proportion to
revenues recorded. Revenues under certain long-term fixed price contracts,
which provide for the delivery of minimal quantities or require significant
amounts of development effort in relation to total contract value, are recorded
upon achievement of performance milestones or using the cost-to-cost method of
accounting where revenues and profits are recorded based on the ratio of costs
incurred to estimated total costs at completion. Losses on contracts are
recognized when estimated costs are reasonably determined. Actual results of
contracts may differ from management's estimates and such differences could be
material to the consolidated financial statements. Professional fees are billed
to customers on a time and materials basis, a fixed price basis or a
per-transaction basis depending on the terms and conditions of the specific
contract. Time and material revenues are recognized as services are performed
and costs incurred.

In 2002, billings in excess of costs incurred and estimated earnings represent
the excess of amounts billed in accordance with the contractual billing terms.
Costs in excess of billings represent the excess of actual costs incurred to the
amount that is billed to date.

Deferred revenue represents amounts collected from customers for projects,
products or services to be provided at a future date.

F-14

(g) Depreciation and amortization

Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting.

In December 2002, the Company entered an agreement to sell its interest in its
only facility, which closed in January 2003. The escrow transaction included
the sale of the land and building at 13855 Stowe Drive, Poway, CA 92064. In
conjunction with the sale of its only facility in December 2002, the Company
entered into a non-cancelable operating lease with the buyer to lease-back its
facilities for ten years (see Note 2). The base rent shall increase by 3.5% per
year (see Notes 2 and 9(c)).

(h) Research and development

The Company is actively engaged in design and development activities with its
commercial propulsion systems as well as its new projects with the Missile
Defense Agency and the Air Force Research Laboratory. The Company has several
SBIR (Small Business Innovation Research) grants from the government and
continues to seek new SBIR opportunities. Cost incurred under SBIR grants are
charged against revenues received under SBIR grants. Non-reimbursable research
and development expenditures relating to possible future products are expensed
as incurred. The Company incurred $281,280 in non-reimbursable research and
development costs during 2003 as compared to no recorded research and
development costs during 2002.

(i) Advertising

The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was approximately $1,460 and $900 in 2003 and
2002, respectively.

(j) Income taxes

Deferred income taxes are recognized for the tax consequences in future years of
the differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the years in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the combination of the tax payable for the year and the
change during the year in deferred tax assets and liabilities.

F-15

(k) Stock-based compensation

In October 1995, the FASB (Financial Accounting Standards Board) issued SFAS
(Statements of Financial Accounting Standards) No. 123, "Accounting for
Stock-Based Compensation." The Company adopted SFAS No. 123 in 1997. The
Company has elected to measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method prescribed by APB
(Accounting Principles Board) Opinion No. 25, "Accounting for Stock Issued to
Employees," and has provided pro forma disclosures as if the fair value based
method prescribed in SFAS No. 123 has been utilized. See Note 8(d). During
December 2002, FASB issued SFAS No. 148 "Accounting for Stock Based Compensation
- Transition and Disclosure", which amends SFAS No. 123 to require companies to
elect to recognize fair value stock based compensation costs in their financial
statements or to disclose the pro forma impact of those costs in the footnotes.
If the Company had accounted for these options in accordance with SFAS No. 123,
the total value of options granted during 2003 and 2002 would be amortized on a
pro forma basis over the vesting period of the options. Thus, the Company's
consolidated net loss would have been as follows:

Years Ended December 31, 2003 2002
------------------------ ------------ ----------
Net loss:
As reported. . . . . . . $(1,246,067) ($376,160)
Pro forma. . . . . . . . $(1,480,592) ($604,395)
------------------------ ------------ ----------
Loss per Share:
As reported. . . . . . . $ (0.08) ($0.03)
Pro forma. . . . . . . . $ (0.09) ($0.04)
------------------------ ------------ ----------

(l) Common stock, stock options and warrants to non-employees

The Company has valued its stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.

(m) Net loss per common share

Net loss per common share has been computed on the basis of the weighted average
number of shares outstanding, according to the rules of SFAS No. 128, "Earnings
per Share." Diluted net loss per share has not been presented, as the
computation would result in anti-dilution.

(n) Financial instruments

The Company's financial instruments consist primarily of cash, accounts
receivable, capital leases and notes payable. These financial instruments are
stated at their respective carrying values, which approximate their fair values.

F-16

(o) Segment reporting

The Company merged its Space Missions Division business segment and ISS business
segment in 2002. The Company has one other inactive subsidiary, SpaceDev
Oklahoma. The Company follows the requirement of SFAS No. 131 "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS No. 131").

(p) New accounting standards

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 requires that contracts with comparable characteristics be accounted for
similarly. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The adoption of this Statement did not have a material effect on the
consolidated financial statements of the Company.

F-17

2. FIXED ASSETS

In December 2002, the Company entered an agreement to sell its interest in its
only facility. As of December 31, 2002 the Company listed a receivable held for
sale of $3,150,124 which was realized when the transaction closed in January
2003. The escrow transaction included the sale of the land and building at
13855 Stowe Drive, Poway, CA 92064.

In conjunction with the sale, the Company entered into a lease agreement with
the buyer to lease-back its facilities (see Note 9(c)). The gain on the sale of
the facility was deferred and will be amortized in proportion to the gross
rental charged to expense over the lease term. Deferred gain of $1,172,720 will
be amortized over ten (10) years beginning February 2003 and ending in February
2013. This amortization will be included in the Company's non-operating income
and expense.

Fixed assets consisted of the following:

December 31,. . . . . . . . . 2003 2002
----------------------------- ---------- ----------
Capital leases. . . . . . . . $ 155,802 $ 145,365
Computer equipment. . . . . . 163,721 124,429
Building improvements . . . . 9,488 9,488
Furniture and fixtures. . . . 5,271 5,271
----------------------------- ---------- ----------
334,282 284,553
Less accumulated depreciation
and amortization . . . . . (196,750) (143,065)
----------------------------- ---------- ----------
$ 137,532 $ 141,488
---------- ----------

Depreciation and amortization expense for fixed assets was approximately $53,000
and $164,000 for the years ending December 31, 2003 and 2002, respectively.
Depreciation and amortization expense was significantly less during 2003 due to
the sale of our facility in January 2003 and the full amortization of the AMROC
technology. (See Note 3(a).)

F-18

3. ACQUISITIONS

All acquisitions have been accounted for using the purchase method of accounting
and intangible assets were amortized using the straight-line method. Initial
purchase price included stock issued at the date of acquisition, direct
acquisition costs and any guaranteed future consideration.

(a) AMROC
On August 14, 1998, the Company entered an Agreement for License and Purchase of
Technology from American Rocket Company (AMROC) with an unrelated individual who
had obtained ownership of such technology from AMROC. The intellectual property
acquired was hybrid rocket technology that may be modified and used in the
future operations of the Company. Upon execution of the Agreement, the Company
issued the seller a warrant to purchase 25,000 shares of restricted common stock
at a strike price equal to 50% of the market price of the common stock on the
issuance date. This warrant expired in 2003 having been unexercised.

For each of the three years following the Agreement date, the licensor received
warrants to purchase 25,000 shares of restricted common stock. In the fourth
through tenth year following the Agreement date, the licensor will receive a
warrant to purchase a number of shares based on the amount of revenue generated
from the acquired technology. All revenue based warrants are earned at a rate
of one share per $125 of revenue generated from the technology acquired. Under
the terms of the Agreement, the minimum number of shares to be issued is 100,000
and the maximum consideration shall not exceed warrants to purchase 3,000,000
shares of common stock or $6,000,000 in recognized value. Recognized value is
the sum of (a) the cumulative difference between the market price of the common
stock and the strike price and (b) the cumulative difference between the market
price on the date of exercise and the strike price for each warrant previously
exercised. To date, no revenue has been generated from the acquired technology.

The Company valued the warrants using the fair value method as prescribed by
SFAS No. 123. Under this method, the Company used the risk-free interest rate
at the date of grant, the expected volatility of the stock, the expected
dividend yield on the stock and the expected life of the warrants to determine
the fair value of the warrants. The risk-free rate of interest used to value
the initial issuance was 5.4 percent, a zero percent dividend yield was assumed
and the expected life of the warrants was five years from the date of issuance.
This calculation resulted in a fair value of $24,500 and was used as the value
of the intangible assets acquired. All warrants are immediately exercisable
after issuance and expire on the fifth anniversary of their issuance.

The Company's intangible assets were fully amortized in 2003. Amortization
expense was approximately $11,000 and $40,000 for 2003 and 2002, respectively.

Other intangible assets consisted of the following:

December 31,. . . . . . . . . 2003 2002
----------------------------- ---------- ----------
Other intangibles . . . . . . $ 116,292 $ 116,292
Less accumulated amortization (116,292) (105,736)
----------------------------- ---------- ----------
$ 0 $ 10,556
---------- ----------

F-19

4. NOTES PAYABLE

(a) Building and settlement notes
In December 2002, the Company entered into an agreement to sell its interest in
its only facility. The transaction closed in January 2003. The escrow
transaction included the sale of the land and building at 13855 Stowe Drive,
Poway, CA 92064. Net fixed assets were reduced by approximately $1.9 million
and notes payable were reduced by approximately $2.4 million while a deferred
gain was recorded. In conjunction with the sale, the Company entered into a
lease agreement with the buyer to leaseback its facilities. The Company's Chief
Executive Officer provided a guarantee for the leaseback. The gain on the sale
of the facility was deferred and amortized on a straight-line basis over the ten
(10) year term of the lease. Deferred gain of $1,172,720 is being amortized at
the rate of $117,272 per year for ten (10) years ending in January 2013. As of
December 31, 2003, the deferred gain was $1,065,221. This amortization will be
included in the Company's non-operating income and expense and totaled $107,499
in 2003.

Deferred Gain consisted of the following:

December 31,. . . . . . . 2003 2002
------------------------- ----------- -----

Deferred Gain . . . . . . $1,172,720 $ -
Less Amortization to date (107,499) -
------------------------- ----------- -----
$1,065,221 $ -
----------- -----

In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payment between
24 and 50 months with interest that ranged from 0% to 8%. At December 31, 2003
and 2002, the outstanding balances on these notes were $87,591 and $146,527,
with interest expense of $4,956 and $4,782, respectively.

Future minimum principal payments on notes payable are as follows:

Year Ending December 31,

2004 . . . . . . . . . . $41,464
2005 . . . . . . . . . . 36,670
2006 . . . . . . . . . . 9,457
-------
Total Settlement Notes . $87,591
------------------------ -------

(b) Related parties
The Company has a note payable to its CEO. At December 31, 2003 and 2002, the
balances were $585,522 and $738,496, respectively, with accrued interest of 10%.
The note was amended on March 20, 2000 to call for annual payments of not less
than $80,000 per year with interest at 10%.

F-20

Future minimum principal payments on notes payable, related parties are as
follows:

Year Ended December 31,
-----------------------
2004. . . . . . . . . . 80,000
2005. . . . . . . . . . 80,000
2006. . . . . . . . . . 80,000
2007. . . . . . . . . . 80,000
2008. . . . . . . . . . 80,000
Thereafter. . . . . . . $185,522
----------------------- --------
$585,522
----------------------- --------

Accrued interest expense on this note was $47,023 and $45,265 for 2003 and 2002,
respectively.

On June 3, 2003, the Company entered into a Security Agreement, Secured
Convertible Note, Registration Rights Agreement and Common Stock Purchase
Warrant, with Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form 8-K
dated June 18, 2003. Pursuant to the agreements, the Company received a $1
million revolving credit facility in the form of a three-year Convertible Note
secured by its assets. The net proceeds from the Convertible Note are for
general working capital needs. Advances on the Convertible Note may be repaid
at the Company's option, in cash or through the issuance of the Company's shares
of common stock. The Convertible Note carries an interest rate of WSJ Prime
plus 0.75% on any outstanding balance. In addition, the Company is required to
pay a collateral management payment of 0.55% of the average aggregate
outstanding balance during the month plus an unused line payment of 0.20% per
annum. The outstanding balance on the revolving credit facility at December 31,
2003 was $748,893, of which approximately $13,600 had been accrued for interest.

The Company filed a registration statement on Form SB-2 on July 25, 2003 in
connection with this transaction. The Form SB-2 was declared effective on
August 6, 2003. With the securities registered for public resale, the Company
has an option to pay amounts outstanding under the revolving credit facility by
converting shares of its common stock at the fixed conversion price of $0.55
per share on the first $1 million of principal, as long as the then current
market price is more than 118% of the fixed conversion price.

The Convertible Note includes a right of conversion in favor of Laurus. If
Laurus exercises its conversion right at any time or from time to time at or
prior to maturity, on any outstanding balance at the time, the Convertible Note
will be convertible into shares of the Company's common stock at a fixed
conversion price, subject to adjustments for stock splits, combinations and
dividends and for shares of common stock issued for less than the fixed
conversion price (unless exempted pursuant to the agreements). The fixed
conversion price will be adjusted after conversion of the first $1 million to
103% of the then fair market value of our common stock ("Adjusted Fixed
Conversion Price"). As of December 31, 2003, Laurus had converted 415,000
shares to reduce the amount borrowed under the revolving credit facility by
$228,250. The Company expensed approximately $126,500 for non-cash loan fee
expenses in 2003. Fair market value of the stock was determined by discounting
the closing market price on the date of the conversion by 20%.

F-21

Availability of funds under the revolving credit facility will be based on our
accounts receivables, except as waivers are provided by Laurus. An initial
three (3) month waiver was offered by Laurus, under which Laurus permitted a
credit advance up to $300,000, which amount might otherwise exceed eligible
accounts receivable during the period. Laurus subsequently extended the waiver
for an additional six (6) months, under which Laurus permitted a credit advance
up to $1 million, which amount might otherwise exceed eligible accounts
receivable during the period. The revolving credit facility is secured by all
of the assets of the Company.

In conjunction with this transaction, Laurus was paid a fee of $20,000 for the
first year (and the Company will be required to pay a continuation fee of
$10,000 for each year thereafter), which fee was expensed as additional interest
expense. In addition, Laurus received a warrant to purchase 200,000 shares of
the Company's common stock, as stated herein. The warrant exercise price is
computed as follows: $0.63 per share for the purchase of up to 125,000 shares;
$0.69 per share for the purchase of an additional 50,000 shares; and $0.80 per
share for the purchase of an additional 25,000 shares. The warrant exercise
price may be paid in cash, in shares of the Company's common stock, or by a
combination of both. The warrant expiration date is June 3, 2008. The warrant
exercise price and the number of shares underlying the warrant are subject to
adjustments for stock splits, combinations and dividends.

5. CONVERTIBLE DEBENTURES

From October 14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various directors and officers of
the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitled the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the note matures. The
maturity on the notes was six (6) months from issue date. On March 25, 2003, an
amendment was executed which extended these notes an additional six (6) months.
The convertible debentures were exercisable into a number of the Company's
common shares at a conversion price that equals the 20-day average ask price
less 10%, which was, established when the note was issued, or the initial
conversion price.

Concurrent with the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of the Company's common stock to the
subscribers. These warrants are exercisable for three (3) years from the date
of issuance at the initial exercise price which is equal to the 20-day average
ask price less 10%, which was established when the note was issued, or the
initial conversion price of the notes. Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. As a
result of the change to the maturity date of the convertible debt, the
amortization period for the debt discounts was also extended during the first
quarter in 2003.

F-22

On September 5, 2003, the Company repaid one-half of the convertible notes, with
the condition that the note holders convert the other half. Also, as a condition
of the partial repayment, the note holders were required to relinquish one-half
of the previously issued warrants. Finally, as additional consideration for the
transaction, the note holders were offered 5% interest on their notes, rather
than the stated 2.03%. All the note holders accepted the offer and the
convertible notes were retired. As of December 31, 2003, the Company recorded a
credit of $88,408, as debt discount recovery; therefore, for the year ending
December 31, 2003, the debt discount expense was $112,500. The Company also
expensed $131,411 for non-cash loan fee expense. Fair market value of the stock
was determined by discounting the closing market price on the date of the
transaction by 20%, based on the nature of the restricted securities.

Convertible debentures - beginning balance . $ 475,000
-------------------------------------------- ----------
Total interest expense incurred. . . . . . $ 20,236
Accrued interest paid - current year . . . $ (18,161)
Accrued interest paid - prior year . . . . $ (2,075)
Convertible debtures paid. . . . . . . . . $(237,500)
Convertible debtures converted . . . . . . $(237,500)
-------------------------------------------- ----------
$(475,000)
Convertible debentures - ending balance. . . $ 0
-------------------------------------------- ----------
-------------------------------------------- ----------

Debt discount (Warrants) - beginning balance $ 475,000
Amount forfeited . . . . . . . . . . . . . $(237,500)
Amount expensed prior year . . . . . . . . $(125,000)
Amount expensed current year . . . . . . . $(267,879)
Current year - adjustment. . . . . . . . . $ 155,379
-------------------------------------------- ----------
$(475,000)
-------------------------------------------- ----------
Debt discount (Warrants) - ending balance. . $ 0
-------------------------------------------- ----------
-------------------------------------------- ----------

6. INCOME TAXES
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of $2,190,000 and $1,372,000 as of December 31, 2003 and
2002, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$818,000 in 2003 from $1,372,000 at December 31, 2002 to $2,190,000 at December
31, 2003.

F-23

At December 31, 2003, the Company has federal and state tax net operating loss
and capital loss carryforwards of approximately $4,229,589 and $1,846,945,
respectively. The federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized. The State of California has
suspended the utilization of net operating loss for 2002 and 2003.

A reconciliation of the statutory income tax rates and the Company's effective
tax rate is as follows:

Years Ended December 31,. . . . . . . . . . 2003 2002
--------------------------------------------- ----- -----
Statutory U.S. federal rate . . . . . . . . 34% 34%
--------------------------------------------- ----- -----
State income taxes - net of federal benefit
Net operating loss for which no tax 5% 5%
Benefit is currently available . . . . . . (39%) (39%)
-------------------------------------------- ----- -----

The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets consist of the following:

December 31,. . . . . . . . . . . . . 2003 2002
--------------------------------------- ------------ ------------
Deferred tax assets:
---------------------------------------
Loss carryforwards . . . . . . . . . $ 1,588,000 $ 1,262,000
Deferred gain on sale of building 435,000 -
Temporary differences. . . . . . . . 127,000 100,000
Research and development credits . . 40,000 10,000
Gross deferred tax assets . . . . . . 2,190,000 1,372,000
--------------------------------------- ------------ ------------

Valuation allowance . . . . . . . . . (2,190,000) (1,372,000)
$ - $ -
------------ ------------

7. EMPLOYEE BENEFIT PLAN

(a) Profit sharing 401(k) plan

During 1997, the Company adopted a 401(k) retirement savings plan for its
employees, which allows each eligible employee to voluntarily make pre-tax
salary contributions up to 15% of their compensation. The Company may elect to
make a matching contribution. The total Company contribution and participant
salary reduction may not exceed 25% of the compensation of eligible
participants. During 2003 and 2002, the Company did not contribute to the Plan.

(b) Incentive stock option and employee stock purchase plans

At its 1999 Annual Stockholder Meeting, the shareholders adopted an Incentive
Employee Stock Option Plan under which its Board of Directors may grant its
employees, directors and affiliates Incentive Stock Options, Supplemental Stock
Options and other forms of stock-based compensation, including bonuses or stock
purchase rights. Incentive Stock Options, which provide for preferential tax
treatment, are only available to employees, including officers and affiliates,
and may not be issued to non-employee directors. The exercise price of the
Incentive Stock Options must be 100% of the fair market value of the stock on
the date the option is granted. Pursuant to our plan, the exercise price for
the Supplemental Stock Options will not be less than 85% of the fair market
value of the stock on the date the option is granted. The Company is required
to reserve an amount of common shares equal to the number of shares, which may
be purchased as a result of awards made under the Plan at any time.

F-24

At the 2000 Annual Stockholder Meeting, the shareholders approved an amendment
to the Stock Option Plan of 1999, increasing the number of shares eligible for
issuance under the Plan to 30% of the then outstanding common stock and allowing
the Board of Directors to make annual adjustments to the Plan to maintain a 30%
ratio to outstanding common stock at each annual meeting of the Board of
Directors. The Board, at its annual meetings in 2002 and 2003, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet the Company's needs. As of December 31,
2003, 4,184,698 shares were authorized for issuance under the Plan, 3,124,807 of
which are currently subject to outstanding options and awards. The Stock Option
Plan of 1999 was registered with the U.S. Securities & Exchange Commission on
Form S-8.

During 2003, the Company issued non-statutory options to purchase 140,000 shares
to its independent directors for attendance at its 2003 Board of Directors
meetings. In addition to the Stock Option Plan of 1999, its shareholders
adopted the 1999 Employee Stock Purchase Plan with 1,000,000 shares reserved
under the plan and authorized its Board of Directors to make twelve consecutive
offerings of our common stock to its employees. The 1999 Employee Stock
Purchase Plan has been instituted and the first employees enrolled in the plan
in August 2003. The first shares of common stock were issued under the Plan in
February 2004. The exercise price for the Stock Purchase Plan will not be less
than 85% of the fair market value of the stock on the date the stock is
purchased. During 2003 employees contributed $5,498 to the employee stock
purchase plan; however, no shares were issued under the plan as of December 31,
2003.

8. STOCKHOLDERS' EQUITY

(a) Convertible preferred stock

On November 4, 1997, 82,450 shares of $.001 par value convertible preferred
stock were issued to SD Holdings, LLC in exchange for 8,245,000 common shares of
the Company that were issued on October 22, 1997 (see Notes 1(a) and 8(b)).
Each share of convertible preferred stock was convertible, at the option of the
holder, into 100 shares of common stock. The conversion ratio was subject to
certain anti-dilution adjustments, and the holder of each share of preferred
stock was entitled to one vote for each share of common stock into which it
would convert. These shares were converted into 8,245,000 shares of the
Company's common stock on May 11, 1999.

(b) Common stock

On October 22, 1997, PDGI issued 8,245,000 of its $.0001 par value common stock
for 100 percent (1,000,000 shares) of SpaceDev's common stock owned by SpaceDev,
LLC, a Nevada corporation. Upon the acquisition of the SpaceDev stock, SpaceDev
was merged into PDGI and, on December 17, 1997, the name of the Company was
changed to SPACEDEV, INC. On November 4, 1997, these common shares were
exchanged for 82,450 shares of convertible preferred stock. See Note 8(a). On
May 11, 1999, the Company issued 8,245,000 shares of common stock upon the
conversion of the preferred shares.

F-25

During 2003 and 2002, the Company issued 7,500 and 7,000, shares of its common
stock for employee awards and services and for summer & student interns and
recorded expenses of $9,170 and $2,900, respectively. The fair value of the
shares issued was calculated using the closing price on the date of issuance.

During 2002, the Company recovered 500,000 shares of stock for a credit of
$455,000 during 2002 pursuant to an arbitration award issued against EMC
Holdings, Inc. The Company recorded the credit during 2002 to offset the
expense that was recorded during 2001. On June 18, 2001, SpaceDev entered into
a relationship with two individuals (doing business as EMC Holdings Corporation
("EMC")) whereby EMC was to provide certain consulting and advisory services to
the Company. EMC received the first installment of 500,000 shares of common
stock on June 26, 2001. Total expense for the initial stock issuance through
September 30, 2001 was $455,000. Pursuant to a demand for arbitration filed on
November 7, 2001, the Company sought the return of all or a portion of the
shares issued to EMC. EMC filed its own claim with the American Arbitration
Association on November 13, 2001, alleging that the Company owed EMC $118,000 in
fees, plus damages to be proven at arbitration.

A three-day arbitration hearing was held in May and June 2002 with respect to
claims arising out of consulting and advisory service agreements between the
Company and EMC. On July 17, 2002, an interim award was issued in favor of the
Company against EMC, ordering the return of the initial installment of 500,000
shares and denying EMC's claim for $118,000. On October 22, 2002, a status
conference was held and a tentative final award was issued again in the favor of
the Company. Included in this tentative final ruling was an award of
approximately $83,000 in attorney and arbitration fees to the Company. The
tentative final ruling became effective on October 29, 2002, and was submitted
to the Superior Court of California, Orange County, for entry of judgment.

Because collection of the attorney and arbitration fees award is not assured,
the Company has expensed all of its fees related to this matter, any recovery of
the fees will be recorded as income in the period they are received; however, at
this time, the Company does not expect any recovery, and in June 2003, the
Company ceased efforts to recover the awarded fees, as it was determined that
the cost to pursue collection exceeded the likelihood of collection. The return
of the 500,000 shares, as provided in the interim award issued on July 17, 2002,
was recorded in the third quarter of 2002 as a reversal of the original expense
recorded. Because the original expense was not recorded as an extraordinary
item, the reversal of the expense did not qualify as an extraordinary item.

In connection with the signing of the agreement, the Company's majority
shareholder issued 50,000 shares of common stock to EMC with a fair value of
approximately $45,000. The shares were recorded as a contribution of capital
and additional expense related to the EMC agreement in accordance with the SEC's
Staff Accounting Bulletin number 79.

In June 2003, the Company ceased its efforts to recover the awarded fees, as it
determined the cost to pursue collection exceeded the likelihood of collection.

F-26

On November 5, 2000, the Company commenced a private placement offering (PPO)
for a maximum of 1,000,000 shares of the Company's $0.0001 par value common
stock and warrants to purchase an additional 1,000,000 shares of common stock
(the "Units"). The offering price of the Unit(s) was the five-day average of
the bid and ask price for the Company's common stock on the date of issuance,
with a minimum per Unit price of $1.00. The warrants allowed the holder to
acquire additional shares at $0.50 above the offering price of the shares. The
Company sold to one related-party investor under these terms.

On March 2, 2001, the PPO price was amended to the average of the high bid
prices on the date of issuance and four preceding days, with no minimum per
share price, and the warrants were amended to allow the holder to acquire
additional shares at the Unit price.

The Company sold 153,060 Units under the PPO during 2002 for $75,000.

On January 16, 2003 and February 14, 2003, pursuant to an extension of the PPO,
the Company sold 665,188 and 196,079 Units, respectively. The Company received
approximately $326,000 and $100,000, respectively, for the Units sold under the
PPO during the first quarter 2003. The PPO was subsequently closed.

Concurrent with the issuance of the convertible debentures from October 2002
through November 2002, the Company issued to subscribers warrants to purchase up
to 1,229,705 shares of the Company's common stock. On September 5, 2003, the
Company repaid one-half of the convertible notes, with the condition that the
note holders would convert the other half. As a condition of the partial
repayment, the note holders were required to relinquish one-half of the
previously issued warrants reducing the total warrants issued under the
convertible debt program to 614,853. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, which is
equal to the 20-day average asking price less 10% established when the notes
were issued. Upon issuance the warrants were valued using the Black-Scholes
pricing model based on the expected fair value at issuance and the estimated
fair value was also recorded as debt discount. As of December 31, 2003, the
Company had other warrants outstanding issued as part of its private placement
that allow the holders to purchase up to 2,285,931 shares of common stock at
prices between $0.37 and $1.05 per share. The warrants may be exercised any
time within three (3) and five (5) years of issuance.

(d) Stock options

On November 21, 1997, the Company entered into a five (5) year employment
agreement with its CEO. As part of the employment agreement, the Company
granted options to the CEO to purchase up to 2,500,000 shares of the Company's
$.0001 par value restricted common stock.

The options are subject to the following vesting conditions, which were amended
on January 21, 2000, with an option for the board to award an additional
1,500,000 options at a later date, the exercise prices set forth:

F-27

All options expire ten (10) years from date of amendment.

Exercise
Number price per
Of shares Vesting Conditions share
------- ---------------------------------------------------------- -------------------

Granted Options:
500,000. . . . . Currently vested $ 1.00
500,000. . . . . Obtaining $6,500,000 additional equity capital $ 1.50
500,000. . . . . Financing and executing a definitive space launch agreement $ 2.00
500,000. . . . . Launching of first lunar or deep-space mission $ 2.50
500,000. . . . . Successful completion of first lunar or deep-space mission $ 3.00
Options to be Granted upon the Occurrence of Certain Events:
250,000. . . . . Upon the Company market capitalization reading $250 million $ 5.00
500,000. . . . . Upon the Company market capitalization reading $500 million $ 10.00
750,000. . . . . Upon the Company market capitalization reading $1 billion $ 20.00
------- ---------------------------------------------------------- -------------------

In accordance with APB 25, the Company recognized $500,000 of compensation
expense and $250,000 of deferred compensation in 1997. The options granted to
the CEO are subject to vesting conditions and have exercise prices between $1.00
and $3.00 per share.

On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted to the CEO at the exercise price of $0.9469 per share with
a set vesting schedule of 3,333 shares per year after issuance with the third
year having 3,334 options vest. These options expire five years from grant
date.

The following summarizes stock option activity related to all of the option plan
and employee compensation agreements:

F-28

Weighted
Options Average
Outstanding Exercise Prices
------------ ----------------

Balance at January 1, 2002 . 4,360,162 1.67
Granted. . . . . . . . . . . 1,386,110 0.50
Exercised. . . . . . . . . . 0 -
Expired. . . . . . . . . . . (297,500) 0.88
---------------------------- ------------ ----------------

Balance at December 31, 2002 5,448,772 0.91
Granted. . . . . . . . . . . 1,219,615 0.76
Exercised. . . . . . . . . . (37,000) (0.53)
Expired. . . . . . . . . . . (1,006,580) (0.52)
---------------------------- ------------ ----------------

Balance at December 31, 2003 5,624,807 1.39
---------------------------- ------------ ----------------

The weighted average fair value of options granted to employees under the plan
during 2003 and 2002 was $0.76 and $0.50, respectively. At December 31, 2003
and 2002, there were 2,266,520 and 2,064,716 options exercisable at a weighted
average exercise price of $1.05 and $0.42 per share, respectively. The weighted
average remaining life of outstanding options under the plan at December 31,
2003 was 4.78 years.

Weighted-Average Weighted-
Remaining Contractual Average
Range of Number of Life of Shares Number of Exercisable
Exercise Outstanding Outstanding Exercisable Price
Price
---------- ---------------- ------------------------- ----------------- ----------------

0.42-0.99 1,511,954 4.34 552,001 0.61
1.00-1.99. 2,610,631 4.02 1,712,297 1.19
2.00-2.99. 1,002,222 6.54 2,222 2.25
3.00-3.50. 500,000 6.54 - -
5,624,807 4.78 2,266,520 $ 1.05
---------- ---------------- ------------------------- ----------------- ----------------

The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 2003 and 2002 using the minimum value
method as prescribed by SFAS No. 123. Under this method, the Company used the
risk-free interest rate at date of grant, the expected volatility, the expected
dividend yield and the expected life of the options to determine the fair value
of options granted. The risk-free interest rates ranged from 6.0% to 6.5%;
expected volatility of 117% and the dividend yield was assumed to be zero, and
the expected life of the options was assumed to be three to five years based on
the average vesting period of options granted.

F-29

9. COMMITMENTS AND CONTINGENCIES
(a) Capital leases
The Company leases certain equipment under non-cancelable capital leases, which
are included in fixed assets as follows:

December 31,. . . . . . . . . 2003 2002
----------------------------- ---------- ---------
Computer equipment. . . . . . $ 155,802 $145,365
Less accumulated depreciation (106,562) (76,161)
---------- ---------
$ 49,240 $ 69,204
---------- ---------

Future minimum lease payments are as follows:

Year Ending December 31, 2003
2004. . . . . . . . . . . . . . . . . . $ 11,665
2005. . . . . . . . . . . . . . . . . . $ 4,425
2006. . . . . . . . . . . . . . . . . . $ 1,526
2007. . . . . . . . . . . . . . . . . . $ -
Thereafter. . . . . . . . . . . . . . . $ -
--------------------------------------- ---------
Total minimum lease payments. . . . . . $ 17,616
Amount representing interest. . . . . . $ 2,031
--------------------------------------- ---------
Present value of minimum lease payments $ 15,585

Total obligation. . . . . . . . . . . . $ 15,585
Less current portion. . . . . . . . . . $(10,332)
--------------------------------------- ---------
Long-term portion . . . . . . . . . . . $ 5,253
--------------------------------------- ---------

(b) Other accrued liabilities
During 2003, the Company accrued expenses in connection with current projects
and commitments. The total of these accruals were $248,530 as of December 31,
2003.

In November 2002, the Company entered an agreement to sell its interest in its
only facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building at 13855 Stowe Drive, Poway, CA
92064. The fees that were incurred for the sale of the building were $121,311
and recorded as other accrued liabilities. The fees include broker fees, escrow
and title fees and property taxes.

F-30

In conjunction with the sale of its only facility, the Company entered into a
non-cancelable operating lease with the buyer to lease-back its facilities for
ten (10) years (see Note 2). The base rent is $25,678 per month and will
increase by 3.5% per year. Mr. Benson provided a guarantee for the leaseback.

10. CONCENTRATIONS AND CONTINGENCIES

(a) Credit risk

The Company maintains cash balances at various financial institutions primarily
located in San Diego, California and New York, New York. The accounts at these
institutions are secured by the Federal Deposit Insurance Corporation up to
$100,000. The Company has not experienced any losses in such accounts.

(b) Customer

During 2002, the Company had a major customer that accounted for sales of
approximately $1,727,000 or 51% of consolidated revenue. Sales from this
customer were approximately $346,000 and the contract with this customer was
successfully completed during 2003. During 2003, the Company had three major
customers that accounted for sales of approximately $1,782,600 or 60% of
consolidated revenue. At December 31, 2003 and 2002, the amount receivable from
these customers was approximately $160,200 and $50,000, respectively.

In November 1999, the Space Missions Division was awarded a turnkey mission
contract by the Space Sciences Laboratory at UCB worth as of December 31, 2002
approximately $7.2 million, including two change orders worth approximately
$412,000 June 12, 2002 and October 7, 2002. This contract represented 51% of
the Company's revenue in 2002. The contract concluded on December 31, 2003.

11. SUBSEQUENT EVENTS

On March 31, 2004, the Company was awarded a $43,362,271, five-year,
cost-plus-fixed fee indefinite delivery/indefinite quantity contract to conduct
a micro satellite distributed sensing experiment, an option for a laser
communications experiment, and other micro satellite studies and experiments as
required in support of the Advanced Systems Deputate of the Missile Defense
Agency. This effort will be accomplished in a phased approach. The total
five-year contract has a ceiling amount of $43,362,271. The principal place of
performance will be Poway, California. The Company expects to complete the work
under the contract before February 2009. Government contract funds will not
expire at the end of the current government fiscal year. The micro satellite
distributed sensing experiment is intended to design and build up to six
responsive, affordable, high performance micro satellites to support national
missile defense. The milestone-based, multiyear, multiphase contract has an
effective start date of March 1, 2004. The first phase is expected to be
completed this year and will result in detailed mission and microsat designs.
The estimated first phase revenue is $1.1 million. The overall contract calls
for the Company to analyze, design, develop, fabricate, integrate, test, operate
and support a networked cluster of three formation-flying boost phase and
midcourse tracking microsatellites, with an option to design, develop,
fabricate, integrate, test, operate and support a second cluster of three
formation flying microsats to be networked on-orbit with high speed laser
communications technology. The second phase is anticipated to begin September
1, 2004 and run through 2005.

F-31

On March 31, 2004, the Company negotiated an amendment to its Secured
Convertible Note dated June 3, 2003 with the Laurus Master Fund to add a fixed
conversion price at $0.85 per share for the next $500,000 converted under the
revolving credit facility after the initial $1 million conversion. In exchange
for the amendment, Laurus granted the Company a six-month waiver to utilize the
full revolving credit facility in advance of eligible accounts. At December 31,
2003, Laurus had converted 415,000 shares under the revolving credit facility,
which represented approximately $228,000 of debt converted to equity.

F-32

SPACEDEV, INC.
AND SUBSIDIARIES
CONTENTS

REPORT OF INDEPENDENT AUDITORS F-2

FINANCIAL STATEMENTS

Consolidated Balance Sheets at December 31, 2002 and 2001 G-3 to G-4
Consolidated Statements of Operations for the Years Ending
December 31, 2002 and 2001 G-5
Consolidated Statements of Stockholders' Deficit for the Years
Ending December 31, 2002 and 2001 G-6 to G-8
Consolidated Statements of Cash Flows for the Years Ending
December 31, 2002 and 2001 G-9 to G-10
Notes to Consolidated Financial Statements for the Years Ending
December 31, 2002 and 2001 G-11 to G-30

G-1

Report of Independent Auditors

Board of Directors and Stockholders
SPACEDEV, INC.

We have audited the accompanying consolidated balance sheets of SPACEDEV, INC.
AND SUBSIDIARIES (see Note 1(c) to the consolidated financial statements) as of
December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2002
and 2001, and the consolidated results of their operations and their cash flows
for each of the years then ended, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(b) to
the consolidated financial statements, the Company incurred net losses of
$376,160 and $1,855,871 for the years ended December 31, 2002 and 2001,
respectively, and had working capital deficits of $197,381 and $1,002,390 as of
December 31, 2002 and 2001, respectively. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1(b). The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

San Diego, California
February 13, 2003

G-2

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 2001
------------------------------------------------------------------ ---------- ----------

ASSETS

CURRENT ASSETS
Cash (Note 10(a)) $ 27,648 $ 211,637
Accounts receivable (Note 10(b)) 82,325 290,615
Inventory 1,729 -
Receivable for assets held for sale (Note 2) 3,150,124 -
Costs in excess of billings and estimated earnings (Note 1(f)) 281,175 -
Other current assets - 6,974

Total current assets 3,543,001 509,226

FIXED ASSETS - NET (NOTES 1(G) AND 2) 141,488 2,180,569

CAPITALIZED SOFTWARE COSTS (NOTE 1(E)) 103,508 207,016

OTHER ASSETS (NOTE 3) 23,960 116,840

$3,811,957 $3,013,651

The accompanying notes are an integral part of these
consolidated financial statements.
G-3

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2002 2001
---------------------------------------------------------------------- ------------- -------------

LIABILITIES AND STOCKHOLDERSDEFICIT

CURRENT LIABILITIES
Current portion of notes payable (Note 4(a)) $ 2,431,134 $ 61,761
Current portion of capitalized lease obligations (Note 9(a)) 32,783 31,130
Notes payable - related party (Note 4(b)) 174,665 80,000
Convertible debt notes payable (Note 5) 127,075 -
Accounts payable and accrued expenses 598,480 397,914
Accrued payroll, vacation and related taxes 174,188 158,252
Customer deposits and deferred revenue (Note 1(f)) 69,402 227,721
Billing in excess of costs incurred and estimated earnings
Note 1(f)) - 302,553
Provision for anticipated loss (Note 10(c)) 11,044 102,285
Other accrued liabilities (Note 9(b)) 121,611 150,000

Total current liabilities 3,740,382 1,511,616

NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(A)) 89,052 2,374,096

CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(A)) 8,431 26,942

NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(B)) 563,831 585,232

DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2) 1,172,720 -

DEFERRED REVENUE (NOTE 1(F)) 5,000 5,000

Total liabilities 5,579,416 4,502,886

COMMITMENTS AND CONTINGENCIES (NOTES 9)

STOCKHOLDERSDEFICIT
Convertible preferred stock, $.0001 par value, 10,000,000 shares
authorized, no shares issued or outstanding (Note 8(a)) - -
Common stock, $.0001 par value; 25,000,000 shares authorized, and
14,477,640 and 14,817,580 shares issued and outstanding,
respectively (Note 8(b)) 1,447 1,481
Additional paid-in capital 8,302,803 8,204,831
Additional paid-in capital - stock options (Note 8(d)) 750,000 750,000
Deferred compensation (Note 8(d)) (250,000) (250,000)
Accumulated deficit (10,571,709) (10,195,547)

Total stockholdersdeficit (1,767,459) (1,489,235)

$ 3,811,957 $ 3,013,651

The accompanying notes are an integral part of these
consolidated financial statements.
G-4

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2002 2001
------------------------------------------------------ ------------ ------------

NET SALES $ 3,370,118 $ 4,099,094

Cost of sales 3,322,029 2,808,028
Anticipated loss on uncompleted contract (Note 10(c)) (32,299) (397,238)

TOTAL COST OF SALES 3,289,730 2,410,790

GROSS MARGIN 80,388 1,688,304

OPERATING EXPENSES
General and administrative (including stock-based
compensation of $2,938 and $180,873 in 2002
& 2001 respectively) (Note 1(k) and 8(b)) 521,468 1,144,592
EMC - stock based compensation (Note 8(b)) (455,000) 455,000
- 922,932
Goodwill and amortization - 519,000
Research and development (Note 1(h)) - 198,400

TOTAL OPERATING EXPENSES 66,468 3,239,924

LOSS FROM OPERATIONS 13,920 (1,551,620)

OTHER EXPENSE
Interest expense (263,480) (302,651)
Non-cash interest expense debt discount (Note 5) (125,000) -

TOTAL OTHER EXPENSE (388,480) (302,651)

LOSS BEFORE INCOME TAXES (374,560) (1,854,271)
Income tax provision (Notes 1(j) and 6) 1,600 1,600

NET LOSS $ (376,160) $(1,855,871)

NET LOSS PER SHARE:
Net loss $ (0.03) $ (0.13)
----------------------------------- ------------ ------------

Weighted-Average Shares Outstanding 14,744,423 14,440,354

The accompanying notes are an integral part of these
consolidated financial statements.
G-5

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

Convertible
Preferred Stock Common Stock
--------------- -------------
Shares Amount Shares Amount
--------------- ------- ------------- --------

BALANCE AT JANUARY 1, 2001 - $ - 14,005,229 $ 1,400
Common stock issued for cash (Note 8(b)) - - 156,752 16
Common stock issued for services (Note 8 (b)) - - 605,599 60
Common stock issued to former employee (Note 8 (b)) - - 50,000 5
Common stock exchanged by related party for services (Note 8(b)) - - -
Options issued for services (Note 8(d)) - - - -
Warrants issued for acquisition of intangible assets (Note 3(b)) - - - -

Net loss - - - -
-------- --------------- ------- ------------- --------

BALANCE AT DECEMBER 31, 2001 - - 14,817,580 1,481
Common stock issued for cash (Note 8(b)) - - 153,060 15
Reversal of common stock issued for services (Note 8 (b)) - - (493,000) (49)
Warrants issued for convertible debt program (Note 5 and 8(c)) - - - -

Net loss - - - -
-------- --------------- ------- ------------- --------

BALANCE AT DECEMBER 31, 2002 - $ - 14,477,640 $ 1,447

The accompanying notes are an integral part of these
consolidated financial statements.
G-6

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

Additional
Additional Paid-In
Paid-in Capital - Deferred
Capital Stock Options Compensation

BALANCE AT JANUARY 1, 2001 $ 7,360,155 $ 750,000 $ (250,000)
Common stock issued for cash (Note 8(b)) 119,984 - -
Common stock issued for services (Note 8 (b)) 545,047 - -
Common stock issued to former employee (Note 8 (b)) 45,165 - -
Common stock exchanged by related party for services (Note 8(b)) 45,500 - -
Options issued for services (Note 8(d)) 67,055 - -
Warrants issued for acquisition of intangible assets (Note 3(b)) 21,925 - -

Net loss - - -
-------- ------------ -------------- --------------

BALANCE AT DECEMBER 31, 2001 8,204,831 750,000 (250,000)
Common stock issued for cash (Note 8(b)) 74,985 - -
Reversal of common stock issued for services (Note 8 (b)) (452,013) - -
Warrants issued for convertible debt program (Note 5 and 8(c)) 475,000 - -

Net loss - - -
-
--------------

BALANCE AT DECEMBER 31, 2002 $ 8,302,803 $ 750,000 $ (250,000)

The accompanying notes are an integral part of these
consolidated financial statements.
G-7

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

Accumulated
Deficit Total

BALANCE AT JANUARY 1, 2001 $ (8,339,678) $ (478,123)
Common stock issued for cash (Note 8(b)) - 120,000
Common stock issued for services (Note 8 (b)) - 545,107
Common stock issued to former employee (Note 8 (b)) - 45,170
Common stock exchanged by related party for services (Note 8(b)) - 45,500
Options issued for services (Note 8(d)) - 67,055
Warrants issued for acquisition of intangible assets (Note 3(b)) - 21,925

Net loss (1,855,871) (1,855,871)
-------- ------------- ------------
-
BALANCE AT DECEMBER 31, 2001 (10,195,549) (1,489,237)
Common stock issued for cash (Note 8(b)) - 75,000
Reversal of Common stock issued for services (Note 8 (b)) - (452,062)
Warrants issued for convertible debt program (Note 5 and 8(c)) - 475,000
-
Net loss (376,160) (376,160)
-------- ------------- ------------

BALANCE AT DECEMBER 31, 2002 $(10,571,709) $(1,767,459)

The accompanying notes are an integral part of these
consolidated financial statements.
G-8

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2002 2001
------------------------------------------------------------------- ---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(376,160) $(1,855,871)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 357,692 710,245
Contributed assets (16,251) -
Loss on disposal of assets 7,410 -
Non-cash interest expense - convertible debt program 125,000 -
Impairment of goodwill - 922,932
Common stock issued for compensation and services (452,062) 702,832
Change in operating assets and liabilities:

Accounts receivable 208,290 25,733
Prepaid and other current assets 10,168 -
Inventory (1,729) -
Costs in excess of billings and estimated earnings (281,175) -
Other assets - (2,032)
Accounts payable and accrued expenses 202,641 38,349
Accrued payroll, vacation and related taxes 15,936 (1,922)
Customer deposits and deferred revenue (158,319) 74,851
Billings in excess of costs incurred and estimated earnings (302,553) (30,892)
Provision for anticipated loss (91,241) (758,422)
Accrued interest - related party 45,265 53,266
Other accrued liabilities 115 189,402
------------------------------------------------------------------- ---------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (706,973) 68,471
CASH FLOWS FROM INVESTING ACTIVITIES
Advance on sale of assets held for sale 50,000 -
Purchases of fixed assets (1,900) (42,624)
---------- ------------
Cash acquired in purchase (disposal) of subsidiaries - -
------------------------------------------------------------------- ---------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 48,100 (42,624)
------------------------------------------------------------------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in bank line of credit - -
Proceeds from convertible debt program 475,000 -
Principle payments on notes payable (65,785) (14,840)
Principal payments on capitalized lease obligations (37,330) (98,993)
Payments on notes payable - related party (66,667) (80,000)
Proceeds on notes payable - related party 94,666 -
Proceeds from issuance of common stock 75,000 120,000
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 474,884 (73,833)
------------------------------------------------------------------- ---------- ------------

CASH AT BEGINNING OF YEAR 211,637 259,623
------------------------------------------------------------------- ---------- ------------

CASH AT END OF YEAR $ 27,648 $ 211,637
------------------------------------------------------------------- ---------- ------------

The accompanying notes are an integral part of these
consolidated financial statements.
G-9

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2002 2001
--------------------------------------------------- -------- --------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $310,821 $249,385
Income Taxes $ 1,600 $ 1,600

NONCASH INVESTING AND FINANCING ACTIVITIES:

During 2002 and 2001 the Company acquired fixed assets under capital lease
Agreements of $20,472 and $17,310, respectively.

During 2002 and 2001 the Company issued 7,000 and 655,599 shares of restricted
Common for consulting services with a fair value of approximately$2,900 and
$590,000, respectively. The Company also recovered 500,000 shares issued during
2001 and recorded a credit of $455,000. The fair value of the shares was
calculated using the average closing price surrounding the issuance date. See
Note 8(b)).

During 2002 the Company issued warrants to purchase 1,229,705 shares of common
Stock under the Company's convertible debt program. A debt discount of $475,000
was Recorded related to this convertible debt (See Note 5). These warrants were
valued in Accordance with SFAS 123 for fair value of approximately $475,000.

In August 2001 the Company issued warrants to purchase 25,000 shares of
restricted common stock to acquire certain technology. These warrants were
valued in accordance with SFAS 123 for fair value of approximately $22,000.

During 2001, the Company issued options to purchase 80,000 shares of common
stock for services. These options were valued in accordance with SFAS 123 for
fair value of approximately $67,000.

The accompanying notes are an integral part of these
consolidated financial statements.
G-10

(a) Nature of operations
SPACEDEV, INC. (the "Company") is engaged in the conception, design,
development, manufacture, integration and operations of space technology
systems, products and services. The Company is currently focused on the
commercial development of low-cost satellites and their subsystems, as well as
providing engineering technical services to aerospace companies. The Company
was incorporated under the laws of Colorado on December 23, 1996 as Pegasus
Development Group, Inc. (PDGI).

SpaceDev, LLC of Colorado was originally formed in 1997 for commercial space
exploration and was the sole owner of shares of common stock of SpaceDev (a
Nevada corporation) ("SpaceDev"). On October 22, 1997, PDGI issued 8,245,000 of
its $.0001 par value common stock for 100 percent (1,000,000 shares) of
SpaceDev's common stock owned by SpaceDev, LLC. Upon the acquisition of the
SpaceDev stock, SpaceDev was merged into PDGI and, on December 17,1997, PDGI
changed its name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its
name to SD Holdings, LLC on December 17, 1997. (See Notes 8(a) and 8(b)).

For accounting purposes, the transaction was accounted for as a reverse merger
with the Company as the acquirer. Since SpaceDev had minimal assets prior to
the merger, the transaction was accounted for as the sale of the Company's
common stock for net assets of $1,232.

(b) Liquidity/going concern
The accompanying consolidated financial statements as of December 31, 2002 have
been prepared assuming the Company will continue as a going concern. However,
the Company had working capital deficits of $197,381 and $1,002,390 as of
December 31, 2002 and 2001, respectively, and incurred net loss of $376,160 and
$1,855,871 for the years ended December 31, 2002 and 2001, respectively.
Although there was a significant reduction in the working capital deficit, items
remain that raise substantial doubt about the Company's ability to continue as a
going concern. Subsequent to December 2002, management completed a sale
leaseback transaction (Note 12) and intends to obtain new commercial and
government contracts and to seek additional financing through a combination of
public and private debt or equity placements, commercial project financing and
government programs to fund future operations and commitments. There is no
assurance that new contracts or additional debt or equity financing needed to
fund operations will be available or obtained in sufficient amounts necessary to
meet the Company's needs.

G-11

(c) Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned inactive subsidiaries: Integrated Space Systems, Inc. (ISS) (a
California Corporation); SpaceDev Australia; and, SpaceDev Oklahoma.

(d) Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions, including estimates of anticipated contract costs and revenues
utilized in the earnings recognition process, that affect the reported amounts
in the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

(e) Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes the direct costs and allocated overhead
associated with the development of software products. Initial costs are
capitalized as development costs prior to the design of a detailed program or
working model. Costs incurred subsequent to the product release and development
costs performed under contract are charged to operations. During 2000 the
Company capitalized approximately $207,000 of costs related to the development
of satellite communications software. Beginning in the second quarter 2002,
capitalized software costs are being amortized over their estimated useful life
of eighteen months using the straight-line method. Periodically and at least
annually, management performs a review for impairment in accordance with SFAS
No. 144.

(f) Revenue recognition
The Company's revenues are derived primarily from fixed price contracts and are
recognized using the percentage-of-completion method. Estimated contract
profits are taken into earnings in proportion to recorded sales. Sales under
certain long-term fixed price contracts, which provide for the delivery of
minimal quantities or require significant amounts of development effort in
relation to total contract value, are recorded upon achievement of performance
milestones or using the cost-to-cost method of accounting where sales and
profits are recorded based on the ratio of costs incurred to estimated total
costs at completion. Losses on contracts are recognized when estimated costs
are reasonably determined (see Note 10(c)). Actual results of contracts may
differ from management's estimates and such differences could be material to the
consolidated financial statements. Professional fees are billed to customers on
a time and materials basis, a fixed price basis or a per-transaction basis.
Time and materials revenues are recognized as services are performed.

Billings in excess of costs incurred and estimated earnings represent the excess
of amounts billed in accordance with the contractual billing terms. Costs in
excess represent the excess of actual costs incurred to the amount that is
billed to date.

G-12

(f) Revenue recognition cont.
Deferred revenue represents amounts collected from customers for products or
services to be provided at a future date.

(g) Depreciation and amortization
Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting in accordance with Statement
of Financial Accounting Standards No. 144. Goodwill and other intangible assets
were created upon the acquisition of the Company's subsidiaries. Intangible
assets are amortized over their assets' estimated future useful lives on a
straight-line basis over three to five years. Goodwill and other intangibles
are periodically reviewed for impairment based on an assessment of future
operations to ensure they are appropriately valued in accordance with Statement
of Financial Accounting Standards No. 142. Effective November 2001, there will
be no more amortization of goodwill (see Note 3).

In December 2002, the Company entered an agreement to sell its interest in its
facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building. In conjunction with the sale of its
facility in December 2002, the Company entered into a non-cancelable operating
lease with the buyer to lease-back its facilities for ten years (see Note 2).
The base rent shall increase by 3.5% per year (see note 2 and 9).

(h) Research and development
The Company was actively engaged in new product development for the Office of
Space Launch in 2001. Research and development expenditures relating to
possible future products were expensed as incurred. There were no Research and
Development costs during 2002.

(i) Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was approximately $900 and $67,000 in 2002 and
2001, respectively.

(j) Income taxes
Deferred income taxes are recognized for the tax consequences in future years of
the differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the years in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the combination of the tax payable for the year and the
change during the year in deferred tax assets and liabilities.

(k) Stock-based compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company adopted SFAS 123 in 1997. The Company has elected
to measure compensation expense for its stock-based employee compensation plans
using the intrinsic value method prescribed by APB Opinion 25, "Accounting for
Stock Issued to Employees" and has provided pro forma disclosures as if the fair
value based method prescribed SFAS 123 has been utilized. See Note 8(d).

G-13

(l) Common stock, stock options and warrants to non-employees
The Company has valued its stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.

(m) Net loss per common share
Net loss per common share has been computed on the basis of the weighted average
number of shares outstanding, according to the rules of SFAS No. 128, "Earnings
per Share." Diluted net loss per share has not been presented, as the
computation would result in anti-dilution.

(n) Financial instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, capital leases and notes payable. These financial instruments are
stated at their respective carrying values, which approximate their fair values.

(o) Segment reporting
The Company merged its Space Missions Division (SMD) business segment and ISS
business segment in 2002. The Company has two inactive subsidiaries, SpaceDev
Australia and SpaceDev Oklahoma. The Company follows the requirement of SFSA
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131").

(p) New accounting standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that SFAS, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No.
145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." Further, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases,"
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or described their applicability under
changed conditions. This pronouncement requires gains and losses from
extinguishment of debt to be classified as an extraordinary item only if the
criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," have
been met. Further, lease modifications with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as
sale-leaseback transactions. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions of SFAS No. 145 related to Statement 13 shall be
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have a material impact on the
Company's consolidated financial position or results of operations for the year
ended December 31, 2002.

G-14

In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 requires that a liability for costs associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. We do not expect the adoption of
SFAS 146 to have a material impact on our operating results or financial
position.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Management
is evaluating the adoption of this statement.

2. FIXED ASSETS
In December 2002, the Company entered an agreement to sell its interest in its
facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building.

In conjunction with the sale, the Company entered into a lease agreement with
the buyer to lease-back its facilities (see Note 9). The gain on the sale of
the facility was deferred and will be amortized in proportion to the gross
rental charged to expense over the lease term. Deferred gain of $1,172,720 will
be amortized over ten (10) years beginning February 2003 and ending in February
2013. This amortization will be included in the Company's occupancy and
facility expense.

G-15

2. Fixed Assets, cont.

Fixed assets consisted of the following:
December 31, 2002 2001
---------- -----------

Capital leases $ 145,345 224,721
---------------------------------------- ---------- -----------
Computer equipment 124,429 251,158
Building and improvements 9,488 $2,191,136
Furniture and fixtures 5,271 18,445
284,533 2,685,460
---------- -----------
Less accumulated depreciation
and amortization (143,065) (504,891)
$ 141,488 $2,180,569
---------- -----------

Depreciation and amortization expense for fixed assets was approximately
$164,000 and $156,000 for the 2002 and 2001, respectively.

3. ACQUISITIONS
All acquisitions have been accounted for using the purchase method of accounting
and intangible assets are being amortized using the straight-line method.
Initial purchase price includes stock issued at the date of acquisition, direct
acquisition costs and any guaranteed future consideration.

(a) ISS
On February 7, 1998, the Company issued 2,000,000 shares of restricted common
stock and acquired all of the outstanding shares of common stock of Integrated
Space Systems, Inc. ("ISS"). ISS provides engineering and technical services
related to space-based systems, primarily launch vehicle integration. The fair
value of the shares issued was $1.8125 per share, calculated using the average
daily closing prices for a period surrounding the acquisition date. The
acquisition price was not reduced for the Rule 144 restrictions on the shares of
common stock. The total purchase price was valued at $3,625,000. The
calculated purchase price in excess of the approximately $164,000 of net assets
acquired was capitalized as goodwill was to be amortized over sixty months. On
November 15, 2001, management determined that the unamortized balance of
goodwill from the ISS acquisition of approximately $923,000 became impaired and
was written off.

G-16

(a) ISS cont.
Goodwill from the ISS acquisition consisted of the following:

December 31, 2001
----------------------------- ------------

Goodwill $ 3,461,000
----------------------------- ------------
Less accumulated amortization (2,538,068)
Less impairment loss (922,932)
$ -

Amortization expense was approximately $519,000 for 2001.

(b) AMROC
On August 14, 1998, the Company entered the Agreement for License and Purchase
of Technology (AMROC) with an unrelated individual. The technology acquired was
hybrid rocket technology that will be used in the future operations of the
Company. Upon execution of the Agreement, the Company issued the seller a
warrant to purchase 25,000 shares of restricted common stock at a strike price
equal to 50% of the market price of the common stock on the issuance date.

For the three years following the Agreement date, the seller received warrants
to purchase the greater of 25,000 shares of restricted common stock or a number
of shares to be determined based on revenue generated from the acquired
technology as defined below. In the fourth through tenth year following the
Agreement date, the seller will receive a warrant to purchase a number of shares
based on the amount of revenue generated from the acquired technology. All
revenue based warrants are earned at a rate of one share per $125 of revenue
generated from the technology acquired. Under the terms of the Agreement, the
minimum number shares to be issued is 100,000 and the maximum consideration
shall not exceed warrants to purchase 3,000,000 shares of common stock or
$6,000,000 in recognized value. Recognized value is the sum of (a) the
cumulative difference between the market price of the common stock and the
strike price and (b) the cumulative difference between the market price on the
date of exercise and the strike price for each warrant previously exercised.

The Company valued the warrants using the fair value method as prescribed by
SFAS 123. Under this method, the Company used the risk-free interest rate at
the date of grant, the expected volatility of the stock, the expected dividend
yield on the stock and the expected life of the warrants to determine the fair
value of the warrants. The risk-free rate of interest used to value the initial
issuance was 5.4 percent, a zero percent dividend yield was assumed and the
expected life of the warrants was five years from the date of issuance. This
calculation resulted in a fair value of $24,500 and was used as the value of the
intangible assets acquired. On August 14, 2001, the Company issued warrants to
purchase 25,000 shares of restricted common stock with fair value of $21,925
using the same valuation method. This amount was capitalized as an additional
acquisition of intangible assets and will be amortized over the remaining four
years of the estimated useful life of the assets. All warrants are immediately
exercisable after issuance and expire on the fifth anniversary of their
issuance.

G-17

(b) AMROC cont.
Included in other assets are intangibles, which consisted of the following:

December 31, 2002 2001
----------------------------- ---------- ---------

Other intangibles $ 116,292 $116,292
----------------------------- ---------- ---------
Less accumulated amortization (105,736) (65,415)
$ 10,556 $ 50,877
---------- ---------

Amortization expense was approximately $40,000 and $32,000 for 2002 and 2001,
respectively.

4. NOTES PAYABLE
(a) Building and settlement notes
On February 23, 2000, the Company borrowed $1,330,000 from a lender to refinance
its facility in Poway, California. The note called for 300 monthly payments of
approximately $9,000, which included principal and interest at prime plus 1.5%.
On December 31, 2002 the interest rate on the note was 5.75% with an outstanding
balance of $1,281,227. The note was set to mature in February 2025. In
December 2002 the Company entered into an agreement to sell its interest its
facility and the aforementioned debt was paid in full at the close of escrow in
January 2003.

In December 1998, the Chief Executive Officer (the "CEO") of the Company entered
into a $500,000 loan agreement with another lender to finance additional costs
of its facility. This liability was assigned to the Company and called for 59
monthly interest payments at 12.00% and a balloon payment of $505,000, including
interest, in December 2003. At December 31, 2002 and 2001, the outstanding
balance on this loan was $495,012 and $499,671, respectively. In December 2002
the Company entered into an agreement to sell its interest in its facility and
the aforementioned debt was paid in full at the close of escrow in January 2003.

In 1999 the Company entered into a second loan agreement. The $460,000 loan
called for 59 monthly interest payments at 10.5% and a balloon payment of
$464,000, including interest, in March 2004. At December 31, 2002 and 2001, the
outstanding balance on this loan was $456,020 and $458,609, respectively. In
December 2002, the Company entered into an agreement to sell its interest in its
facility and the aforementioned debt was paid in full at the close of escrow in
January 2003.

G-18

(a) Building and settlement notes cont.
In June 2001, the Company accrued a $150,000 contingent liability from Technical
& General Guarantee Company Ltd. ("T&G") related to its guarantee on a
performance bond on behalf of Space Innovations Limited ("SIL"), which was then
a subsidiary of the Company. In 1999, the Company was required to guarantee a
performance bond on behalf of SIL in connection with a contract to build a
satellite bus for an Australian domestic spacecraft project. SIL was unable to
perform on the contract and subsequently declared bankruptcy. On May 6, 2002 a
settlement agreement was reached with T&G, which called for twelve monthly
payments in the amount of $1,200 to begin March 1, 2002. After the twelve
months, the note called for a balloon payment on the anniversary of the
effective date in the amount of $139,000. The note also called for a third deed
of trust to be placed on the Company's building and land. At December 31, 2002
the outstanding balance on this loan was $141,400. In December 2002 the Company
entered into an agreement to sell its interest in its facility and the
aforementioned debt was paid in full at the close of escrow in January 2003.

In 2001, the Company entered into three loan agreements with various vendors.
The total of $171,402 for all three loans called for payment between 24 and 50
months with interest that ranged from 0% to 8%. At December 31, 2002 and 2001,
the outstanding balances on these notes were $146,527 and $170,089,
respectively.

Future minimum principal payments on notes payable, building and settlement
notes are as follows:

Year Ended December 31,
-----------------------

2003 $2,431,134
----------------------- ----------
2004 41,452
2005 36,670
2006 10,930
$2,520,186

(b) Related parties
The Company has notes payable to its CEO. At December 31, 2002 and 2001, the
balances were $738,496 and $665,232, respectively, with accrued interest of 10%.
The notes were converted to a demand note and amended on March 20, 2000 to call
for annual payments of not less than $80,000 per year with interest at 10%.

G-19

(b) Related parties cont.
Future minimum principal payments on notes payable, related parties are as
follows:

Year Ended December 31,
-----------------------

2003 $174,665
----------------------- --------
2004 80,000
2005 80,000
2006 80,000
2007 80,000
Thereafter 243,831
$738,496
--------

Interest expense accrued on these notes was $45,265 and $53,266 for 2002 and
2001, respectively.

5. CONVERTIBLE DEBENTURES
From October 14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various director and officers of
the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitle the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the note matures. The
original maturity on the notes was six (6) months from issue date and was
subsequently extended to twelve (12) months from issue date on March 19, 2003.
The convertible debentures are exercisable into a number of the Company's common
shares at a conversion price that equals the 20-day average asking price less
10%, which was established when the note was issued, or the initial conversion
price.

Concurrent with the issuance of the convertible debentures, the Company issued
to the subscribers, warrants to purchase up to 1,229,705 shares of our common
stock. These warrants are exercisable for three (3) years from the date of
issuance at the initial exercise price which equals to the 20-day average asking
price less 10% which was established when the note was issued, or the initial
conversion price. Upon issuance the warrants were valued using the
Black-Scholes pricing model based on the expected fair value at issuance and the
estimated fair value was recorded as debt discount. See Note 8(c) for
discussion of the terms of the warrants.

All debt discounts are to be amortized as additional interest expense over the
term of the convertible debentures. As of December 31, 2002, $475,000 has been
reflected as debt discount of which $125,000 was amortized to non-cash interest
expense during 2002.

G-20

Convertible Debentures cont.

Convertible debenture dated December 31, 2002 $ 475,000

Accrued interest 2,075
Less debt discount
Total 475,000
Amount amortized to expense (125,000) (350,000)
-------- --------

Convertible debenture at December 31, 2002 $127,075
--------

6. INCOME TAXES
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of $1,372,000 and $2,036,000 as of December 31, 2002 and
2001, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance decreased approximately
$664,000 in 2001 from $2,036,000 at December 31, 2001 to $1,372,000 at December
31, 2002.

At December 31, 2002, the Company has federal and state tax net operating loss
and capital loss carryforwards of approximately $3,358,000 and $1,525,000,
respectively. The federal and state tax loss carryforwards will expire through
2021, unless previously utilized. The state of California has suspended the
utilization of net operating loss for 2002 and 2003.

A reconciliation of the statutory income tax rates and the Company's effective
tax rate is as follows:

Years Ended December 31, 2002 2001
------------------------------------------- ----- -----

Statutory U.S. federal rate 34% 34%
------------------------------------------- ----- -----
State income taxes - net of federal benefit 5% 5%
Net operating loss for which no tax
Benefit is currently available (39%) (39%)
- -
----- -----

G-21

Income taxes, cont.
The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets consist of the following:

December 31, 2002 2001
--------------------------------- ------------ ------------

Deferred tax assets:
---------------------------------
Loss carryforwards $ 1,262,000 $ 1,866,000
Temporary differences 100,000 120,000
Research and development credits 10,000 50,000
Gross deferred tax assets 1,372,000 2,036,000
--------------------------------- ------------ ------------

Valuation allowance (1,372,000) (2,036,000)
$ - $ -
------------ ------------

7. EMPLOYEE BENEFIT PLAN
(a) Profit sharing 401(k) plan
During 1997, the Company adopted a 401(k) retirement savings plan for its U.S.
employees which allows each eligible employee to voluntarily make pre-tax salary
contributions up to 15% of their compensation. The Company may elect to make a
matching contribution. The total Company contribution and participant salary
reduction may not exceed 25% of the compensation of eligible participants.
During 2002 and 2001, the Company did not contribute to the Plan.

(b) Incentive stock option and employee stock purchase plans
At its 2000 Annual Stockholder Meeting, the Company adopted an Incentive
Employee Stock Option Plan under which the Board of Directors may grant
employees, directors and affiliates of the Company opportunities to purchase
Incentive Stock Options, Supplemental Stock Options and to receive stock bonuses
or rights to purchase restricted stock of the Company. Incentive Stock Options
will only be available to employees, including officers, and affiliates of the
Company; they will not be available to non-employee directors. The exercise
price of the Incentive Stock Options shall not be less than 100% of the fair
market value of the stock subject to the option on the date the option is
granted. The exercise price for the Stock Purchase Plan will not be less than
85% of the fair market value of the stock on the date the stock is purchased.
The Company will be required to reserve an amount of common shares equal to the
number of shares, which may be purchased as a result of stock awards. See Note
8(d).

8. STOCKHOLDERS' EQUITY
(a) Convertible preferred stock
On November 4, 1997, 82,450 shares of $.001 par value convertible preferred
stock were issued to SD Holdings, LLC in exchange for 8,245,000 common shares of
the Company that were issued on October 22, 1997 (see Notes 1(a) and 8(b)).
Each share of convertible preferred stock was convertible, at the option of the
holder, into 100 shares of common stock. The conversion ratio was subject to
certain anti-dilution adjustments, and the holder of each share of preferred
stock was entitled to one vote for each share of common stock into which it
would convert. These shares were converted into 8,245,000 shares of the
Company's common stock on May 11, 1999.

G-22

(b) Common stock
On October 22, 1997, PDGI issued 8,245,000 of its $.0001 par value common stock
for 100 percent (1,000,000 shares) of SpaceDev's common stock owned by SpaceDev,
LLC. Upon the acquisition of the SpaceDev stock, SpaceDev was merged into PDGI
and, on December 17, 1997, the name of the Company was changed to SPACEDEV, INC.
On November 4, 1997, these common shares were exchanged for 82,450 shares of
convertible preferred stock. See Note 8(a). On May 11, 1999, the Company
issued 8,245,000 shares of common stock upon the conversion of the preferred
shares.

The Company entered into agreements with current employees, public relations
firms and consultants to perform services and reach certain milestones for the
Company. In connection with these agreements, the Company issued 7,000 and
655,599 shares of its common stock during 2002 and 2001, respectively, of which
500,000 went to EMC and subsequently was recovered after a final judgment in
favor of the Company was granted on October 22, 2002. The Company recorded a
credit of $455,000 during 2002 to offset the expense that was recorded during
2001. The Company also recorded an expense of approximately $2,900 and $590,000
for 2002 and 2001, respectively, for the issuance of common stock. The fair
value of the shares issued was calculated using the average closing price
surrounding the issuance dates.

On June 18, 2001, SpaceDev entered into a relationship with two individuals
(doing business as EMC Holdings Corporation ("EMC")) whereby EMC was to provide
certain consulting and advisory services to the Company. EMC received the first
installment of 500,000 shares of common stock on June 26, 2001. Total expense
for the initial stock issuance through September 30, 2001 was $455,000.
Pursuant to a demand for arbitration filed on November 7, 2001, the Company
sought the return of all or a portion of the shares issued to EMC. EMC filed
its own claim with the American Arbitration Association on November 13, 2001,
alleging that the Company owed EMC $118,000 in fees, plus damages to be proven
at arbitration.

G-23

(b) Common stock, cont.
Because collection of the attorney and arbitration fees award is not assured,
the Company has expensed all of its fees related to this matter. Any recovery
of the fees will be recorded as income in the period they are received. The
return of the 500,000 shares, as provided in the interim award issued on July
17, 2002, was recorded in the third quarter of 2002 as a reversal of the
original expense recorded. Because the original expense was not recorded as an
extraordinary item, the reversal of the expense did not qualify as an
extraordinary item.

On November 5, 2000, the Company issued a private placement memorandum ("PPM")
offering a maximum of 1,000,000 shares of the Company's $0.0001 par value common
stock and one re-pricing warrant to purchase one additional share of common
stock. The offering price for the common stock is a five-day average of the bid
and ask prices on the date of issuance with a minimum of $1.00 per share. The
re-pricing warrants allow the holder to acquire additional shares at $0.50 above
the offering price of the shares.

On March 2, 2001, the PPM offering price was amended to the average of the high
bid prices on the date of issuance and four preceding days, with no minimum per
share price and the warrants allow the holder to acquire additional shares at
the same price as the shares acquired.

The Company sold 153,060 and 156,752 shares of its common stock under the PPM
during 2002 and 2001, respectively. The Company also issued matching warrants to
the investors under the PPM agreement. The Company received $75,000 and
$120,000 for the shares of common stock sold under the PPM during 2002 and 2001,
respectively.

On August 14, 2001, the Company issued warrants to purchase 25,000 shares of
common stock at 50% of their fair market value on the date of issuance, in
return for the exclusive royalty-free right to use, sell and apply patents and
other technology developed by an individual (see Note 3(b)). The individual
will receive warrants to purchase a minimum of 25,000 additional shares and a
maximum of 3,000,000 shares of common stock at 50% of their fair market value on
the date of issuance. The number of shares varies with revenue generated by the
technology on specific dates.

Concurrent with the issuance of the convertible debentures from October 2002
through November of 2002, the Company issued to subscribers warrants to purchase
up to 1,229,705 shares of the Company's common stock. These warrants are
exercisable for three (3) years from the date of issuance at the initial
exercise price, which is equal to the 20-day average asking price less 10%
established when the notes were issued. Upon issuance the warrants were valued
using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was also recorded as debt discount.

G-24

(d) Stock options
On November 21, 1997, the Company entered into a five (5) year employment
agreement with its CEO. As part of the employment agreement, the Company
granted options to the CEO to purchase up to 2,500,000 shares of the Company's
$.0001 par value restricted common stock.

The options are subject to the following vesting conditions, which were amended
on January 21, 2000, at the exercise prices set forth:

Number
of shares Vesting Conditions Exercise price per share
--------- ------------------------------------------------------------- -------------------------

500,000 Currently vested $ 1.00
500,000 Obtaining $6,500,000 additional equity capital $ 1.50
500,000 Financing and executing a definitive space launch agreement $ 2.00
500,000 Launching of first lunar or deep-space mission $ 2.50
500,000 Successful completion of first lunar or deep-space mission $ 3.00
250,000 Upon the Company's market capitalization reading $250 million $ 5.00
500,000 Upon the Company's market capitalization reading $500 million $ 10.00
750,000 Upon the Company's market capitalization reading $1 billion $ 20.00

All options expire five (5) years from date of amendment.

On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted to the CEO at the exercise price of $0.9469 per share with
a set vesting schedule of 3,333 per year after issuance with the third year
having 3,334 options vest. These options expire five years from grant date.

G-25

(d) Stock options cont.

The following summarizes stock option activity related to all of the option plan
and employee compensation agreements:

Weighted
Options Average
Outstanding Exercise Prices
------------ ----------------

Balance at January 1, 2001 3,761,553 $ 1.81
Granted 648,609 0.83
Exercised - -
Expired (50,000) 1.28

Balance at December 31, 2001 4,360,162 $ 1.67
---------------------------- ------------ ----------------
Granted 1,386,110 0.50
Exercised - -
Expired (297,500) 0.88

Balance at December 31, 2002 5,448,772 $ 0.91
---------------------------- ------------ ----------------

The weighted average fair value of options granted to employees under the plan
during 2002 and 2001 was $0.50 and $0.83, respectively. At December 31, 2002
and 2001, there were 2,064,716 and 1,834,475 options exercisable at a weighted
average exercise price of $2.25 and $0.42 per share, respectively. The weighted
average remaining life of outstanding options under the plan at December 31,
2002 was 5.75 years.

Range of Weighted-Average
Exercise Number of Shares Remaining Contractual Life Number of Shares
Price Outstanding of Shares Outstanding Exercisable Weighted-Average
Exercisable Price
---------- ---------------- -------------------------- ---------------- -----------------

0.42-0.99 1,728,919 4.80 years 401,530 $ 0.56
1.00-1.99 2,217,631 6.75 years 1,660,964 1.26
2.00-2.99 1,002,222 7.04 years 2,222 2.25
3.00-3.50 500,000 2.05 years - 3.00
5,448,772 5.75 years 2,064,716 $ 1.38

G-26

(d) Stock options, cont'd
As of December 31, 2002, the Company had warrants outstanding that allow the
holders to purchase up to 1,692,753 shares of common stock at prices between
$0.37 and $1.44 per share. The warrants may be exercised any time within five
(5) years of issuance.

The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 2002 and 2001 using the minimum value
method as prescribed by SFAS 123. Under this method, the Company used the
risk-free interest rate at date of grant, the expected volatility, the expected
dividend yield and the expected life of the options to determine the fair value
of options granted. The risk-free interest rates ranged from 6.0% to 6.5%;
expected volatility of 117% and the dividend yield was assumed to be zero, and
the expected life of the options was assumed to be three to five years based on
the average vesting period of options granted.

If the Company had accounted for these options in accordance with SFAS 123, the
total value of options granted during 2002 and 2001 would be amortized on a pro
forma basis over the vesting period of the options. Thus, the Company's
consolidated net loss would have been as follows:

Years Ended December 31, 2002 2001
---------- ------------

Net loss:
------------------------
As reported $(376,160) $(1,885,871)
Pro forma $(604,395) $(2,002,481)
Loss per Share:
------------------------
As reported $ (.03) $ (.13)
Pro forma $ (.04) $ (.14)

On February 9, 2001, the Company purchased all rights to the name "ExploreSpace"
and the Website www.explorespace.com in an isolated transaction under Section
4(2) of the Securities Act. The Company purchased all of the outstanding common
stock of ExploreSpace.com, Inc. in exchange for options to purchase a total of
80,000 common shares of the Company for $1.00 per share.

G-27

9. COMMITMENTS AND CONTINGENCIES
(a) Capital leases
The Company leases certain equipment under non-cancelable capital leases, which
are included in fixed assets as follows:

December 31, 2002 2001
----------------------------- --------- ---------

Computer equipment $145,365 $224,721
----------------------------- --------- ---------
Less accumulated depreciation (76,161) (94,890)
$ 69,204 $129,831

Future minimum lease payments are as follows:

Year Ending December 31,
---------------------------------------

2003 $ 35,563
2004 8,882
Total minimum lease payments 44,445
Amount representing interest (3,231)
Present value of minimum lease payments $ 41,214

Total obligation $ 41,214
--------------------------------------- ---------
Less current portion (32,783)
Long-term portion $ 8,431

(b) Other accrued liabilities

In November 2002, the Company entered an agreement to sell its interest in its
facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building. The fees that were incurred for the
sale of the building were $121,311 and recorded as other accrued liabilities.
The fees include broker fees escrow and title fees and property taxes.

In conjunction with the sale of its facility in December 2002, the Company
entered into a non-cancelable operating lease with the buyer to lease-back its
facilities for ten years (see Note 2). The base rent is $25,678 and will
increase by 3.5% per year. Mr. Benson provided a guarantee for the leaseback.

10. CONCENTRATIONS AND CONTINGENCIES

(a) Credit risk

The Company maintains cash balances at various financial institutions primarily
located in San Diego. The accounts at these institutions are secured by the
Federal Deposit Insurance Corporation up to $100,000. The Company has not
experienced any losses in such accounts.

(b) Customer

During 2002 and 2001, the Company had a major customer that accounted for sales
of approximately $1,727,000 and $3,163,000 or 51% and 77% of consolidated
revenue, respectively. At December 31, 2002 and 2001, the amount receivable
from this customer was approximately $0 and $228,000, respectively.

G-28

In November 1999, the Space Missions Division was awarded a turnkey mission
contract by the Space Sciences Laboratory (SSL) at University of California,
Berkeley (UCB) worth as of December 31, 2002 approximately $7.4 million,
including two change orders worth approximately $412,000 June 12, 2002 and
October 7, 2002. This contract represented 51% of the Company's revenue in
2002. The contract will conclude on January 31, 2004. The payments on the
contract are made on a monthly basis according to a preset payment schedule and
resulted in costs in excess of billings and estimated earnings of approximately
$268,800. At December 31, 2002 the total costs estimated to complete the
contract was approximately $7,640,000.

11. OPERATING SEGMENTS
The Company's operating structure included one operating segment for 2002 and
two operating segments for 2001.

(a) Segment products and services
The Company merged its Space Missions Division (SMD) business segment and ISS
business segment in 2002.

The following is a summary of operating results and assets by segment for 2001.

For the Year Ended December 31, 2001
--------------------------------------

(In thousands) SMD ISS Total
Net revenue from external
--------------------------
Customers $3,749 $350 $4,099
Intersegment revenues - - -
Depreciation and
Amortization expense (181) (529) (710)
Impairment loss (923) (923)
Segment loss $(473) $(1,383) $(1,856)
-------------------------------------- -------- --------

Total segment assets $3,140 $38 $3,178
-------------------------------------- -------- --------
Less intersegment assets (164) - (164)
Net segment assets $2,976 $38 $3,014

(b) Method of determining segment profit or loss
Management evaluated the performance of its operating segments separately in
2001 to individually monitor the different factors affecting financial
performance. Segment profit or loss includes substantially all of the segment's
costs of production, distribution and administration. The Company manages
income taxes on a global basis. Thus, management evaluated segment performance
based on profit or loss before income taxes, exclusive of any significant gains
or losses on the disposition of investments or other assets.

G-29

12. SUBSEQUENT EVENTS
On January 31, 2003, the Company closed escrow on the sale of its facility in
Poway, California. The selling price of the facility was $3.2 million. The
total debt repayment from the transaction was approximately $2,407,000. The
approximate net proceeds to the Company for working capital purposes was
$635,800.

On February 10, 2003, the Company hired a new chief financial officer, who was
subsequently approved during a Board meeting on February 14, 2003. The Board
approved an at-will contract for him and granted the new chief financial officer
options to purchase up to 375,000 shares of the Company's common stock at the
closing price on date of grant. The options vest over various time periods
based on certain performance criteria and expire six (6) years from grant date.

G-30

No dealer, sales person or other SPACEDEV, INC.
individual has been authorized to
give any information or make any 3,214,261 SHARES
representations other than those
contained in this prospectus and, if OF
given or made, such information or
representations must not be relied COMMON STOCK
upon as having been authorized by
the Company. This prospectus does
not constitute an offer to sell, or a
solicitation of an offer to buy, the PROSPECTUS
Notes offered hereby in any
jurisdiction where, or to any person
to whom, it is unlawful to make an
offer or solicitation. Neither the
delivery of this prospectus nor any
sale made hereunder shall, under
any circumstances, create an
implication that there has been any
change in the affairs of the
Company since the date hereof or
that the information contained
herein is correct or complete as of
any time subsequent to the date
hereof.
May 6, 2004

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

INDEMNIFICATION OF DIRECTORS AND OFFICERS

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Expenses payable in connection with the distribution of the securities
being registered (estimated except for the registration fee), all of which will
be borne by the registrant, are as follows:

Securities and Exchange Commission Registration Fee $ 143
Printing Expenses $ 500
Legal Fees and Expenses $10,000
Accounting Fees $ 5,000
Miscellaneous Expenses $ 500
Total $16,143
=================================================== =======

RECENT SALES OF UNREGISTERED SECURITIES

On March 2, 2001, we issued 50,000 shares of its common stock to its former
president, Mr. Stanley W. Dubyn, according to the terms of his employment
agreement with us. The common stock was issued with restrictions pursuant to
Section 4(2) of the Securities Act. Mr. Dubyn resigned his positions as our
president, chief operating officer and director on July 6, 2001.

II-1

During the first quarter of 2001, we issued a total of 17,247 shares to
consultants in exchange for services rendered to us. The shares were issued with
restrictions pursuant to Section 4(2) of the Securities Act.

In April 2001, we issued 66,667 shares of common stock and warrants to purchase
an additional 66,667 shares of common stock at an exercise price of $0.75 per
share to an individual investor in exchange for an investment of $50,000. This
purchase was made as a part of an accredited investor only, private placement
transaction under Rule 506 of Regulation D of the Securities Act of 1933.

During the second quarter of 2001, we issued a total of 500,000 shares to
EMC Holdings Corporation pursuant to Section 4(2) of the Securities Act for
certain consulting services. Due to teh failure of performance by EMC under the
consulting and advisory agreements between EMC and the Company, EMC's engagement
was terminated in late 2001, and the shares were recovered by us in arbitration.

On June 12, 2001 we issued 33,333 shares of common stock and warrants to
purchase an additional 33,333 shares of common stock at an exercise price of
$0.75 per share to an individual investor in exchange for an investment of
$25,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.

On June 20, 2001 we issued 33,333 shares of common stock and warrants to
purchase an additional 33,333 shares of common stock at an exercise price of
$0.75 per share to an individual investor in exchange for an investment of
$25,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.

On August 11, 2001, we issued a warrant to purchase 25,000 shares of
restricted common stock pursuant to its agreement to acquire the AMROC hybrid
motor technology. The exercise price of the warrant is $.877, based on the
five-day average closing price of our common stock on the date of grant. The
warrant was issued pursuant to Section 4(2) of the Securities Act of 1933 (the
"Act").

On September 18, 2001, we issued 23,419 shares of common stock and warrants
to purchase an additional 23,419 shares of common stock at an exercise price of
$0.854 per share to an individual investor in exchange for an investment of
$20,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.

During 2001, we issued a total of 105,599 shares to consultants, employees
and summer interns in exchange for services rendered to us and awards given by
us. The shares were issued with restrictions pursuant to Section 4(2) of the
Securities Act.

On November 21, 1997, we entered into a five-year employment agreement with
its President, James W. Benson. This agreement provides for compensation of

II-2

salary and stock as well as stock options. Our Board of Directors amended the
Employment contract for Mr. Benson at its meeting on July 16, 2000. The amended
agreement provides for the grant of options to purchase up to 4,000,000 shares
of our common stock upon the occurrence of certain events. Such options would be
immediately exercisable upon grant. The options are non-statutory stock options
issued outside of our 1999 Incentive Stock Option Plan and were originally
granted to Mr. Benson pursuant to Rule 701 of the Securities Act.

On March 14, 2002, we issued 40,816 shares of common stock and warrants to
purchase an additional 40,816 shares of common stock at an exercise price of
$0.49 per share to an individual investor in exchange for an investment of
$20,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.

On August 9, 2002, we issued 30,612 shares of common stock and warrants to
purchase an additional 30,612 shares of common stock at an exercise price of
$0.49 per share to an individual investor in exchange for an investment of
$15,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.

From October 14, 2002 through November 14, 2002, we sold an aggregate of
$475,000 of 2.03% convertible debentures to three of our directors and officers
pursuant to Section 4(2) of the Securities Act. Mr. Benson purchased $375,000
of Series A Subordinated Convertible Notes and Messrs. Shaffer and Skarupa
purchased $50,000 each. The total funding was completed on November 14, 2002.
The convertible debentures entitle the holder to convert the principal and
unpaid accrued interest into our common stock when the note matures. The notes
originally were set to mature six (6) months from issue date and were
subsequently extended to twelve (12) months from issue date on March 19, 2003,
unless paid, extended or re-negotiated, the convertible debentures are
exercisable into a number of our common shares at a conversion price that equals
the 20-day average asking price less 10%, which was established when the note
was issued, or the initial conversion price. Concurrent with the issuance of the
convertible debentures, we issued to the subscribers, warrants to purchase up to
1,229,705 shares of our common stock. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, which equals
to the 20-day average asking price less 10% which was established when the note
was issued, or the initial conversion price.

During 2002, we issued a total of 7,000 shares to employees and summer
interns in exchange for services rendered to us and awards given by us. The
shares were issued with restrictions pursuant to Section 4(2) of the Securities
Act.

On December 2, 2002, we issued 81,632 shares of common stock and warrants
to purchase an additional 81,632 shares of common stock at an exercise price of
$0.49 per share to two individual investors in exchange for an investment of
$40,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.

II-3

On January 21, 2003, we issued 665,188 shares of common stock and warrants
to purchase an additional 665,188 shares of common stock at an exercise price of
$0.49 per share to an individual investor in exchange for an investment of
$325,942. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.

On February 14, 2003, we issued 196,079 shares of common stock and warrants
to purchase an additional 196,079 shares of common stock at an exercise price of
$0.51 per share to an individual investor in exchange for an investment of
$100,000. This purchase was made as a part of an accredited investor only,
private placement transaction under Rule 506 of Regulation D of the Securities
Act of 1933.

On June 3, 2003, we issued warrants to purchase 200,000 shares of common
stock to Laurus Master Fund Ltd. The warrants were issued in three tranches:
warrants on 125,000 shares of common stock at an exercise price of $0.63 per
share; warrants on 50,000 shares of common stock at an exercise price of $0.69
per share; and warrants on 25,000 shares of common stock at an exercise price of
$0.80 per share.

On July 18, 2003, we issued a total of 2,100 shares to employees in
exchange for services rendered to us and awards given by us. The shares were
issued with restrictions pursuant to Section 4(2) of the Securities Act.

II-4

On July 18, 2003, pursuant to our independent director compensation plan,
adopted January 16, 2000, we granted options to purchase 10,000 shares each to
Howell M. Estes, III and Scott McClendon and 5,000 shares each to Robert Walker
and Wesley T. Huntress for their attendance and participation at the Board of
Directors meeting held on July 18, 2003. These options were issued with an
exercise price of $0.71 per share, (based on the closing price of our common
stock on the date of grant), will vest over two years and will expire on the
five-year anniversary date of the date of grant.

Also, on July 18, 2003, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 50,000 shares of our common stock to one of our new
engineers. These options were issued with an exercise price of $0.60 per share
(based on the closing price of our common stock on the date of grant), will vest
over five years and will expire on the nine-year anniversary date of the date of
grant.

On August 7, 2003, we issued a total of 1,000 shares to an employee in
exchange for summer intern services rendered to us in 2003. The shares were
issued with restrictions pursuant to Section 4(2) of the Securities Act.

On August 8, 2003, we issued 10,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $5,500 reduction in our revolving credit facility. As
part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.

On August 19, 2003, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 50,000 shares of our common stock to one of our new
engineers. These options were issued with an exercise price of $1.00 per share
(based on the closing price of our common stock on the date of grant), will vest
over five years and will expire on the six-year anniversary date of the date of
grant.

On September 1, 2003, we issued warrants to purchase 200,000 shares of
common stock to Dian Grisel of the Investor Relations Group ("IRG"), for public
and investor relations services. The warrants will vest ratably over one year at
an exercise price of $1.05 per share.

On September 15, 2003, we issued a total of 500 shares to an employee in
exchange for summer intern services rendered to us in 2003. The shares were
issued with restrictions pursuant to Section 4(2) of the Securities Act.

On September 23, 2003, we issued 50,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $27,500 reduction in our revolving
credit facility. As part of the transaction, the shares were registered with the
Securities and Exchange Commission ("SEC") for public resale on August 6, 2003.

On September 29, 2003, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 50,000 shares of our common stock to one of our new
engineers. These options were issued with an exercise price of $0.94 per share
(based on the closing price of our common stock on the date of grant), will vest
over five years and will expire on the six-year anniversary date of the date of
grant.

On October 3, 2003, we issued 55,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $30,250 reduction in our revolving credit facility. As
part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.

On October 14, 2003, we issued 100,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $55,000 reduction in our revolving
credit facility. As part of the transaction, the shares were registered with the
Securities and Exchange Commission ("SEC") for public resale on August 6, 2003.

On October 20, 2003, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 50,000 shares of our common stock to one of our new
engineers. These options were issued with an exercise price of $1.15 per share
(based on the closing price of our common stock on the date of grant), will vest
over five years and will expire on the six-year anniversary date of the date of
grant.

On November 6, 2003, pursuant to our independent director compensation
plan, adopted January 16, 2000, we granted options to purchase 5,000 shares each
to Howell M. Estes, III and Scott McClendon and 10,000 shares each to Curt Dean
Blake, Robert Walker and Wesley T. Huntress for their attendance and
participation at the Board of Directors meeting held on November 6, 2003. These
options were issued with an exercise price of $0.94 per share, (based on the
closing price of our common stock on the date of grant), will vest over two
years and will expire on the five-year anniversary date of the date of grant.

On November 11, 2003, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 30,000 shares of our common stock to one of our new
engineers. These options were issued with an exercise price of $0.95 per share
(based on the closing price of our common stock on the date of grant), will vest
over five years and will expire on the six-year anniversary date of the date of
grant.

On December 8, 2003, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 250,000 shares of our common stock to our new vice
president of engineering. These options were issued with an exercise price of
$1.05 per share (based on the closing price of our common stock on the date of
grant), will vest over five years and will expire on the six-year anniversary
date of the date of grant.
II-5

On December 11, 2003, we issued 100,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $55,000 reduction in our revolving
credit facility. As part of the transaction, the shares were registered with the
Securities and Exchange Commission ("SEC") for public resale on August 6, 2003.

On December 29, 2003, we issued 100,000 shares of our common stock to
Laurus, pursuant to our Security Agreement, Secured Convertible Note,
Registration Rights Agreement and Common Stock Purchase Warrant with Laurus
dated June 3, 2003, for a corresponding $55,000 reduction in our revolving
credit facility. As part of the transaction, the shares were registered with the
Securities and Exchange Commission ("SEC") for public resale on August 6, 2003.

On January 9, 2004, we issued 300,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $165,000 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.

On February 23, 2004, we issued 7,076 shares of our common stock pursuant
to our 1999 Stock Purchase Plan to four employees enrolled in the plan for
approximately $6,400 in cash.

On March 3, 2004, we issued 200,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $110,000 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.

Pursuant to our independent director compensation plan, adopted January 16,
2000 and modified March 25, 2004, we granted options to purchase 5,000 shares
each to Curt Dean Blake, Wesley T. Huntress and Scott McClendon for their
attendance and participation at the Audit Committee Meeting held on March 23,
2004. These options were issued with an exercise price of $0.92 per share,
(based on the closing price of our common stock on the date of grant), will vest
over two-years and will expire on the three-year anniversary date of the date of
grant.

Pursuant to our independent director compensation plan, adopted January 16,
2000 and modified March 25, 2004, we granted options to purchase 12,000 shares
each to Howell M. Estes, III, Wesley T. Huntress and Scott McClendon and 6,000
shares to Curt Dean Blake for their attendance and participation at the Board of
Directors meeting held on March 25, 2004. These options were issued with an
exercise price of $0.92 per share, (based on the closing price of our common
stock on the date of grant), will vest over two years and will expire on the
three-year anniversary date of the date of grant.

On March 25, 2004, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 1,104,000 shares of our common stock to employees and
officers. These options were issued with an exercise price of $0.92 per share
(based on the closing price of our common stock on the date of grant). Options
to purchase 781,500 shares of our common stock will vest over five-years in ten
semi-annual installments and options to purchase the remaining 322,500 shares
will vest based on performance criteria established by the CEO. All options will
expire on the six-year anniversary date of the date of grant, unless sooner
forfeited, exercised or otherwise terminated.

Also, on March 25, 2004, pursuant to our 1999 Stock Option Plan, we granted
options to purchase up to 25,000 shares of our common stock each to Curt Dean
Blake, Wesley T. Huntress and Scott McClendon for their previous work,
attendance and participation on the Audit Committee.

On April 1, 2004, we issued 250,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $137,500 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.

On April 20, 2004, we issued 300,000 shares of our common stock to Laurus,
pursuant to our Security Agreement, Secured Convertible Note, Registration
Rights Agreement and Common Stock Purchase Warrant with Laurus dated June 3,
2003, for a corresponding $165,000 reduction in our revolving credit facility.
As part of the transaction, the shares were registered with the Securities and
Exchange Commission ("SEC") for public resale on August 6, 2003.

II-6

(a) Exhibits:

ITEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EXH. NO.
--------------------------------------------------------------------------------------------------------- ---------
SpaceDev's Articles of Incorporation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1
SpaceDev's Articles of Amendment to Articles of Incorporation dated November 4, 1997
Authorizing Series B Preferred Stock(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2
SpaceDev's Articles of Amendment to Articles of Incorporation dated December 17, 1997
Changing Name to SpaceDev, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3
SpaceDev's Bylaws(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4
Form of Common Stock Certificate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1
Form of Non-Qualified Stock Option(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Form of Incentive Stock Option(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3
Form of Re-Pricing Warrant(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4
Form of Warrant(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5
1999 Stock Option Plan(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6
First Amendment to 1999 Stock Option Plan(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7
1999 Employee Stock Purchase Plan(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8
Form of Warrant from November 2, 2000 Private Placement (4) . . . . . . . . . . . . . . . . . . . . . . . 4.9
Common Stock Purchase Warrant-Phillips Aerospace (4). . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10
Note Purchase Agreement for Series A Subordinated Convertible Notes (6) . . . . . . . . . . . . . . . . . 4.11
Form of Series A Subordinated Convertible Note (6). . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.12
Form of Warrant for Series A Subordinated Convertible Note Offering (6) . . . . . . . . . . . . . . . . . 4.13
Common Stock Exchange Agreement Between SpaceDev and SIL (1). . . . . . . . . . . . . . . . . . . . . . . 10.1
Mutual Rescission and Release of Share Acquisition Agreement (1). . . . . . . . . . . . . . . . . . . . . 10.2
Share Exchange Agreement Between SpaceDev and ISS (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
Agreement of License and Purchase of Technology Between SpaceDev and AMROC (1). . . . . . . . . . . . . . 10.4
Firm Fixed Price Agreement Number 108252 Between SpaceDev and Regents of the University of California (1) 10.5
Employment Agreement of James W. Benson (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6
Employment Agreement between ISS and Charles H. Lloyd (1) . . . . . . . . . . . . . . . . . . . . . . . . 10.7
Deed of Counter-Indemnity dated August 28, 1999 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8
Financial Advisory Services Agreement, dated June 18, 2001 (5). . . . . . . . . . . . . . . . . . . . . . 10.9
Consultant/Advisory Services Agreement, dated June 18, 2001 (5) . . . . . . . . . . . . . . . . . . . . . 10.10
Employment Agreement between SpaceDev, Inc. and Stuart Schaffer, dated May 17, 2002(7). . . . . . . . . . 10.11
First Amendment to Employment Agreement with Stuart Schaffer, dated May 17, 2002(7) . . . . . . . . . . . 10.12
Employment Agreement between SpaceDev, Inc. and Emery Skarupa, dated May 24, 2002(7). . . . . . . . . . . 10.13
Confidential Separation Agreement and General Release of Claims, dated May 31, 2002(7). . . . . . . . . . 10.14
Code of Business Conduct and Ethics(7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.15
Employment Agreement between SpaceDev and Richard B. Slansky, dated Feb. 10, 2003(7). . . . . . . . . . . 10.16
Second Amendment to Series A Subordinated Convertible Note - Benson1, dated Mar. 25, 2003(7). . . . . . . 10.17
Second Amendment to Series A Subordinated Convertible Note - Benson2, dated Mar. 25, 2003(7). . . . . . . 10.18
Second Amendment to Series A Subordinated Convertible Note - Benson3, dated Mar. 25, 2003(7). . . . . . . 10.19
Second Amendment to Series A Subordinated Convertible Note - Benson4, dated Mar. 25, 2003(7). . . . . . . 10.20
Second Amendment to Series A Subordinated Convertible Note - Skarupa, dated Mar. 25, 2003(7). . . . . . . 10.21
Second Amendment to Series A Subordinated Convertible Note - Schaffer, dated Mar. 25, 2003(7) . . . . . . 10.22
Confidential Separation Agreement and General Release of Claims with Mr. Schaffer, dated July 2, 2003(8). 10.23
AFRL Small Vehicle Launch Technology SBIR contract(9) . . . . . . . . . . . . . . . . . . . . . . . . . . 10.24
AFRL Small Satellite Bus Technologies SBIR contract(9). . . . . . . . . . . . . . . . . . . . . . . . . . 10.25
AFRL Small Shuttle Compatible Propulsion Module contract(9) . . . . . . . . . . . . . . . . . . . . . . . 10.26
MDA Advanced Systems Deputate for the Micro Satellite Experiment(9) . . . . . . . . . . . . . . . . . . . 10.27
MDA Advanced Systems Deputate for the Micro Satellite Experiment (Modification) (9) . . . . . . . . . . . 10.28
Lunar Enterprises of California contract(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.29
Hybrid Rocket Motor Systems and Components contract*(9) . . . . . . . . . . . . . . . . . . . . . . . . . 10.30
Third Amendment to Series A Subordinated Convertible Note - Benson1, dated Sept. 5, 2003(9). . . . . . . 10.31
Third Amendment to Series A Subordinated Convertible Note - Benson2, dated Sept. 5, 2003(9). . . . . . . 10.32
Third Amendment to Series A Subordinated Convertible Note - Benson3, dated Sept. 5, 2003(9). . . . . . . 10.33
Third Amendment to Series A Subordinated Convertible Note - Benson4, dated Sept. 5, 2003(9). . . . . . . 10.34
Third Amendment to Series A Subordinated Convertible Note - Skarupa, dated Sept. 5, 2003(9). . . . . . . 10.35
Third Amendment to Series A Subordinated Convertible Note - Schaffer, dated Sept. 5, 2003(9). . . . . . . 10.36
Employment Offer between SpaceDev and Dario Emanuel DaPra, dated November 17, 2003(11) . . . . . . . . . 10.37
Employment Offer between SpaceDev and Randall K. Simpson, dated Jan. 16, 2004(11) . . . . . . . . . . . . 10.38
Confidential Separation Agreement and General Release of Claims with Mr. DaPra, dated March 18, 2004(11) 10.39
Missile Defense Agency Contract with SpaceDev, dated March 31, 2004(11) . . . . . . . . . . . . . . . . . 10.40
Amendment No. 1 to Note with the Laurus Master Fund, dated March 31, 2004(11) . . . . . . . . . . . . . . 10.41
Waiver Letter from Laurus Master Fund, dated March 31, 2004(11) . . . . . . . . . . . . . . . . . . . . . 10.42
First Task Order Under Missile Defense Agency Contract with SpaceDev, dated April 1, 2004(11) . . . . . . 10.43
Letter from Nation Smith dated June 4, 2003 (11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1
List of Subsidiaries of the Company(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consent of Weintraub Dillon PC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.1
Consent of Independent Auditor - Form SB-2, dated May 6, 2004 - PKF . . . . . . . . . . . . . . . . . . 23.2

* Registrant requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.

(b) Reports on Form 8-K:

We have filed two reports on Form 8-K, since fiscal year ended December 31,
2002. These reports, dated June 4, 2003 (and subsequently amended on June 9,
2003) and June 18, 2003, disclosed: 1) the changes in registrants certifying
accountants; and, 2) the establishment of the registrant's revolving credit
facility with the Laurus Master Fund, Ltd.

(1) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Form 10-SB (File #0-28947).
(2) Incorporated by reference to Exhibit 10.1 previously filed as an Exhibit
to Registrant's Form 10-QSB filed on August 10, 2000.
(3) Incorporated by reference to Exhibit 10.2 previously filed as an Exhibit
to Registrant's Form 8-K filed on September 20, 2000.
(4) Incorporated by reference to the corresponding Exhibit previously filed
as an Exhibit to Registrant's Form 10-KSB filed on April 2, 2001.
(5) Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as
an Exhibit to Registrant's Form 8-K filed on July 19, 2001.
(6) Incorporated by reference to Exhibits 4.11, 4.12 and 4.13 previously
filed as an Exhibit to Registrant's Form 10-QSB filed on November 14, 2002.
(7) Incorporated by reference to Exhibits 10.11, 10.12, 10.13, 10.14, 10.15,
10.16, 10.17, 10.18, 10.19, 10.20, 10.21 and 10.22 previously filed as an
Exhibit to Registrant's Form 10-KSB on March 28, 2003.
(8) Incorporated by reference to Exhibit 10.27 previously filed as an Exhibit to
Registrant's Form SB-2 on July 25, 2003.
(9) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5,
10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12 and 10.13 previously filed as an
Exhibit to Registrant's Form 10-QSB on November 12, 2003.
(10) Incorporated by reference to Exhibit 16.1 previously filed as an Exhibit to
Registrant's Form 8-K filed on June 4, 2003.
(11) Incorporated by reference to Exhibits 10.37, 10.38, 10.39, 10.40, 10.41,
10.42, 10.43, and 21 previously filed as an Exhibit to Registrant's Form 10-KSB
on April 6, 2004.

II-7

UNDERTAKINGS

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and

(iii) to include any additional or changed material information on the
plan of distribution.

Provided however, that paragraphs (1)(i) and (1)(ii) shall not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.

(2) For determining liability under the Securities Act of 1933, to treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.

(4) That, insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or controlling
persons of the registrant pursuant to the foregoing provisions or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the

II-8

registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.

II-9

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 to be signed on its
behalf by the undersigned, in the City of San Diego, California, on the 6th
day of May 2004 .

SpaceDev, Inc.

By: /s/ James W. Benson
-------------------------------------------------
James W. Benson, Chief Executive Officer

By: /s/ Richard B. Slansky
-------------------------------------------------
Richard B. Slansky, Chief Financial Officer

KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and directors
of SpaceDev, Inc., a Colorado corporation that is filing a registration
statement on Form SB-2 with the Securities and Exchange Commission under the
provisions of the Securities Act of 1933, as amended, hereby constitute and
appoint James W. Benson and Richard B. Slansky, and each of them, their true and
lawful attorneys-in-fact and agents; with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign such registration statement and any or all amendments to the
registration statement, including a prospectus or an amended prospectus therein,
and all other documents in connection therewith to be filed with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all interests and purposes as they might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
following capacities on the dates indicated.

Name Title Date
--------------------------------------------------------------- -------------
/s/ James W. Benson Chairman of the Board, Chief Exec May 6, 2004
---------------------- Officer and Director (principal
James W. Benson executive officer)

/s/ Richard B. Slansky Chief Financial Officer and Corporate May 6, 2004
---------------------- Secretary
Richard B. Slansky

II-10

/s/ Curt Dean Blake Director May 6, 2004
----------------------------
Curt Dean Blake

/s/ Howell M. Estes, III Director May 6, 2004
----------------------------
Howell M. Estes, III

/s/ Wesley T. Huntress Director May 6, 2004
----------------------------
Wesley T. Huntress

/s/ Scott McClendon Director May 6, 2004
----------------------------
Scott McClendon

/s/ Stuart Schaffer Director May 6, 2004
----------------------------
Stuart Schaffer

/s/ Robert S. Walker Director May 6, 2004
----------------------------
Robert S. Walker

II-11

INDEX TO EXHIBITS FILED WITH THIS REGISTRATION STATEMENT

(a) Exhibits:

* Registrant requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.

(b) Reports on Form 8-K: