Edgar Filing: SPACEDEV INC

As filed with the Securities and Exchange Commission on April 26, 2005 .

Registration Statement No. 333-107360

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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POST EFFECTIVE AMENDMENT NO. 2
FORM SB-2
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)
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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)
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Copies to:
GRETCHEN COWEN, ESQ.
LAW OFFICES OF GRETCHEN COWEN, APC
1903 WRIGHT PLACE, SUITE 250
CARLSBAD, CA 92008
(760) 931-0903

Approximate date of commencement of proposed sale to public: AS SOON AS
PRACTICALBE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE .

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 $26,143.

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 April 18,
2005, was $1.69 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.

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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 April 26, 2005.

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

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 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 ("MoTVs") 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. See
"Description of Business" for more information.

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 22,577,491 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, 2004 and 2003 . The financial data as of and for
the fiscal years ended December 31, 2004 and 2003 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,

2004 2003
-------------- ------------
Net revenues $ 4,890,743 $ 2,956,322
Income (Loss) from operations $ 144,285$ $ (890,092)
Net loss $ (3,027,054)$ (1,246,067)
Basic loss per share $ (0.16)$ (0.08)
Weighted average shares outstanding, basic 18,610,141 16,092,292

AS OF
DECEMBER 31,
2004 2003
------------------ ------------------

Cash and cash equivalents $5,068,601 $592,006
------------------ ------------------
Working capital (deficit) $4,897,796 $(630,805)
------------------ ------------------
Total assets $6,090,434 $1,084,819
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Long-term debt, net of current portion $963,875 $1,627,123
------------------ ------------------
Stockholders' Equity (Deficit) $4,335,657 $(2,072,628)
------------------ ------------------

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 , HIRE NEW ENGINEERS, AS WELL
AS, IMPROVE OUR PROJECT MANAGEMENT EXPERTISE.

We were cashflow positive in 2004 primarily as a result of our raising over
$4 million in cash through the sale of our preferred and common stock. Our
ability to increase cash generation from operations and thereby continue as a
going concern without the need to raise equity capital depends upon our ability
to ultimately implement our business plan, which includes (but is not limited
to) generating substantial new revenue from the Missile Defense Agency by
successfully performing under our $43 million contract and continuing to attract
and successfully complete other government and commercial contracts. The Missile
Defense Agency contract is staged, and we cannot guarantee that all subsequent
phases will be awarded or will be awarded to us. Recent budget cuts may affect
government spending on these space-based contracts.

In order to perform the Missile Defense Agency contract on schedule and to
successfully execute other existing and new business opportunities, we must
substantially increase our staff and hire new engineers or subcontract the work
to third parties. Although we are actively and aggressively seeking to hire
spacecraft and propulsion engineers to fulfill existing and new business demand,
there can be no assurance that we will be able to attract such engineering
resources or if we are able to attract them, that they will be available in the
timeframe needed or for a reasonable cost.

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, 2004
and 2003 ,we had a working capital surplus (deficit) of $4,897,796, and
($630,805), respectively, and an accumulated deficit of $14,905,797 and
$11,817,776, respectively. As of those dates, we had $5,068,601 and $592,006,
respectively, in cash and cash equivalents and $620,097 and $187,062,
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 (12) months. However, 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. As of December 31, 2004, Laurus
had converted all amounts under the revolving credit facility. As a result,
dilution of the voting power of your investment and of our earnings per share
occurred. Furthermore, 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 based on a fair market value formula specified in the
agreement. There was no outstanding balance on the revolving credit facility at
December 31, 2004.

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

We issued 250,000 shares of the Company's Series C Non-Redeemable Convertible
Preferred Stock, par value $0.001 per share (the "Preferred Stock"), to Laurus
Master Fund, Ltd. ("Laurus") for an aggregate purchase price of $2,500,000 or
$10.00 per share (the "Stated Value"). The Preferred Stock is convertible into
shares of the Company's $0.0001 par value common stock at a rate of $1.54 per
share at any time after the date of issuance. The Preferred Stock is redeemable
by the Company in whole or in part at any time after issuance for (a) 115% of
the Stated Value if the average closing price of the common stock for the 22
days immediately preceding the date of conversion does not exceed the conversion
rate or (b) the Stated Value if the average closing price of our common stock
for the 22 days immediately preceding the date of conversion exceeds the Stated
Value. If the Preferred Stock is converted at the price stated above, dilution
of the voting power of your investment and of our earnings per share could
continue to occur.

In addition, in conjunction with the issuance of the Preferred Stock and with
our revolving credit facility with Laurus, we issued Laurus warrants to purchase
up to 787,000 shares of our common stock. Each warrant may be exercised for a
per share price that is lower than the current fair market value of our common
stock as traded on the Over-The-Counter Bulletin Board. Although the exercise of
those warrants will result in proceeds to the Company, significant dilution of
the voting power of your investment and of our earnings per share could occur
upon exercise.

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

Laurus may convert the Preferred Stock into shares of our common stock at a rate
of $1.54 per share. The contractual limitations that restrict Laurus' ability to
convert the Preferred Stock 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 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 Preferred Stock 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.

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 any future balances on the Convertible
Note are 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 and the hybrid rocket motor technology for SpaceShipOne ,
our products and technologies are currently under various stages of development.
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,
THE PREFERRED STOCK OROTHER WARRANTS ISSUED TO LAURUS, WE MAY INCUR SUBSTANTIAL
MONETARY PENALTIES.

The agreements we entered into in connection with our issuance of the
Convertible Note, Preferred Stock or warrants issued to Laurus require us to,
among other things, register for resale the shares of common stock issued or
issuable under the note, upon conversion of the Preferred Stock and the
accompanying warrants 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 and 1.5% for
the stated value of the Preferred Stock 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 launched our first micro-satellite, CHIPSat, in January 2003 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.

Although our current $43,362,271 contract with the Missile Defence Agecy Is a
cost-plus agreement, which shifts the monetary risk of failure to the buyer,
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 will migrate our technology from projections into products for
micro-satellites and hybrid rocket motors over the next several years. In the
meantime, 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 President and Chief Financial Officer, Richard B. Slansky, our
Vice President of new business development and projects, Randall K. Simpson and
our vice president of engineering, Frank Macklin. 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.

Also, as some of our projects with the Department of Defense proceed, we may
need special clearances to continue working on and advancing our projects.
Classified programs generally will require that we comply with various Executive
Orders, Federal laws and regulations and customer security requirements that may
include specialized facilities and restrictions on how we develop, store,
protect and share information. Laboratories, manufacturing and assembly areas,
meeting spaces, office areas, storage areas, computers systems and networks and
telecommunications systems may require modification or replacement in order to
comply with customer requirements. Classified programs may require our employees
to obtain government clearances and restrict our ability to have key employees
work on these programs until these clearances are received from the appropriate
United States government agencies. In order to staff these programs we may need
to recruit personnel with the appropriate professional training, experience and
security clearances. There are a very limited number of individuals with all of
the requirements that we seek. There is no assurance that we can locate and
recruit these individuals in a timely and cost-effective manner. We may be
required to modify existing facilities and to develop new facilities and
capabilities that will only be utilized by these classified programs. We may be
required to install computer networks, communications systems and monitoring
systems that are dedicated to these classified programs. Some or all of these
requirements may entail substantial additional expense. It is uncertain whether
we will be able to recover any of the costs of these systems from our customers.
Many of these classified programs are regulated by Executive Orders, various
Federal laws and regulations and customer requirements. The failure of the
Company to comply with any of the foregoing Executive Orders, Federal laws and
regulations and customer requirements could have serious adverse effects. Also,
our ability to successfully market and sell into the Department of Defense
markets may be severely hampered if we are unable to meet classified program
requirements. There is no assurance that we will be able to successfully pass
the criteria required in order to win a classified program or to maintain
current contracts, such as our Missile Defense Agency contract (which may become
classified), and there is no assurance that we will maintain that status once it
has been obtained. This year we began an active program to complete the steps
required in order to win preliminary certification for classified programs. A
number of our employees have received preliminary and permanent security
clearances. We received preliminary certification for classified computer system
processing in early 2005.

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 April 18,
2005, the high and low closing price of a share of our common stock was $2.46
and $1.04 , 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, 2004, we had available net operating loss carryforwards of
approximately $4,826,000 for federal income tax purposes and approximately
$2,146,000 for state income tax purposes. California net operating loss
carryforwards were suspended from use for 2003 and were limited for 2004.
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 $2.4 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 $2,350,000 and $2,190,000 as of December 31,
2004 and 2003, respectively, consisted primarily of the income tax benefits from
net operating loss and capital loss carryforwards, deffered gain on building 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
$126,000 in 2004 from $2,190,000 at December 31, 2003 to $2,318,000 at December
31, 2004. At December 31, 2004, the Company has federal and state tax net
operating loss and capital loss carryforwards of approximately $4,826,000 and
$2,146,000, respectively. The federal and state tax loss carryforwards will
begin to expire in 2013 and 2008, respectively, unless previously utilized.
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 14, 2005, our executive officers and directors together
beneficially owned approximately 27.8% 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.

WE COMPETE IN A MARKET THAT IS NEW AND INTENSLY COMPETITIVE.

The Company competes in markets that are new, intensely competitive and rapidly
changing. We expect to experience increasing competition from potential
competitors, many of which will have significantly greater financial, technical,
marketing and other resources. Our competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements
than we can. Virtually all of the Company's products and services face
significant competition from existing and potential competitors, many of whom
are larger and have substantially greater resources than the Company. The
Company's satellites and satellite subsystem products compete with products and
services produced or provided by government entities and numerous private
entities, including TRW Inc., Ball Aerospace and Technology Corporation,
Lockheed-Martin, GM Hughes Electronics Corporation ("Hughes"), Orbital Sciences
Corp., Spectrum Astro, Inc., Surrey Technologies and Matra Marconi.

RISKS ASSOCIATED WITH ACQUISITIONS

The Company has historically made strategic acquisitions of businesses and
routinely evaluates potential acquisition candidates that it believes would
enhance its business. The Company has also historically pursued strategic
alliances through joint ventures and routinely evaluates similar opportunities.
Such transactions commonly involve certain risks including, among others,
assimilating the acquired operations, technologies, and personnel and
maintaining appropriate standards, controls, procedures, and policies, entering
markets in which we have little or no direct prior experience, and potentially
losing key employees of acquired organizations. There can be no assurance that
we will be successful in overcoming these risks in connection with its recent
acquisitions or any future transactions.

THE MARKET PRICE OF OUR COMMON STOCK AND THE VALUE OF YOUR INVESTMENT COULD
SUBSTANTIALLY DECLINE IF ALL OR A SIGNIFICANT PORTION OF THE PREFERRED STOCK
AND/OR WARRANTS 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 our Preferred Stock is converted, or the
exercise prices on warrants, 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 Preferred Stock or exercise of the warrants, 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
Preferred Stock and/or the exercise of the warrants.

MARKET VOLATILITY

The market price of our Common Stock may be significantly affected by factors
including announcement of funding, contract, and launch dates by the Company or
its competitors; corporate partner affiliations; changes in the regulatory
environment; technical performance of our products; market acceptance of our
products and services; variations in our operating results; changes in reports
of securities analysts; and publicity regarding the industry or the Company. In
addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies, which may adversely affect the market price of the
shares of Common Stock.

RISK OF DELISTING

Our Common Stock is quoted on the Nasdaq Over-the-Counter Bulletin Board
("OTCBB"). Under the rules of the National Association of Securities Dealers,
Inc., which monitors the OTCBB, we are required to maintain our status as a
reporting company under the Securities Exchange Act of 1934. Failure to maintain
those standards could result in our Common Stock being delisted from the OTCBB.
Any delisting of our Common Stock may adversely affect your ability to dispose
of, or to obtain quotations as to the market value of, our Common Stock. In
addition, any delisting may cause our Common Stock to be subject to the "penny
stock" regulations of the Commission. Under such regulations, broker-dealers
would be required to, among other things, comply with disclosure and special
suitability determinations prior to the sale of our Common Stock. If our Common
Stock becomes subject to these regulations, the market price of our Common Stock
and your ability to dispose of it could be adversely affected.

BLUE SKY REGISTRATION REQUIREMENTS

We believe that this Reoffer Prospectus, which is part of our registration
statement, may be used by the Selling Stockholders for the sale of the Shares
offered hereby for a period of nine months after the date on the cover page
hereof, provided that the information contained herein (including our financial
statements) is not more than 16 months old from the date of such Reoffer
Prospectus and we otherwise comply with applicable securities laws. We cannot
assure you, however, that our registration statement will remain effective as we
intend. The value of the Shares being offered by this Reoffer Prospectus could
deteriorate if a current Reoffer Prospectus covering the Shares is not part of
an effective registration statement, or if the Common Stock is not registered
for sale or exempt from registration in the jurisdictions governing the sales
made under this Reoffer Prospectus.

OUR INVESTORS MAY NOT RECEIVE DIVIDENDS.

We have not paid dividends since our inception and do not anticipate issuing
common stock dividends in the foreseeable future. There can be no guarantee or
assurance that common stock 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 1,149,500 shares of our common stock if all of our
outstanding warrants, outside of the warrants in this offering, are exercised.
In addition, as of April 18, 2005, we have outstanding stock options to purchase
an aggregate of 6,467,266 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 (4,224,993 shares) represents approximately 19.7% of our issued and
outstanding shares of common stock as of April 18, 2005 . 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 December 31, 2004, Laurus had converted the 1,818,182 shares
under the revolving credit facility. 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, 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 April 18, 2005 . 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
21,434,592 shares of common stock outstanding as of April 18, 2005 .
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) 0.94 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 April 18, 2005,
Laurus had converted the 1,818,182 shares under the revolving credit facility.

As of April 18, 2005, all other selling security holders named in this
prospectus are offering up to 942,899 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 0 50,000 0.22%
Lunar Enterprises. . 133,334 0 66,667 0.30%
Craig Haffner. . . . 66,666 0 66,666 0.30%
Alex Duncan. . . . . 95,166 0 95,166 0.42%
Arthur Benson. . . . (2) 128,470 0 128,470 0.57%
Curt Dean Blake. . . (3) 61,224 30,612 30,612 0.14%
John Gross . . . . . 61,224 0 61,224 0.27%
Edward Cuthbert. . . 102,040 51,020 51,020 0.23%
J. Mark Grosvenor. . (4) 1,330,376 665,188 665,188 2.95%
Christopher McKellar (5) 392,158 196,079 196,079 0.87%
---------- --------- ---------
2,420,658 942,899 1,411,092
---------- --------- ---------

(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 held options to purchase 1,000,000 shares of our common stock, 891,300
of which were exercised in 2004 and 88,700 shares of which were exercised in
2005 and the remaining 20,000 of which will expire in 2005, if not
exercised.
(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 April 18, 2005 plus shares issuable
upon exercise of the Warrants, the Convertible Note and the Laurus Warrant, or
22,577,491 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:

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

- 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;

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

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

- privately negotiated transactions;

- 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

- 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:

- the market price prevailing at the time of sale;

- a price related to the prevailing market price;

- at negotiated prices; or

- 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 or the other selling security holders 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
and in our periodic reports, including our annual report filed on Form 10-KSB
on March 29, 2005 .

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
or 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 commercial Atlas 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. ISS was dissolved in
2003 .

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 the design, development and testing of 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.

On March 22, 2000, the California Spaceport Authority and the California
Space and Technology Alliance awarded us 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 capabilities were
used to expand our project and technology base.

In July 2000, the National Reconnaissance Office 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
National Reconnaissance Office has helped fund two innovative hybrid rocket
motor potential products:

o family of small versatile orbital Maneuver and orbit Transfer Vehicles
using clean, safe hybrid rocket propulsion technology; and,
o protoflight hybrid propulsion module for a 50-kg class micro- satellite.

Both of those contracts were successfully completed.

In September 2001, Scaled Composites awarded us a contract for a
proprietary hybrid propulsion development program for Scaled's "SpaceShipOne,"
valued in excess of $1 million. The entire contract, awarded upon the submitted
designs, was valued at approximately $2.2 million. The contract was indicative
of an increased demand for our hybrid motor technology and expertise in the
space industry. Work on this project generated approximately $1.2 million and
$397,000 of revenue in 2002 and 2003, respectively. In September of 2003,
SpaceDev was selected by Scaled Composites as the sole supplier of hybrid
propulsions systems, and was awarded the follow-on SpaceShipOne propulsion
contract. We generated approximately $115,000 of revenue in 2003 and $686,000
of revenue in 2004 from this contract and related engineering change orders,
with approximately $180,000 from engineering change orders and approximately
$506,000 from the contract.

On December 17, 2003, which corresponded with the 100th anniversary of the
Wright Brothers flight, our hybrid propulsion system, which we believe is the
world's largest of its kind, aboard SpaceShipOne, successfully powered a pilot
toward space on its historic first powered supersonic flight. After being
released by the White Knight, a carrier aircraft, the SpaceShipOne Test Pilot
flew the ship to a stable, 0.55 mach gliding flight condition, started a
pull-up, and fired our hybrid rocket motor. Nine seconds later, SpaceShipOne
broke the sound barrier and continued its steep powered ascent. The climb was
very aggressive, accelerating forward at more than 3-g while pulling upward at
more than 2.5-g. At motor shutdown, 15 seconds after ignition, SpaceShipOne was
climbing at a 60-degree angle and flying near 1.2 Mach (930 mph). The test
pilot then continued the maneuver to a vertical climb, achieving zero speed at
an altitude of 68,000 feet.

On June 21, 2004, our proprietary hybrid rocket motor technology
successfully powered SpaceShipOne on its fourth and most important
history-making flight to space. At approximately 7:45 AM PDT on Monday, June
21st, SpaceDev powered SpaceShipOne well beyond the 50 mile altitude required to
be considered a space flight, and created the world's first private sector
astronaut. After being released by the White Knight, SpaceShipOne's test pilot,
Mike Melvill, fired the rocket motor at the planned altitude and the rocket
motor then propelled SpaceShipOne to over 328,000 feet in approximately 80
seconds, flying near Mach 5.0.

On September 29, 2004 and October 4, 2004, our hybrid propulsion technology
helped propel Scaled Composites/Paul Allen's SpaceShipOne into space flight
history as the craft garnered the $10 Million Ansari X Prize, a contest created
to stimulate the development of the private sector human space flight industry.
We provided several critical components and the hybrid rocket technology for the
craft's motor, including igniter, injector and main operating valve, which
successfully performed as expected and powered SpaceShipOne on its historic
manned flight. SpaceShipOne exceeded the altitude requirement on both scheduled
flights as required by the Ansari X Prize competition. The hybrid propulsion
system burned full duration and pilot Brian Binnie steered SpaceShipOne high
above the Mojave, California desert to a height of 367,442 feet altitude (69.5
miles), which far exceeded the required 328,000 feet altitude - a sky-high goal
required by the X Prize Foundation of St. Louis, Missouri. The altitude is
generally considered to be the threshold of space.

Although we were not the recipient of the Ansari X Prize, it was a contest
designed to jumpstart the space tourism industry through competition among the
most talented entrepreneurs and rocket experts in the world. SpaceShipOne was
built and launched with private funds from Paul Allen. The craft was able to
carry equivalent weight of three people to 100 kilometers (62.5 miles) and
return safely to earth. The competition followed in the footsteps of more than
100 aviation incentive prizes offered between 1905 and 1935 credited with
spawning today's multibillion-dollar air transport industry. By helping
SpaceShipOne succeed, we were instrumental in moving the private space community
closer to realizing its vision of creating safe, affordable, commercial human
space flight.

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. We currently have no plans to develop this business in
Oklahoma and our subsidiary there remains dormant.

On April 30, 2002, the Company was awarded Phase I of a contract to develop
a Shuttle-compatible propulsion module for the Air Force Research Laboratory. We
received an award for Phase II of the contract on March 28, 2003. We are using
the project to further expand our Maneuvering and Orbital Transfer Vehicle
technology and product line to satisfy government space transportation
requirements. The first two phases of the contract have an estimated value of
approximately $2.5 million, of which $100,000 was awarded for Phase I. Phase II
of the contract is cost-plus fixed fee. In order to complete Phase II, we
requested and were granted approximately four months of additional time and
approximately $240,000 of additional funding, memorialized by a contract
amendment executed on July 7, 2004. In addition to the Phase I and Phase II
awards, there is an option worth approximately $800,000, which was initiated on
May 3, 2004. The additional funding to complete AFRL Phase II came in part from
the original $1 million option; thereby reducing the option to approximately
$800,000. An additional effort to develop a miniaturized Shuttle-compatible
propulsion module has been added to this contract and is worth approximately
$150,000.

On July 9, 2003, we were awarded a contract by the Missile Defense Agency
to explore the use of microsatellites in national missile defense. It was a
precursor contract to the $43 million contract mentioned below. Our
microsatellites are operated over the Internet and are capable of pointing and
tracking targets in space or on the ground. This study explored fast response
microsatellite launch and commissioning; small, low-power passive sensors;
target acquisition and tracking; formation flying and local area networking
within a cluster of microsatellites; 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. This contract was considered an investigatory phase by MDA.

Also, on July 9, 2003, we were awarded a Phase I Small Business Innovation
Research contract by Air Force Research Lab to design and effectively begin the
development of our small launch vehicle. The SpaceDev Small Launch Vehicle will
be designed to responsively and affordably lift up to 1,000 pounds to Low Earth
Orbit. The SpaceDev Small Launch Vehicle 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 was valued at
approximately $100,000, and was a fixed price, milestone-based agreement, which
was completed in about one year. The Phase II of this SBIR was awarded on
September 29, 2004 and is worth approximately $1,557,000. The contract outlines
the development and test firing of our large Common Core Booster for the
SpaceDev Small Launch Vehicle. Congress has awarded us approximately $3.0
million in additional funding for this project, which we expect will be
available by mid-2005. We believe that there is additional interest by Congress
in providing further funding to expand and accelerate the scope of the work;
however, there can be no assurance that such work will be awarded to us.

Also, on July 9, 2003, we were awarded a Phase I contract to develop micro
and nanosatellite bus and subsystem designs. This Air Force Research Laboratory
Small Business Innovation Research contract, valued at approximately $100,000,
has enabled us to explore the further miniaturization of our unique and
innovative microsatellite subsystems. It has also enabled 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 was
completed in about one year. On August 23, 2004, we were awarded the Phase II
of this Small Business Innovation Research grant, which was later amended on
September 8, 2004 to shorten the length of the overall contract, worth
approximately $739,000 for carry-forward work.

On July 24, 2003, we were awarded a contract by Lunar Enterprise of
California for a first phase project to begin developing a conceptual mission
and spacecraft design for a lunar lander program. The unmanned mission is being
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 were awarded a follow-on phase 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 on July 20, 2004 in the amount of
$150,000. The contract has been completed.

On March 31, 2004, we were awarded a five-year, cost-plus-fixed fee
indefinite delivery/indefinite quantity contract for up to $43,362,271 to
conduct a microsatellite distributed sensing experiment, an option for a laser
communications experiment, and other microsatellite 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, with the first
Task Order for approximately $1.1 million awarded on April 1, 2004 and completed
by September 30, 2004. The second Task Order for approximately $8.3 million was
awarded on October 20, 2004. The principal place of performance will be Poway,
California. We expect to complete the work under the contract before March 2009.
Government contract funds will not expire at the end of the current government
fiscal year. The microsatellite distributed sensing experiment is intended to
design and build up to six responsive, affordable, high performance
microsatellites to support national missile defense. The milestone-based,
multiyear, multiphase contract had an effective start date of March 1, 2004.
Approximately $1.14 million of revenue was generated under the first phase of
this contract. The first phase or "Task Order," resulted in a detailed mission
and microsatellite design. The second phase or "Task Order," was signed on
October 20, 2004 with an effective date of October 1, 2004. The second Task
Order is expected to be completed by January 2006. 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
microsatellites to be networked on-orbit with high speed laser communications
technology. The third phase is anticipated to begin on or before February
2006.

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";

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

o Establish a team to build a safe, affordable orbital passenger vehicle as
a potential shuttle replacement .

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 Decreases schedule time and lowers total project costs, thereby providing
greater value and increasing return on investment for us and our customers; and

o Creates barriers to entry by and competition from competitors.

PRODUCTS AND SERVICES; MARKET

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

Our Spacecraft Products and Services - Microsatellites & Nanosatellites,
BD-II Spacecraft Buses, and Maneuvering and orbital Transfer Vehicles; and,

Our Propulsion Products and Services - Hybrid Propulsion and Launch Vehicle
Systems.

These products and services are being marketed and sold directly into
primarily domestic government, university, military and commercial markets. We
consider ourselves a project company rather than a product company today,
although products are generated from projects. Our long term goal and vision is
to migrate from a project company to a product company. 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 and Boeing Lunar Orbiter mission design contracts.

OUR SPACECRAFT PRODUCTS AND SERVICES
----------------------------------------

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 and weight. 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,
high-performance space-mission solutions involving microsatellites (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, government and potentially
international customers.

BD-II (BOEING DELTA-II COMPATIBLE) SPACECRAFT BUSES - 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 began developing this product in 1999, when we were selected as
the mission designer, spacecraft bus provider, integrator and mission operator
of the University of California at Berkeley Space Sciences Laboratory's 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.

Maneuvering and orbital Transfer Vehicle - Our Maneuvering and orbital
Transfer Vehicle system is a family of small, affordable, elegantly simple,
throttleable, and restartable propulsion and integrated satellite products. Our
Maneuvering and orbital Transfer Vehicle can be used as a standard propulsion
module to transport a customer's payload to different orbits. The Maneuvering
and orbital Transfer Vehicle 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 transfers.

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 is only 24 cubic inches and provides 300 million instructions per
second 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 work with 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, 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 have the
capacity to perform all the tasks required for the customer to get to orbit and
to begin collecting their data.

MISSION CONTROL AND OPERATIONS - OUR mission control and operations center,
located in our headquarters building near San Diego, coupled with 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. CHIPSat was 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 microsatellites, similar to the cluster
of microsats we are developing for the Missile Defense Agency, can be designed
to communicate directly with each other, as in a wide area network in space.
Provided any one satellite/node in this network is in line-of-sight with any
ground station at any given time, the entire constellation could 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.

OUR PROPULSION PRODUCTS AND SERVICES
----------------------------------------

Hybrid Rocket Propulsion and Launch Vehicle Systems - We provide a wide
variety of safe, clean, simple, reliable, cost-effective 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.

Hybrid Orbital Vehicle - we have begun designing a reuseable, piloted,
sub-orbital space ship that could be scaled to safely and economically transport
passengers to and from low earth orbit, including the International Space
Station. The name of the vehicle is the SpaceDev DreamChaser(TM). We signed a
non-binding Space Act Memorandum of Understanding with NASA Ames Research
Center, which confirms our intention to explore novel, hybrid propulsion based
hypersonic test beds for routine human space access. We will explore with NASA
collaborative partnerships to investigate the potential of using our proven
hybrid propulsion and other technologies, and a low cost, private space program
development approach, to establish and design new piloted small launch vehicles
and flight test platforms to enable near-term, low-cost routine space access for
NASA and the United States. One possibility for collaboration is the SpaceDev
DreamChaser(TM) project, which is currently being discussed with NASA Ames.
Unlike the more complex SpaceShipOne, for which SpaceDev provided critical
proprietary hybrid rocket motor propulsion technologies and components, the
SpaceDev DreamChaser(TM) would be crewed and launch vertically, like most launch
vehicles, and would glide back for a normal horizontal runway landing. The
sub-orbital SpaceDev DreamChaser(TM) will have an altitude goal of approximately
160 km (about 100 miles) and will be powered by a single, high performance
hybrid rocket motor, under parallel development by us for the SpaceDev
Streaker(TM), a family of small, expendable launch vehicles, designed to
affordably deliver small satellites to low earth orbit. The SpaceDev
DreamChaser(TM) will use motor technology being developed for the SpaceDev
Streaker(TM) booster stage, the most powerful motor in the Streaker family. The
SpaceDev DreamChaser(TM) motor will produce approximately 100,000 pounds of
thrust, about six times the thrust of the SpaceShipOne motor, but less than
one-half the thrust of the 250,000 pounds of thrust produced by hybrid rocket
motors developed several years ago by the American Rocket Company. Our
non-explosive hybrid rocket motors use synthetic rubber as the fuel, and nitrous
oxide for the oxidizer to make the rubber burn. Traditional rocket motors use
two liquids, or a solid propellant that combines the fuel and oxidizer, but both
types of rocket motors are explosive, and all solid motors produce copious
quantities of toxic exhaust. Our hybrid rocket motors are non-toxic and do not
detonate like solid or liquid rocket motors.

Mission Analysis and Design - We can 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 or are
nearing qualification 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.

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 2003, we began an active and comprehensive internal
and external ITAR training program provided by our regulatory consulting firm, Q
International Group, and the Society for International Affairs, both for our
employees and our empowered office, Richard B. Slansky. We also introduced an
Internal Export Compliance Control Program for defense articles and defense
services controlled by the U.S. Department of State under ITAR.

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").

Also, as some of our projects with the Department of Defense proceed, we
may need special clearances to continue working on and advancing our projects.
Classified programs generally will require that we comply with various Executive
Orders, Federal laws and regulations and customer security requirements that may
include specialized facilities and restrictions on how we develop, store,
protect and share information. Laboratories, manufacturing and assembly areas,
meeting spaces, office areas, storage areas, computers systems and networks and
telecommunications systems may require modification or replacement in order to
comply with customer requirements. Classified programs may require our employees
to obtain government clearances and restrict our ability to have key employees
work on these programs until these clearances are received from the appropriate
United States government agencies. In order to staff these programs we may need
to recruit personnel with the appropriate professional training, experience and
security clearances. There are a very limited number of individuals with all of
the requirements that we seek. There is no assurance that we can locate and
recruit these individuals in a timely and cost-effective manner. We may be
required to modify existing facilities and to develop new facilities and
capabilities that will only be utilized by these classified programs. We may be
required to install computer networks, communications systems and monitoring
systems that are dedicated to these classified programs. Some or all of these
requirements may entail substantial additional expense. It is uncertain whether
we will be able to recover any of the costs of these systems from our customers.
Many of these classified programs are regulated by Executive Orders, various
Federal laws and regulations and customer requirements. The failure of the
Company to comply with any of the foregoing Executive Orders, Federal laws and
regulations and customer requirements could have serious adverse effects. Also,
our ability to successfully market and sell into the Department of Defense
markets may be severely hampered if we are unable to meet classified program
requirements. There is no assurance that we will be able to successfully pass
the criteria required in order to win a classified program or to maintain
current contracts, such as our Missile Defense Agency contract (which may become
classified), and there is no assurance that we will maintain that status once it
has been obtained. This year we began an active program to complete the steps
required in order to win preliminary certification for classified programs. A
number of our employees have received preliminary and permanent security
clearances. We received preliminary certification for classified computer system
processing in early 2005.

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. There was no outstanding balance on the
revolving credit facility at December 31, 2004.

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. As of April 18, 2005, 1,818,182 shares had been issued on
conversion of the line of credit since commencement. There is currently no
balance of the Convertible Note.

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 our 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 Agreement). The fixed conversion price will be adjusted
after conversion of the
31

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 is 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%.

In conjunction with the Preferred Stock financing, Laurus agreed to
extend the revolving credit facility from $1.0 million to $1.5 million and
committed to converting $1,000,000 under the Convertible Note into common stock
before December 31, 2004. All $1,000,000 was converted prior to December 31,
2004 and there was no outstanding balance on the Convertible Note as of that
date.

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 April 18, 2005, we employed approximately thirty-eight (38)
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; U.S. government budget cuts; 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 some of the 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
microsatellites, nanosatellites 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

nanosatellites, hybrid rocket-based launch vehicles, Maneuvering and orbital
Transfer Vehicles as well as safe sub-orbital and orbital hybrid rocket-based
propulsion systems. Although we believe there will be a commercial market for
our microsatellite and nanosatellite 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 "SPDV."

SELECTION OF SIGNIFICANT CONTRACTS

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 microsatellite distributed sensing experiment, an option for a laser
communications experiment, and other microsatellite 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 at our facilities located in Poway, California. We expect
to complete the work under the contract before March 2009. Government contract
funds will not expire at the end of the current government fiscal year. The
microsatellite distributed sensing experiment is intended to design and build up
to six responsive, affordable, high performance microsatellites to support
national missile defense. The milestone-based, multiyear, multiphase contract
had an effective start date of March 1, 2004. The first phase was completed on
September 30, 2004 and resulted in detailed mission and microsat designs. The
first phase revenue was approximately $1.14 million. On October 1, 2004, the
second phase of the contract began with an approximate value of $8.3 million and
is expected to last approximately 18 months. 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.

On December 18, 2003, we were awarded a contract by the Defense Advanced
Research Projects Agency for the study of Novel Satcom Microsat Constellation
Deployment. The contract was a milestone-based, fixed price contract with total
consideration of approximately $200,000. On August 6, 2004, an additional
$39,849 was added to the contract for increased scope bringing the total
contract value on this fixed price effort to approximately $240,000. We have
successfully completed this contract and the entire revenue of approximately
$240,000 was realized during the twelve-month period ending December 31, 2004.
We expect to either further expand this contract or obtain new contracts under
the Defense Advanced Research Projects Agency program(s); however, there can be
no assurance as to whether such contract(s) will be awarded to us, or, if
awarded, there can be no assurance as to the amounts or terms of the awards.

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 and 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 provided 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 produced and assembled test
motors, including but not limited to, all expendable or semi-reusable materials
as defined by our baseline design motor. We also provided on-site engineering
test support and post-test analysis. Provisions were 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 was originally estimated at $615,000. Approximately
$686,000 of revenue was realized in the year ending December 31, 2004, with
approximately $180,000 from engineering change orders and the remaining $506,000
from the contract.

On July 24, 2003, we were awarded a contract by Lunar Enterprise of
California 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 were awarded a follow-on phase 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 on July 20, 2004 in the amount of
$150,000. Although the complete 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 any additional contracts
will be awarded to us from this contract. We successfully completed this stage
of the project, and revenues for the year ending December 31, 2004 were
approximately $150,000.

On July 9, 2003, we were awarded a contract by the Missile Defense Agency
to explore the use of microsatellites in national missile defense. It was a
precursor contract to the $43 million contract mentioned above. Our
microsatellites are operated over the Internet and are capable of pointing and
tracking targets in space or on the ground. This study explored fast response
microsatellite launch and commissioning; small, low-power passive sensors;
target acquisition and tracking; formation flying and local area networking
within a cluster of microsatellites; 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 $319,000 of revenue realized in 2004 and
approximately $481,000 of revenue realized in 2003. This contract was
considered an investigatory phase by MDA.

Also, on July 9, 2003, we were awarded a Phase I Small Business Innovation
Research contract by Air Force Research Lab to design and effectively begin the
development of our small launch vehicle. The SpaceDev Small Launch Vehicle will
be designed to responsively and affordably lift up to 1,000 pounds to Low Earth
Orbit. The 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 was valued at approximately $100,000, and was
a fixed price, milestone-based agreement, which was completed in about one year.
Phase II of this Small Business Innovation Research grant was awarded on
September 29, 2004 and is worth approximately $1,557,000. The contract outlines
the development and test firing of our large Common Core Booster for the
SpaceDev Small Launch Vehicle. Congress has awarded us approximately $3.0
million in additional funding for this project, which we expect will be
available by mid-2005. We believe that there is additional interest by Congress
in providing further funding to expand and accelerate the scope of the work;
however, there can be no assurance that such work will be awarded to us.
Revenue from this project for the year ending December 31, 2004 was
approximately $58,000 for Phase I and approximately $161,000 for Phase II.
Revenue from this project for the year ending December 31, 2003 was
approximately $42,000 for Phase I.

Also, on July 9, 2003, we were awarded a Phase I contract to develop micro
and nanosatellite bus and subsystem designs. This Air Force Research Laboratory
Small Business Innovation Research contract was valued at approximately
$100,000, and enabled us to explore the further miniaturization of our unique
and innovative microsatellite subsystems. It also enabled 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 was fixed price, milestone-based and was
completed within one year. On August 23, 2004, we were awarded Phase II of this
Small Business Innovation Research, which was later amended on September 8,
2004, to shorten the length of the overall contract, worth approximately
$739,000 for carry-forward work. Revenues for the year ending December 31, 2004
were approximately $52,000 for Phase I and approximately $52,000 for Phase II.
Revenues for the year ending December 31, 2003 were approximately $48,000 for
Phase I.

On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for the Air Force Research Laboratory. We
received an award for Phase II of the contract on March 28, 2003, and used 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) were worth approximately $2.5 million,
of which $100,000 was awarded for Phase I, and approximately $1.4 million was
awarded for Phase II. Phase II is a cost-plus fixed fee contract. In order to
complete Phase II, we requested and were granted approximately four months of
additional time and approximately $240,000 of additional funding, memorialized
by a contract amendment executed on July 7, 2004. In addition to the Phase I
and Phase II awards, there was an option worth approximately $800,000, which was
initiated on May 3, 2004, of which approximately $565,000 was funded and the
balance to complete Phase II remains unfunded. Part of the funding for Phase II
came from the original $1 million option; thereby reducing the option to
approximately $800,000. An additional effort to develop a miniaturized
Shuttle-compatible propulsion module has been added to this contract worth
approximately $150,000. Revenue for the year ending December 31, 2004 was
approximately $1.2 million for Phase II, including the exercised option, and
approximately $159,000 for the new add on contract. Revenue for the year
ending December 31, 2003 was approximately $997,000 for Phase II.

In November 1999, we won a $4.9 million mission contract by the Space
Sciences Laboratory at the University of California at Berkeley. We were
competitively selected 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, to our knowledge, only successful mission of
NASA's low-cost University-Class Explorer series to date. Due to additional
NASA and customer reviews, additional work, schedule extensions and a fee for
one year of satellite operations, the CHIPSat contract award was increased by
approximately $2.5 million in 2001 and 2002, bringing the total contract value
for design, build, launch and operations to approximately $7.4 million. CHIPSat
launched as a secondary payload on a Delta-II rocket on January 12, 2003.
CHIPSat is the world's first orbiting Internet node, 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 more than two years. The CHIPSat program generated
approximately $2.1 million, $3.2 million, $1.7 million, $0.4 million and less
than $0.1 million of revenue in 2000, 2001, 2002, 2003 and 2004, respectively.
As of December 31, 2003, the total contract costs were expended, mainly as cost
of goods sold. There were minimal costs incurred in 2004. The original support
contract expired on December 31, 2003. CHIPSat is still operating successfully
and providing the University of California at Berkeley with new and interesting
data. The University of California at Berkeley requested to extend the program
and we negotiated a new time and materials contract in the first quarter of 2004
in the form of a purchase order with the University of California at Berkeley
for continuing support of this project. The contract will continue until the
University of California at Berkeley decides that no further relevant
information is forthcoming or funding is terminated, at which time the use of
the microsatellite will revert to NASA and then to us. Revenues for the year
ending December 31, 2004 and 2003 were approximately $25,000 and $356,000,
respectively.

In February 1998, our operations were expanded with the acquisition of
Integrated Space Systems, Inc., a California corporation founded for the purpose
of providing engineering and technical services related to space-based systems.
The Integrated Space Systems 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. Integrated Space Systems 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 Integrated
Space Systems, which was approximately $923,000, had become impaired and it was
written off. While the Integrated Space Systems 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 dissolved Integrated
Space Systems 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 ENDING DECEMBER 31, 2004 -VS.- YEAR ENDING DECEMBER 31, 2003

During the year ending December 31, 2004, we had net sales of approximately
$4,891,000 as compared to net sales of approximately $2,956,000 for the same
period in 2003. Sales increased primarily due to our new government contracts

and few delays in finalizing follow-on contracts for the current Missile Defense
Agency task orders. Sales in 2004 reflected our completion of the Missile
Defense Agency Phase 0 and Task Order 1 on the Missile Defense Agency contract
of approximately $319,000 and $1,140,000, respectively, as well as the start of
Task Order II for approximately $574,500 of our $43 million contract. We had
ongoing contracts with the Air Force Research Laboratory and the Small Business
Innovation Research contract Phase II, the option to that contract and an add-on
contract totaled approximately $1.4 million. Other ongoing work from
SpaceShipOne totaled approximately $686,000. We had a new Defense Advanced
Research Projects Agency contract that had revenues which totaled approximately
$240,000 and our Air Force Research Laboratory Small Business Innovation
Research work for Phase I and II had revenues which totaled approximately
$323,000. We also had smaller projects with approximately $208,500 in revenue,
which included CHIPSat, and the lunar lander project as well other smaller
projects. Sales in 2003 reflected the substantial completion of CHIPSat and the
completion of the original SpaceShipOne contract, the Air Force Research
Laboratory Small Business Innovation Research Phase I and the Missile Defense
Agency Phase 0 work, while SpaceShipOne began on October 2, 2003, a new contract
with the Missile Defense Agency began on July 9, 2003, a new contract with the
Air Force Research Laboratory began on July 9, 2003 and a new contract with
Lunar Enterprises began on July 24, 2003. The total value of the Missile
Defense Agency contract, the Air Force Research Laboratory contract and the
Lunar Enterprises contract was approximately $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 the Air Force Research
Laboratory Small Business Innovation Research (Phase I and II) contracts,
respectively; $397,000 and $115,000 from the original and new SpaceShipOne
contracts), respectively; $250,000 and $481,000 from the Missile Defense Agency
(Phase I and II) contracts, respectively; $356,000 from the CHIPSat program;
$100,000 from the contract by Lunar Enterprises of California; and approximately
$234,400 from all other programs.

For the year ending December 31, 2004, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately
$3,821,000, or 78.12% of net sales, as compared to approximately $2,415,000, or
81.69% of net sales, during the same period in 2003. The increase in cost of
sales was primarily due to higher revenue 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 Air Force
Research Laboratory and Missile Defense Agency 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, 2004 was 21.88% of net sales, an
increase of 3.57% of net sales, as compared to 18.31% of net sales for the
period in 2003.

We experienced a decrease of approximately $505,000 in operating expenses
from approximately $1,431,000, or 48.42% of net sales, in the year ending
December 31, 2003 to approximately $926,000, or 18.93% of net sales, for the
year ending December 31, 2004. Operating expenses include general and
administrative expenses, marketing and sales expenses and research and
development expenses, as well as stock and stock option based compensation
expenses.

- Marketing and sales expenses increased during 2004 (but decreased as a
percentage of sales), from approximately $395,000, or 13.36% of net sales,
for the year ending December 31, 2003, to approximately $419,000, or 8.56%
of net sales, during the same period in 2004. The total dollar value
increased by approximately $24,000, mainly due to our decision to expand
our marketing and sales department, with partial costs of our Vice
President of New Business Development and our Chief Executive Officer being
charged to marketing and sales expenses.

- Research and development expenses decreased approximately $242,000 during
2004. Although we focus our efforts on government funded development and
rarely do pure research, we devote certain resources to building our
intellectual property portfolio. We incurred research and development
expenses of approximately $281,000, or 9.51% of net sales, during the year
ending December 31, 2003. We decreased non-funded research and development
expenditures in 2004 to approximately $39,400. During 2003, approximately
$192,000 of research and development costs were related to our hybrid
rocket propulsion design system and technologies outside the scope of our
SpaceShipOne contract and the remaining $89,000 was related to our
satellite bus design and development effort. In 2004, we continued to fund
a small amount of hybrid rocket propulsion design and development
independent of any contract.

- We had no expenses from stock and stock option based compensation during
the year ending December 31, 2004, compared to approximately $9,000, or
0.31% of net sales, for the same period in 2003. See "Critical Accounting
Policies" below.

- General and administrative expenses decreased approximately $279,000 from
approximately $746,000, or 25.23% of net sales, for the year ending
December 31, 2003 to approximately $467,000, or 9.56% of net sales, for the
same period in 2004. This decrease is attributed to better controls and
internal procedures, reduced overhead costs and more of the actual overhead
costs being more finely classified as cost of goods sold.

Non-operating expense/(income) consisted 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, 2004 and 2003 was
approximately $52,000, or 1.06% of net sales, and $91,000, or 3.09% of net
sales, respectively. The decrease was due to a reduction in debt with fewer
notes payable. We continue to pay interest expense on certain capital
leases and settlement notes, although the balances continue to decline. We
accrued interest expense on our related party note, which was paid in full
during 2004, and on our revolving credit facility, which also had a zero
balance at December 31, 2004. We accrued and paid interest on our related
party note of approximately $29,000 for the year ending December 31, 2004
and accrued $47,000 for the year ending December 31, 2003. We also accrued
and paid approximately $4,700 of interest on our various capital leases and
notes payable and accrued and paid approximately $18,300 and $12,000 of
interest on our revolving credit facility for the years ending December 31,
2004 and 2003, respectively. For the year ending December 31, 2003, we
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. We began generating
interest income in 2004 of approximately $19,500, or 0.40% of net sales,
due to increasing cash balances.

- We recognized approximately $117,000 and $107,500 of the deferred gain on
the sale of the building during the years ending December 31, 2004 and
2003, respectively, and we will continue to amortize the remaining deferred
gain of approximately $948,000 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, 2004 or 2003, respectively. The reduction of
the income tax payable in 2003 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
(approximately $2,480,000) and expenses related to the conversion of
previous notes payable (approximately $774,000) into common stock at below
fair market value for a total of approximately $3,254,000 and $258,000 for
the year ending December 31, 2004 and 2003. We do not anticipate additional
expenses related to similar note to equity conversions in the upcoming
quarters of 2005.

- 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.

During the year ending December 31, 2004, we incurred a net loss of
approximately $3,027,000, or 61.89% of net sales, compared to a net loss of
approximately $1,246,000, or 42.15% of net sales, for the same period in 2003.
During the year ending December 31, 2004, we incurred a positive EBITDA
(earnings before interest taxes depreciation and amortization) of approximately
$228,000, or 4.66% of net sales, compared to a negative EBITDA of approximately
$723,000, or 24.46% of net sales, for the year ending December 31, 2003.

The following table reconciles Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA) to net loss for the twelve-months ending
December 31, 2004 and 2003, respectively:

FOR THE TWELVE-MONTHS ENDING . . . . . DECEMBER 31, 2004 December 31, 2003
(AUDITED) (Audited)
-------------------------------------- ------------------- -------------------
NET INCOME (LOSS). . . . . . . . . . . $ (3,027,054) $ (1,246,067)
-------------------------------------- ------------------- -------------------

Interest Income. . . . . . . . . . . . (19,497) -
Interest Expense . . . . . . . . . . . 52,077 91,493
Non-Cash Interest exp. (Debt Discount) - 112,500
Gain on Building Sale. . . . . . . . . (117,272) (107,498)
Loan Fee - Equity Conversion. . . . . 3,254,430 257,882
Provision for income taxes . . . . . . 1,600 1,600
Depreciation and Amortization. . . . . 83,531 166,971
-------------------------------------- ------------------- -------------------
EBITDA (LBITDA)* . . . . . . . . . . . $ 227,815 $ (723,119)
-------------------------------------- ------------------- -------------------
* Loss Before Interest, Taxes, Depreciation and Amortization.

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 revolving credit facility and the non-cash interest
expense in conversions under the revolving credit facility. For the eight
consecutive quarters in 2003 and 2004, we showed continued progress in total
revenue as well as in EBITDA.

[GRAPHIC OMITED]

QUARTER ENDING DECEMBER 31, 2004 -VS.- QUARTER ENDING DECEMBER 31, 2003

SPACEDEV, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDING
(UNAUDITED)

THREE MONTHS ENDING DECEMBER 31,. . . . . . . 2004 % 2003 %
---------------------------------------------- ---------------- ------------ ---------- --------

NET SALES . . . . . . . . . . . . . . . . . . $ 1,445,174 100.00% $ 901,746 100.00%
---------------------------------------------- ---------------- ------------ ---------- -------

TOTAL COST OF SALES . . . . . . . . . . . . . 1,118,100 77.37% 732,573 81.24%
---------------------------------------------- ---------------- ------------ ---------- -------

GROSS MARGIN. . . . . . . . . . . . . . . . . 327,075 22.63% 169,173 18.76%
---------------------------------------------- ---------------- ------------ ---------- -------

OPERATING EXPENSES
Marketing and sales expense. . . . . . . . 101,001 6.99% 83,606 9.27%
Research and development . . . . . . . . . - 0.00% 8,743 0.97%
Stock and stock option based compensation. - 0.00% 4,485 0.50%
General and administrative . . . . . . . . 170,999 11.83% 84,050 9.32%
---------------------------------------------- ---------------- ------------ ---------- -------

TOTAL OPERATING EXPENSES. . . . . . . . . . . 271,999 18.82% 180,884 20.06%

INCOME/(LOSS) FROM OPERATIONS . . . . . . . . 55,075 3.81% (11,711) -1.30%

NON-OPERATING EXPENSE/(INCOME)
Interest expense/(income). . . . . . . . . (20,093) -1.39% 26,809 2.97%
Non-cash interest expense debt discount. . - 0.00% - 0.00%
Gain on Building Sale. . . . . . . . . . . (29,318) -2.03% (29,318) -3.25%
Loan Fee - Equity Compensation . . . . . . 797,636 55.19% 109,470 12.14%
---------------------------------------------- ---------------- ------------ ---------- -------

TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . 748,225 51.77% 106,961 11.86%

LOSS BEFORE INCOME TAXES. . . . . . . . . . . (693,150) -47.96% (118,672) -13.16%
Income tax provision. . . . . . . . . . . . . 1,600 0.11% 1,600 0.18%
---------------------------------------------- ---------------- ------------ ---------- -------

NET LOSS. . . . . . . . . . . . . . . . . . . $ (694,750) -48.07% $(120,272) -13.34%
---------------------------------------------- ---------------- ------------ ---------- -------

NET LOSS PER SHARE:
Net loss. . . . . . . . . . . . . . . . . . $ (0.04) $ (0.01)
---------------------------------------------- ---------------- ------------ ---------- -------

Weighted-Average Shares Outstanding . . . . 19,545,951 16,282,485
---------------------------------------------- ---------------- ------------ ---------- -------

NOTE: THE NUMBERS PRESENTED IN THE CHART ABOVE WERE NOT AUDITED OR REVIEWED FOR
THE THREE-MONTH PERIODS ENDING DECEMBER 31, 2004 AND 2003, RESPECTIVELY. WE,
AND NOT OUR AUDITORS, ARE RESPONSIBLE FOR THEIR FAIR PRESENTATION IN CONFORMITY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.

During the fourth quarter of 2004, we recorded our eighth consecutive
quarter of revenue growth and our fourth consecutive quarter of profit from
operations. During the three-month period ending December 31, 2004, we had net
sales of approximately $1,445,000 as compared to net sales of approximately
$902,000 for the same three-month period in 2003, an increase of over 60.0%.
Sales increased primarily due to the addition and expansion of our contracts
with customers such as the Air Force Research Laboratory and the Missile Defense
Agency, which created new revenue opportunities for us. Revenue increased
approximately 17% from approximately $1,230,000 in the third quarter of 2004,
mainly due to Task Order 2 of our Missile Defense Agency contract, which began
in October 2004. Revenues for the three-month period ending December 31, 2004
were comprised of approximately $575,000 from the Missile Defense Agency Task
Order 2, approximately $422,000 from the Air Force Research Laboratory Phase II
contract including the option and additional contract value, approximately
$204,000 from the two Small Business Innovation Research contracts listed above,
approximately $110,000 from the Lunar Enterprises project, approximately $76,000
from SpaceShipOne, approximately $40,000 from our Defense Advanced Research
Projects Agency contract and approximately $18,000 from all other programs.
During the same period of 2003, sales were comprised of approximately $336,000
from the Missile Defense Agency contract, approximately $321,000 from the Air
Force Research Laboratory Phase II contract, approximately $102,000 from the
SpaceShipOne contract, approximately $54,000 from two Air Force Research
Laboratory Small Business Innovation Research projects, approximately $30,000
form the contract with Lunar Enterprises, approximately $24,000 from the
completion of the CHIPSat program and approximately $35,000 from all other
programs.

For the three-months ending December 31, 2003, we had costs of sales
(direct and allocated costs associated with individual contracts) of
approximately $1,118,000, or 77% of net sales, as compared to approximately
$732,000, or 81% of net sales, during the same three-month period in 2003. The
increase in cost of sales was primarily attributable to the increase in revenue
on all programs and, in particular, to increases in cost plus contracts as a
percentage of total contracts, which derive revenue from costs spent. The gross
margin for the three-month period ending December 31, 2004 was approximately
$327,000, or 23% of net sales, an increase of 4% of net sales over the prior
year. The increase was mainly due to the improved management of our projects
and the influence of our fixed priced contracts, which generally carry higher
margins than our cost plus contracts.

We experienced an increase of approximately $91,000 in operating expenses
from approximately $181,000, or 20% of net sales, for the three-month period
ending December 31, 2003 to approximately $272,000, or 19% of net sales, for the
three-month period ending December 31, 2004, primarily due to an increase in
market and sales and general and administrative cost. Operating expenses
include general and administrative expenses, marketing and sales expenses and
research and development expenses as well as stock and stock option based
compensation expenses. Fluctuations in operating expenses for 2004 from 2003
are primarily attributable to the following:

- Marketing and sales expenses accounted for an increase of approximately
$17,000 in operating expenses during the fourth quarter of 2004 (but a
decrease as a percentage of sales), from approximately $84,000, or 9.27% of
net sales, for the three-months ending December 31, 2003, to approximately
$101,000, or 6.99% of net sales, during the same period in 2004. The total
dollar expenditure increased mainly due to our decision to expand our
marketing and sales department, with partial costs of our Vice President of
New Business Development and our Chief Executive Officer being charged to
marketing and sales expenses

- Research and development expenses accounted for a decrease of
approximately $9,000 in operating expenses from no recorded research and
development expenses during the three-months ending December 31, 2004 to
approximately $9,000 during the same three-month period in 2003. Although
we focus our efforts primarily on government funded development and rarely
do pure research, we devote certain resources to building our intellectual
property portfolio. During 2003, our research and development costs were
related to our hybrid rocket propulsion design system and technologies
outside the scope of our SpaceShipOne contract.

- General and administrative expenses accounted for approximately $82,500
of the increase in operating expenses. General and administrative expenses
consist primarily of salaries for administrative personnel, fees for
outside consultants, rent, insurance, legal and accounting fees and other
overhead expenses. General and administrative expenses for the three-months
ending December 31, 2004 were approximately $171,000 compared to
approximately $88,500 (including approximately $4,500 for stock and stock
option based compensation) for the same three-month period in 2003. The
increase was primarily attributable to increased staff and support costs,
the implementation of our new accounting and project tracking system and
the addition of a government contract administrator.

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

- Interest expense/(income) for the three-month periods ending December 31,
2004 and 2003 was approximately ($20,000), or 1.4% of net sales, and
$27,000, or 3.9% of net sales, respectively. The improvement was due to a
reduction of interest on debt mainly from a repayment/conversion under our
revolving credit facility, an adjustment to reclassified interest expense
from the prior quarter and an increase in interest earned on growing cash
balances. Interest expense is comprised of interest on our note to our CEO,
interest on our revolving credit facility, interest on our convertible debt
and interest on our settlement notes/capital leases. For the three-month
period ending December 31, 2004 and 2003, interest expense on our note to
our CEO was approximately $0.00 and $19,000, respectively. For the
three-month period ending December 31, 2004 and 2003, interest expense on
our revolving credit facility/convertible debt was $11,000 and $18,000,
respectively. And interest expense on our settlement notes/capital leases
for the three-month periods ending December 31, 2004 and 2003 were
approximately $900 and $1,800 respectively. We also earned interest income
during the three-months ending December 31, 2004 of approximately $13,400
from our growing cash balances and reclassified approximately $18,500 from
interest expensed in the prior quarter.

- We recognized approximately $29,000 of the deferred gain on the sale of
the building during the three-months ending December 31, 2004 and 2003,
respectively, and we will continue to amortize the remaining deferred gain
of approximately $948,000 into non-operating income over the remainder of
the lease.

- We recognized approximately $798,000 in non-cash interest expense and
loan fees of which approximately $763,000 was related to our revolving
credit facility and approximately $35,000 was related to the conversion of
notes to common stock below fair market value for the three-month period
ending December 31, 2004. We anticipate no additional expenses related to
similar note to equity conversions in the upcoming quarters of 2005.

During the three-month period ending December 31, 2004, we incurred a net
loss of approximately $695,000, or 48% of net sales, compared to a loss of
approximately $120,000, or 13% of net sales, for the same three-months ending in
2003. During the three-month period ending December 31, 2004, we incurred a
positive EBITDA (earnings before interest taxes depreciation and amortization)
of approximately $83,000, or 5% of net sales, compared to a positive EBITDA of
approximately $2,200, or 1% of net sales, for the same three-months ending in
2003. The following table reconciles EBITDA to net loss for the three-months
ending December 31, 2004 and 2003, respectively:

FOR THE THREE-MONTHS ENDING. . . . . . DECEMBER 31, 2004 December 31, 2003
(UNAUDITED) (Unaudited)
-------------------------------------- ------------------- -------------------
NET INCOME/(LOSS). . . . . . . . . . . $ (694,750) $ (120,272)
-------------------------------------- ------------------- -------------------

Interest Expense/(Income). . . . . . . (20,093) 26,809
Non-Cash Interest exp. (Debt Discount) - -
Gain on Building Sale. . . . . . . . . (29,318) (29,318)
Loan Fee - Equity Conversion. . . . . 797,636 109,470
Provision for income taxes . . . . . . 1,600 1,600
Depreciation and Amortization. . . . . 28,250 13,948
-------------------------------------- ------------------- -------------------
EBITDA . . . . . . . . . . . . . . . . $ 83,325 $ 2,237
-------------------------------------- ------------------- -------------------

EBITDA should not be considered as an alternative to net income or loss (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.

[GRAPHIC OMITED]

LIQUIDITY AND CAPITAL RESOURCES

CASH POSITION FOR YEAR ENDED DECEMBER 31, 2004 -VS.- YEAR ENDED DECEMBER
31, 2003

Net increase in cash during the year ending December 31, 2004 was
approximately $4,477,000 compared to a net increase of approximately $564,000
for the same period in 2003. Net cash used in operating activities totaled
approximately $110,000 for the year ending December 31, 2004, a decrease of
approximately $925,000 as compared to approximately $1,035,000 used in operating
activities during the same period in 2003. The improvement in cash position was
mainly due to our improved operating performance, an increase in accounts
receivable from new and existing contracts and a reduction in work-in-process
due to the shift from fixed price contracts to cost plus fixed fee contracts, as
well as a few other small improvements.

Net cash used in investing activities totaled approximately $225,000 for
the year ending December 31, 2004, compared to approximately $3,111,000 provided
by investing activities during the same period in 2003. The increase in cash
used in investing activities is attributable to the sale of the building on
January 31, 2003 and the purchase of fixed assets, primarily computer hardware
and software tools, in 2004.

Net cash provided by financing activities totaled approximately $4,812,000
for the year ending December 31 2004, which is an increase of approximately
$6,323,000 from the approximately $1,511,000 used in financing activities during
the same period in 2003. This is primarily attributable to the cash raised by
the sale of our preferred stock (approximately $2,500,000 of gross proceeds),
cash raised by the exercise of common stock options and warrants (approximately
$1,600,000) and advances/conversions under our revolving credit facility with
the Laurus Master Fund in 2004 (approximately $2,300,000).

At December 31, 2004, our cash, which includes cash reserves and cash
available for investment, was approximately $5,069,000, as compared to
approximately $592,000 at December 31, 2003, an increase of approximately
$4,477,000 mainly due to the issuance of our preferred stock in August 2004, the
exercise of stock options and warrants throughout the year and
advances/conversions under our revolving credit facility throughout the year.

As of December 31, 2004, our backlog of funded and non-funded business was
approximately $47 million, as opposed to approximately $2 million as of December
31, 2003. We expect approximately $8 million in revenue from the Missile
Defense Agency program in 2005. Although the Missile Defense Agency 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, 2004, we completed work on our Air
Force Research Laboratory Phase II Small Business Innovation Research contract
worth approximately $1.6 million, as well as the negotiated a deferred option of
approximately $0.8 million and the addition of approximately $0.1 million. We
successfully powered SpaceShipOne in their quest to win the $10 million Ansari
X-Prize in October 2004. We completed Task Order 1 for the Missile Defense
Agency and won two Phase II Small Business Innovation Research awards related to
the Air Force Research Laboratory of approximately $2.3 million.

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 $2,350,000 and $2,190,000 as of December 31, 2004 and
2003, 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
$126,000 in 2004 from $2,190,000 at December 31, 2003 to $2,318,000 at December
31, 2004.

At December 31, 2004, the Company has federal and state tax net operating
loss and capital loss carryforwards of approximately $4,826,000 and $2,146,000,
respectively. The federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized. The State of California
suspended the utilization of net operating loss for 2002 and 2003, and limited
them for 2004.

CRITICAL ACCOUNTING STANDARDS

Our revenues transitioned in 2003 and early 2004 from being based primarily
on 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 primarily 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 the 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.

CASH POSITION

Although we were cashflow positive in 2004, we raised over $4 million in
cash during the year, mainly through the sale of our preferred and common stock.
Our ability to increase cash generation from operations and thereby continue as
a going concern without the need to raise equity capital depends upon our
ability to ultimately implement our business plan, which includes (but is not
limited to) generating substantial new revenue from the Missile Defense Agency
by successfully performing under our $43 million contract and continuing to
attract and successfully complete other government and commercial contracts. The
Missile Defense Agency contract is staged, and we cannot guarantee that all
subsequent phases will be awarded or will be awarded to us. Recent budget cuts
may affect government spending on these space-based contracts.

In addition, we need to continue developing project management expertise to
profitably execute on new business contracts and effectively and efficiently bid
on and win new business. We have no current need to draw any funds from our
revolving credit facility and we will only investigate the possibility of
raising additional capital if we have a compelling need to do so or as new
contracts and business opportunities materialize. New business opportunities
can come from a variety of sources, including state and federal grants and
government and commercial customer programs. However, there can be no assurance
that we will be able to obtain such new business contracts or, if such
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, which was used in operating the
business in 2003.

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. Of the 614,853 remaining warrants, all were exercised in 2004 and none
remained outstanding at December 31, 2004.

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 made under
Section 4(2) of the Securities Act of 1933, and Rule 506, to accredited
investors only. We subsequently closed the Private Placement Offering. (See
Note 8 of the Consolidated Financial Statements.)

During the year ending December 31, 2004, we raised approximately
$6,375,000 in cash from accredited investors who converted debt into 2,991,417
shares of our common stock, through the exercise of options and warrant for
1,748,983 shares of our common stock and by selling 250,000 shares of our
preferred stock, which could be converted into 1,623,377 shares of our common
stock at a purchase price of $1.54 per share and which underlying common stock
was registered with the Securities and Exchange Commission on Form SB-2's during
2004.

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 from the Air Force Research
Laboratory on March 28, 2003 and from the Missile Defense Agency on March 31,
2004. Both awards were cost-plus fixed fee contracts, which required us to
incur certain costs in advance of regular contract reimbursements. 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.
There was no balance on the revolving credit facility at December 31, 2004 and
we do not anticipate further need to draw on the revolving credit facility;
however, the revolving credit facility will remain in place pursuant to our
original agreement with the Laurus Master Fund until June 2007, unless sooner
terminated by either party. We would be required to pay Laurus a termination
fee for early termination of the revolving credit facility.

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. On August 25, 2004, we
negotiated an amendment to our Secured Convertible Note to add a fixed
conversion price at $1.00 per share for the next $1 million converted under the
revolving credit facility after the $500,000 mentioned above. In exchange for
the amendment, Laurus granted us a waiver to utilize the full revolving credit
facility in advance of eligible accounts and committed to convert the entire $1
million into equity by the end of the year. At December 31, 2004, Laurus had
converted approximately $2,272,000 of debt into 2,990,000 shares under the
revolving credit facility.

We experienced a positive cash flow in 2004 for the first time in our
history. We also realized operating profit in 2004; however, we incurred a net
loss due to the non-cash expenses related to our revolving credit facility. We
anticipate that with our projected increase in revenue and backorders from near
term contracts, combined with our fiscally responsible budget and project
controls, that net positive cash flow from operations will continue and will be
sufficient to fund both operations and capital expenditures in 2005 and beyond.
There is no assurance, however, that we will sustain our current positive cash
flow or our operating profit now or in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

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 our consolidated
financial statements.

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.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share Based
Payment" (SFAS No. 123R), a revision to Statement No. 123, Accounting for
Stock-Based Compensation which supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The revised SFAS 123 eliminates the alternative to
use Opinion 25's intrinsic value method of accounting and, instead, requires
entities to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
Furthermore, public entities are required to measure liabilities incurred to
employees in share-based payment transactions at fair value as well as estimate
the number of instruments for which the requisite service is expected to be
rendered. Any incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair values before and after
the modification. We have yet to determine the effect SFAS No. 123R may have on
our financial statements, if any.

FORWARD-LOOKING STATEMENTS AND RISK ANALYSIS

During the first three-months of 2005, we submitted two bids for government
programs, continued our work with the United States Congress to identify
directed funding for our programs and are actively working to identify several
significant commercial programs. We believe that we will win some of these
opportunities, which would enable us to continue to enhance our backorder,
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
2004, we had about 85% government and government-related work. In 2003, we had
about 82% government or 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 technology and
product areas. Currently, we are focusing on the domestic United States
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, 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 some 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 2005 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 maintain 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, or
are awarded in phases the award of which is not guaranteed to us. We do not
believe that any of our contracts will be terminated early; however, there can
be no assurance that they will not be terminated prior to completion or that all
phases of any of our contracts will be awarded to us. Finally, we do not
believe that significant capital expenditures will be required to achieve this
increase in sales; however, additional capital may be required to support and
sustain our growth.

During the year ended December 31, 2004, we raised approximately $6,375,000
through a combination of private sales of our preferred stock (approximately
$2,500,000), exercises of options and warrants (approximately $1,600,000) and
conversions on our revolving credit facility (approximately $2,300,000). 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). To
execute our strategy of rapidly growing our Company with small, capable,
low-cost micro- and nanosatellites, hybrid propulsion products and new
commercial revenue sources, we may require additional funding in order to win
significant government and commercial programs. We believe investor or customer
funding of $10 to $30 million may be required in the future, which could come
from a combination of private and/or public equity placements or government and
commercial customers. Our intent is to only raise additional capital now when
it is required or makes sense to do so. We do not have any ongoing private or
public equity offerings and the Board has not authorized any additional
financings at this time.

We have sufficient capital to operate our business currently. The amount
of capital we may need to raise in the future is dependent upon many factors.
For example, the need for additional capital may be greater if (i) we do not
enter into future agreements with our customers on the terms we anticipate; (ii)
our net operating profit reverts to a deficit due to significant unanticipated
expenses; or (iii) we incur additional unexpected research and development costs
for 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 in the long term.

Our ability to execute a public offering of our common stock 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 remain profitable or cash
flow positive, 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 stockholders. The unavailability of funds when needed
could have a material adverse effect on us.

Our business partially depends on activities regulated by various agencies
and departments of the United States 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 United States 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 with
respect to terrorism, national defense and national security.

DESCRIPTION OF PROPERTY

In January 2003, we entered into a lease for our 25,000 square foot
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
ending December 31, 2004 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.

Effective April 14, 2005, we entered into a 16-month lease for
approximately 11,000 square feet of fabrication space. The total cost of the
lease is approximately $107,000. We plan to use the new facilities to begin
construction of portable, high tech rocket motor test support equipment in
anticipation of test firing new rocket motors being developed for SpaceDev
StreakerTM.

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 2004 and 2003, we incurred no consulting fees with Hill and
Knowlton, Inc., an affiliate of Wexler & Walker.

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 2004 and 2003, 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. The
remaining warrants for 614,852 shares were all exercised in 2004.

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
3/31/2003. . . $ 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
6/30/2004. . . $ 2.38 $ 1.04
9/30/2004. . . $ 2.46 $ 1.43
12/31/2004 . . $ 2.42 $ 1.51
3/31/2005 . . $ 1.97 $ 1.55
4/18/2005 . . $ 1.75 $ 1.60

* April 18, 2005 high and low from 04/01/2005 to 04/18/2005 .

HOLDERS

As of March 14, 2005, there were over 300 holders of record of our
common stock. We estimate the total number of beneficial owners of our common
stock to be in excess of 4,500 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, our
President and Chief Financial Officer, Richard B. Slansky, our Vice President of
Engineering, Frank Macklin, and our Vice President of New Business Development
and Project Management, Randall K. Simpson, manage the Company's daily
operations. Our Board currently consists of eight directors. Mr. Slansky was
added to the Board of Directors in November 2004. J. Mark Grosvenor was added
and resigned from the Board of Directors in 2003. Below is a list of 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 President, Chief Financial Officer,
13855 Stowe Drive Director, Corporate Secretary
Poway, CA 92064

Frank Macklin Vice President, Engineering
13855 Stowe Drive
Poway, California 92064

Randall K. Simpson Vice President, New Business
13855 Stowe Drive Development & Project Management
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 60, 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.

Frank Macklin, age 48, was appointed as our Vice President of
Engineering in 2004. Mr. Macklin has been our chief engineer of hybrid
propulsion systems and the technical leader for our National Reconnaissance
Office funded SPOTV Hybrid System Definition study, and is acting chief engineer
for our Maneuvering and orbital Transfer Vehicle Hybrid Technology Development
and X-Motor Development. Mr. Macklin was a founder of Integrated Space Systems,
Inc., which was acquired by SpaceDev in 1998. Prior to his work at Integrated
Space Systems, Mr. Macklin worked at the General Dynamics Space Systems Division
in San Diego from January 1987 to December 1994. During his tenure at General
Dynamics, Mr. Macklin integrated a new guidance system onto the new generation
of Atlas launch vehicles and became intimately familiar with all aspects of
vehicle flight software and hardware. He also designed and implemented diverse
ground guidance performance and analysis software systems, became a complete
end-to-end systems expert, and served as the guidance system expert on the elite
"tiger team" sent to support all launches. Prior to General Dynamics, Mr.
Macklin served as a member of the Peacekeeper developmental launch team at
Vandenberg Air Force Base from March 1984 to December 1986, where he was
responsible for the $30M guidance and control system, led a group of 30 industry
engineers and gave the final guidance system go/no-go for launch. Mr. Macklin is
a California State registered professional electrical engineer with more than 20
years of experience with launch vehicles, ground launch control systems, launch
sites and launch teams. Mr. Macklin received his BSEE from San Diego State
University and is a California Board Certified Professional Engineer.

Randall K. Simpson, age 58, 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 48, is our President, 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 45, 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 63, 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 66, 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.

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 Retired General Estes, Mr. Walker and Dr. Huntress and a
compensation committee comprised of Messrs. Blake and McClendon and Retired
General Estes. 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 five (5) times during the last
fiscal year, with all five (5) being at regular or special meetings attended by
the members of the Board either personally or telephonically. There were no
unanimous written consents in 2004. Our Audit Committee took separate action
five (5) times during the last fiscal year, each time at a regular or special
meeting attended by a quorum of the members of the committee either personally
or telephonically. The Nominating and Corporate Governance Committee and the
Compensation Committee met once to approve their respective charters.

ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE OFFICER COMPENSATION

During the fiscal years ended December 31, 2002, 2003 and 2004, 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:

SUMMARY COMPENSATION TABLE

Long Term Compensation
--------------------------------------------------------

Annual Compensation Awards Payouts
---------------------- ---------- ---------

Name and Principal Position(1) Year Salary Bonus Other Annual Restricted Securities LTIP Payouts All Other
($) ($) Compensation Stock Award(s) Underlying ($) Compensation
($) ($) Options/ SARs # ($)
------------------------------ ---- ------- ------ ------------- -------------- ------------ ------------ -----------
James W. Benson, CEO (2) . . . 2002 141,325 - - - 10,000(2) - -
. . . . . . . . . . . . . . . 2003 150,000 - - - - - -
. . . . . . . . . . . . . . . 2004 177,923 40,000 3,894 - - - -

Richard B. Slansky, President, 2002 - - - - - - -
. . . . . . . . . CFO. . . . .2003 94,625 - 1,183 - 355,000(3) - -
. . . . . . . . . . . . . . . 2004 150,000 - 27,672 - 395,000(3) - -

Randall K. Simpson, V.P. . . . 2002 - - - - - - -
..New Business Development. . ..2003 - - - - - - -
. . . . . . . . . . . . . . . 2004 114,231 - - - 250,000(4) - -

Frank Macklin, V.P. . .. . . . 2002 - - - - - - -
.. Engineering. . ..2003 - - - - - - -
. . . . . . . . . . . . . . . 2004 109,110 - 4,067 - 50,000(5) - -

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

(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. The options are incentive stock options and
were granted with an exercise price equal to 110% of the fair market value of
our common stock on the date of grant.

(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. Mr. Slansky was awarded up to 395,000 options in 2004 as
part of an overall option normalization and based on positions held; and these
options vest based on the following: options on 197,500 shares vesting in
six-month increments over five years and the remaining vest based on performance
criteria established by the CEO, as approved by the Board.

(4) Mr. Simpson was awarded up to 250,000 options in 2004 as part of his
employment agreement, with 125,000 vesting in six-month increments over five
years and the remaining vest based on performance criteria established by the
CEO or President, as approved by the Board.

(5) Mr. Macklin was awarded up to 50,000 options in 2004 as part of an
overall option normalization and based on positions held; and these options vest
based on six-month increments over five years.

During the last fiscal year and as of December 31, 2004, 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 395,000 18% 0.92 3/25/2010

Randall K. Simpson 250,000 11% 1.19 1/26/2010

Frank Macklin 50,000 2% 0.92 3/25/2010
------------------ -------------------- ----------------------- ---------------- ------------

As of December 31, 2004, 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, 2004

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

Exercisable/ Exercisable/
Name . . . . . . . Shares Acquired on Value Realized Unexercisable Unexercisable(1)
Exercise (#) ($)
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
James W. Benson. . 0 0 255,000/ 254,734/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
1,000,000 375,000
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
Richard B. Slansky 0 0 276,250/ 184,860/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
473,750 359,590
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
Randall Simpson 0 0 12,500/ 14,875/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
237,500 282,625
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
Frank Macklin 0 0 8,000/ 48,583/
------------------ ------------------ -------------- -------------------------------------- ---------------------------------
45,000 41,400
------------------ ------------------ -------------- -------------------------------------- ---------------------------------

(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 14,
2005, or $1.72 per share. All the options listed on the table are
"in-the-money", except unvested options on 750,000 of Mr. Benson's shares.

PERQUISITES

We provide our Chief Executive Officer, Mr. Benson, with a few perquisites
including a cell phone with basic coverage and charges, an annual membership to
alpha trader.com, annual air travel club memberships and a monthly hosting on
web site works. Although the value of these perks is not substantial, we
believe these perks are an important component of chief executive officer
compensation.

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.

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.

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.

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 . . . . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Richard B. Slansky. . . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Stuart Schaffer . . . . . . . - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Wesley T. Huntress. . . . . . - - - - 75,000
----------------------------- -------- ------- ---------- --------- ------------
Curt Dean Blake . . . . . . . - - - - 74,000
----------------------------- -------- ------- ---------- --------- ------------
General Howell M. Estes, III. - - - - 30,000
----------------------------- -------- ------- ---------- --------- ------------
Robert S. Walker. . . . . . . - - - - 18,000
----------------------------- -------- ------- ---------- --------- ------------
Scott McClendon . . . . . . . - - - - 75,000
----------------------------- -------- ------- ---------- --------- ------------

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 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,
2004, all shares issuable under the 1999 Incentive Stock Option Plan had been
issued or were in reserve subject to outstanding awards under the plan.

At our 2004 Annual Stockholder Meeting, held on August 5, 2004, the
stockholders adopted a 2004 Equity Incentive Plan. The 2004 Equity Incentive
Plan authorized and reserved for issuance under the Plan 2,000,000 shares of our
common stock. The 2004 Equity Incentive Plan is an important part of our total
compensation program because competitive benefit programs are a critical
component of our efforts to attract and retain qualified employees, directors
and consultants. Options granted under the plan may be Incentive Stock Options
or non-statutory stock options, as determined by the Board of Directors or a
committee appointed by the Board of Directors at the time of grant. Limited
rights and stock awards may also be granted under the Plan. As of December 31,
2004, 6,184,698 shares were authorized for issuance under the 1999 Stock Option
Plan and the 2004 Equity Incentive Plan, 3,878,766 of which are currently
subject to outstanding options and awards and options on 1,005,035 shares were
exercised in 2004. During 2004, we issued non-statutory options to purchase
272,000 shares to our independent directors for attendance at our 2004 Board of
Directors meetings.

The Stock Option Plan of 1999 was registered with the U.S. Securities &
Exchange Commission on Form S-8. Shares issuable under the 2004 Equity Incentive
Plan were registered on Form S-8 on March 28, 2005.

In addition to the 1999 Stock Option Plan and the 2004 Equity Incentive
Plan, 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 and
every six-month anniversary thereafter. The 1999 Employee Stock Purchase Plan
expired in June 2005; however, the Board authorized a one-year extension of the
plan at their meeting in November 2004, while the Compensation Committee reviews
the value of the plan to employees and the desire for its continuance.

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 3,878,766 $ 1.05 1,263,897
approved by
security holders

------------------ --------------------------- ------------------- --------------------------
Equity . . . . . . 2,500,000 $ 2.00 0
compensation plans
not approved by
security holders

------------------ --------------------------- ------------------- --------------------------
Total. . . . . . . 6,378,766 $ 1.50 1,263,897
------------------ --------------------------- ------------------- --------------------------

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table provides information as of March 14, 2005 concerning
the beneficial ownership of the Company's common stock by (i) each director,
(ii) each named executive officer, (iii) each stockholder 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 Susan C. Benson 4,875,853(2) 22.55%
value 13855 Stowe Drive
common Poway, California 92064
stock

.0001 par James W. Benson, CEO 4,865,854(3) 22.51%
value and Chairman
common 13855 Stowe Drive
stock Poway, California 92064

.0001 par Richard B. Slansky 397,544(4) 1.83%
value President and CFO
common 13855 Stowe Drive
stock Poway, California 92064

.0001 par Frank Macklin 243,073(5) 1.14%
value 13855 Stowe Drive
common Poway, California 92064
stock

.0001 par Randall K. Simpson 28,366(6) 0.13%
value 13855 Stowe Drive
common Poway, California 92064
stock

.0001 par J. Mark Grosvenor 1,330,376(7) 6.04%
value 13855 Stowe Drive
common Poway, California 92064
stock

.0001 par Wesley T. Huntress Jr. 124,015(8) 0.58%
value Director
common 13855 Stowe Drive
stock Poway, California 92064

.0001 par Curt Dean Blake 169,430(9) 0.79%
value Director
common 13855 Stowe Drive
stock Poway, California 92064

.0001 par General Howell M. 88,167(10) 0.41%
value Estes III, Director
common 13855 Stowe Drive
stock Poway, California 92064

.0001 par Robert S. Walker 77,167(11) 0.36%
value Director
common 13855 Stowe Drive
stock Poway, California 92064

.0001 par Stuart Schaffer, Director 218,206(12) 1.02%
value 13855 Stowe Drive
common Poway, California 92064
stock

.0001 par Scott McClendon 64,460(13) 0.30%
value Director
common 13855 Stowe Drive
stock Poway, California 92064
---------- ---------------------- ---------------- -----------
.0001 par Officers and Directors as 6,276,282(14) 27.84%
value a group (10 Persons)
common
stock
---------- ---------------------- ---------------- -----------
---------- ---------------------- ---------------- -----------

(1) Where persons listed on this table have the right to obtain additional
shares of Common Stock through the exercise of outstanding options or warrants
or the conversion of convertible securities within 60 days from March 14, 2004,
these additional shares are deemed to be outstanding for the purpose of
computing the percentage of Common Stock owned by such persons, but are not
deemed outstanding for the purpose of computing the percentage owned by any
other person. Percentages are based on total outstanding shares of 21,363,980
on March 14, 2005.

(2) Represents 4,372,147 shares held directly by Ms. Susan Benson as a
result of a marital separation agreement between Mr. James W. Benson and Ms.
Susan C. Benson plus 248,706 shares held in Space Development Institute and
vested options on 255,000 shares. In addition, Ms. Benson has unvested options
on 1,000,000 shares. Mr. and Ms. Benson disclaim ownership of shares held by
their children. Mr. and Ms. Benson executed and filed a property settlement
agreement on November 18, 2004 and hold their stock in sole and separate name.

(3) Represents 4,362,147 shares held directly by Mr. James W. Benson as a
result of a marital separation agreement between Mr. James W. Benson and Ms.
Susan C. Benson plus 248,707 shares held in Space Development Institute and
vested options on 255,000 shares. In addition, Mr. Benson has unvested options
on 1,000,000 shares. Mr. and Ms. Benson disclaim ownership of shares held by
their children. Mr. and Ms. Benson executed and filed a property settlement
agreement on November 18, 2004 and hold their stock in sole and separate name.

(4) Mr. Slansky owns 83,544 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 and an additional 38,462 shares Mr. Slansky bought by
exercising his warrant rights which were also purchased from Mr. Skarupa. In
addition, Mr. Slansky has vested options on 314,000 shares. Mr. Slansky also
holds 436,000 unvested options which are not expected to vest within the next 60
days.

(5) Mr. Macklin owns 230,073 shares and vested options on 13,000 shares.
Mr. Macklin also holds 40,000 unvested options which will not vest within the
next 60 days.

(6) Mr. Simpson owns 3,366 shares of our common stock, vested options on
25,000 shares of our common stock and also holds 225,000 unvested options which
will not vest within the next 60 days.

(7) 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.

(8) Mr. Huntress owns 8,868 shares of our common stock. Mr. Huntress also
owns 115,147 vested options, which he received as compensation for his
participation on our Board of Directors. In addition, Mr. Huntress has unvested
options on 61,500 shares which will not vest within the next 60 days.

(9) 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
108,206 vested options, which he received as compensation for his participation
on our Board of Directors. In addition, Mr. Blake has unvested options on
55,500 shares which will not vest within the next 60 days.

(10) General Estes III owns 88,167 vested options, which he received as
compensation for his participation on our Board of Directors. In addition,
General Estes III has unvested options on 28,500 shares which will not vest
within the next 60 days.

(11) Mr. Walker owns 77,167 vested options, which he received as
compensation for his participation on our Board of Directors. In addition, Mr.
Walker has unvested options on 22,500 shares will not vest within the next 60
days.

(12) Mr. Schaffer owns 128,206 shares of which 64,103 were converted from
warrants. 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.

(13) Mr. McClendon owns 64,460 vested options, which he received as
compensation for his participation on our Board of Directors. In addition, Mr.
McClendon has unvested options on 56,000 shares which will not vest within the
next 60 days.

(14) Officers and directors as a group include our eight Board members, two
of whom are also officers of the Company, and Messrs. Simpson, and Macklin, who
are officers of the company.

Change in Control

James W. Benson, our Chief Executive Officer and Chairman of the Board of
Directors, and Susan Benson, our former Corporate Secretary, are married but
separated. They filed a property settlement agreement on November 18, 2004.
Mr. and Ms. Benson hold their ownership in SpaceDev as sole and separate
property and are therefore listed separately in the beneficial ownership table.

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 21,434,592 shares are issued and outstanding as of
April 18, 2005 . 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.

PREFERRED STOCK

We are authorized to issue up to 10,000,000 shares of our $0.001 par value
preferred stock, of which 250,000 shares have been designated Series C
Convertible Cumulative Preferred Shares (referred to in this section as the
"Series C Shares") issued to Laurus on August 25, 2004 at a stated value of $10
per share, for an aggregate purchase price of $2,500,000 and are currently
outstanding. No other series of preferred shares is currently outstanding. The
Board of Directors may designate additional series of preferred stock ranking on
parity with or subordinate to the Series C Shares.

VOTING RIGHTS

The Series C Shares have no voting rights.

LIQUIDATION RIGHTS

The Series C Shares carry a liquidation preference equal to the then stated
value ($10.00 per share) of the then outstanding Series C Shares. As a result,
the holders of the Series C Shares will receive a distribution out of the assets
of the Company upon liquidation equal to the number of Series C Shares then
outstanding multiplied by $10.00 before the holders of our Common Stock will be
entitled to any distribution.

DIVIDENDS

The Series C Shares pay quarterly, cumulative dividends at a rate of 6.85%
with the first payment due on January 1, 2005. Dividends are payable in cash
or shares of Common Stock at the holder's option with the exception that
dividends must be paid in shares of Common Stock for up to 25% of the aggregate
dollar trading volume if the fair market value of the Common Stock for the
20-days preceding the conversion date exceeds 120% of the Conversion Rate.

CONVERSION

The Series C Shares are convertible into the $0.0001 par value Common Stock
of the Company at a rate of $1.54 per share (the "Conversion Rate") at any time
after the date of issuance, 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).

REDEMPTION

We may redeem the Series C Shares in whole or in part at any time after
issuance for (a) 115% of the stated value if the average closing price of the
Common Stock for the 22 days immediately preceding the date of conversion does
not exceed the Conversion Rate or (b) the stated value if the average closing
price of the Common Stock for the 22 days immediately preceding the date of
conversion exceeds the stated value.

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

In 2003, we changed our principal independent accountants due to their
decision, at the time, not to register with the Public Company Accounting
Oversight Board ("PCAOB"), established by the Sarbanes-Oxley Act of 2002 (the
"Act" to oversee 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. 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
the end of the first quarter 2003, 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 with respect to
previously issued audit reports . 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, 2004 and 2003 , 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.

The Law Office of Gretchen Cowen, our independent legal counsel, has
provided an opinion on the validity of our common stock.

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.

CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2

FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3 to F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity (Deficit) F-6 to F-8
Consolidated Statements of Cash Flows F-9 to F-10
Notes to Consolidated Financial Statements F-11 to F-31

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
SPACEDEV, INC.

We have audited the accompanying consolidated balance sheets of SPACEDEV, INC.
AND SUBSIDIARY as of December 31, 2004 and 2003, respectively, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SPACEDEV, INC. AND SUBSIDIARY as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.

/s/ PKF
San Diego, California PKF
February 10, 2005 Certified Public Accountants
A Professional Corporation

F-2

SPACEDEV, INC.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31,. . . . . . . . . . . . . 2004 2003
-------------------------------------- ---------- ----------

ASSETS

CURRENT ASSETS
Cash (Note 10(a)). . . . . . . . . $5,068,601 $ 592,006
Accounts receivable (Note 10(b)) . 620,097 187,062
Inventory. . . . . . . . . . . . . 0 9,961
Work in Progress . . . . . . . . . 0 110,490
-------------------------------------- ---------- ----------
Total current assets. . . . . . . . . 5,688,698 899,519

FIXED ASSETs - Net (Notes 1(g) and 2) 279,381 137,532

CAPITALIZED SOFTWARE COSTS . . . . . 0 -

OTHER ASSETS. . . . . . . . . . . . . 122,355 47,768
-------------------------------------- ---------- ----------
TOTAL ASSETS. . . . . . . . . . . . . $6,090,434 $1,084,819
-------------------------------------- ---------- ----------
-------------------------------------- ---------- ----------

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

F-3

SPACEDEV, INC.
AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003
---------------------------------------------------------------------- ------------- -------------

LIABILITIES AND STOCKHOLDERSEQUITY

CURRENT LIABILITIES
Current portion of notes payable (Note 4(a)) . . . . . . . . . . . $ 36,670 $ 41,464
Current portion of capitalized lease obligations (Note 9(a)) . . . 3,784 10,332
Notes payable - related party (Note 4(b)). . . . . . . . . . . . . 0 80,000
Accounts payable and accrued expenses. . . . . . . . . . . . . . . 338,809 311,606
Accrued payroll, vacation and related taxes. . . . . . . . . . . . 195,045 84,001
Revolving line of credit (Note 4(c)) . . . . . . . . . . . . . . . 0 748,893
Employee Stock Purchase Plan (Note (7(b)). . . . . . . . . . . . . 9,332 5,498
Other accrued liabilities (Note 9(b)). . . . . . . . . . . . . . . 207,262 248,530
---------------------------------------------------------------------- ------------- -------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 790,902 1,530,324

NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(A)). . . . . . . . . . 9,457 46,127

CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(A)). . 1,469 5,253

NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(B)). . 0 505,522

DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2) . . . . . . . . . . . . 947,949 1,065,221

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

TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 1,754,777 3,157,447

COMMITMENTS AND CONTINGENCIES (NOTE 9)

STOCKHOLDERSEQUITY (DEFICIT)
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized, and 250,000 shares issued and outstanding (Note 8(a)). 250 -
Common stock, $.0001 par value; 50,000,000 shares authorized, and
21,153,660 and 16,413,260 shares issued and outstanding,
respectively (Note 8(b)) . . . . . . . . . . . . . . . . . . . . . 2,114 1,641
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 18,739,090 9,243,507
Additional paid-in capital - stock options (Note 8(d)) . . . . . . 750,000 750,000
Deferred compensation (Note 8(d)). . . . . . . . . . . . . . . . . (250,000) (250,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . (14,905,797) (11,817,776)
---------------------------------------------------------------------- ------------- -------------
TOTAL STOCKHOLDERSEQUITY (DEFICIT). . . . . . . . . . . . . . . . . . 4,335,657 (2,072,628)
---------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . $ 6,090,434 $ 1,084,819
---------------------------------------------------------------------- ------------- -------------
---------------------------------------------------------------------- ------------- -------------

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

F-4

SPACEDEV, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ending December 31, . . . . . . . . . . . . . 2004 % 2003 %
---------------------------------------------------- ------------ ------------ ------------ -------

NET SALES . . . . . . . . . . . . . . . . . . . . . $ 4,890,743 100.00% $ 2,956,322 100.00%
---------------------------------------------------- ------------ ------------ ------------ -------

COST OF SALES . . . . . . . . . . . . . . . . . . . 3,820,683 78.12% 2,414,997 81.69%
---------------------------------------------------- ------------ ------------ ------------ -------

GROSS MARGIN. . . . . . . . . . . . . . . . . . . . 1,070,060 21.88% 541,325 18.31%

OPERATING EXPENSES
Marketing and sales expense. . . . . . . . . . . 418,831 8.56% 394,974 13.36%
Research and development . . . . . . . . . . . . 39,473 0.81% 281,280 9.51%
Stock and stock option based compensation. . . . 0 0.00% 9,170 0.31%
General and administrative . . . . . . . . . . . 467,471 9.56% 745,993 25.23%
---------------------------------------------------- ------------ ------------ ------------ -------
TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . 925,775 18.93% 1,431,417 48.42%
---------------------------------------------------- ------------ ------------ ------------ -------
INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . . 144,285 2.95% (890,092) -30.11%
---------------------------------------------------- ------------ ------------ ------------ -------
NON-OPERATING EXPENSE/(INCOME)
Interest income. . . . . . . . . . . . . . . . . (19,497) -0.40% - 0.00%
Interest expense . . . . . . . . . . . . . . . . 52,077 1.06% 91,492 3.09%
Non-cash interest expense debt discount (Note 5) 0 0.00% 112,500 3.81%
Gain on Building Sale (Note 4(a)). . . . . . . . (117,272) -2.40% (107,499) -3.64%
Loan Fee - Equity Compensation (Note 4(c) & 5) . 3,254,430 66.54% 257,882 8.72%
---------------------------------------------------- ------------ ------------ ------------ -------
TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . . 3,169,739 64.81% 354,375 11.99%
---------------------------------------------------- ------------ ------------ ------------ -------

LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . (3,025,454) -61.86% (1,244,467) -42.10%
Income tax provision (Notes 1(j) and 6) . . . . . . 1,600 0.03% 1,600 0.05%
---------------------------------------------------- ------------ ------------ ------------ -------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . $(3,027,054) -61.89% $(1,246,067) -42.15%
---------------------------------------------------- ------------ ------------ ------------ -------
---------------------------------------------------- ------------ ------------ ------------ -------
NET LOSS PER SHARE:
Net loss . . . . . . . . . . . . . . . . . . . $ (0.16) $ (0.08)
-------------------------------------------------------------------------------------------------------
Weighted-Average Shares Outstanding. . . . . . 18,610,141 16,092,292
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------

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

F-5

SPACEDEV, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)

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

BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . - $ - 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)) . . . . . . . - - - -

BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . - - 16,413,260 1,641
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . 250,000 250 - -
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . - - 14,010 1
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - - 2,991,417 299
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - - 1,005,035 100
Common stock issued from private placement memorandum warrants (Note 8(b)) . - - 115,085 12
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) - - 614,853 61
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -

Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . 250,000 $ 250 21,153,660 $ 2,114
---------------------------------------------------------------------------- --------------- ------------- ---------- -------
---------------------------------------------------------------------------- --------------- ------------- ---------- -------

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

F-6

SPACEDEV, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)

Additional
Additional Paid-In
Paid-in Capital - Deferred
Capital Stock Options Compensation
---------------------------------------------------------------------------- ------------ -------------- -------------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $ 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
---------------------------------------------------------------------------- ------------ -------------- -------------
9,243,507 750,000 (250,000)
BALANCE AT DECEMBER 31, 2003
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . 2,366,250
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . 12,626 - -
Common stock issued from notes on revolving credit facility (Note 4( c)) . . 4,752,079 - -
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . 1,264,649 - -
Common stock issued from private placement memorandum warrants (Note 8(b)) . 88,738 - -
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) 1,011,241 - -
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
- - -
Net loss - - -
---------------------------------------------------------------------------- ------------ -------------- -------------

BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . $18,739,090 $ 750,000 $ (250,000)
---------------------------------------------------------------------------- ------------ -------------- -------------
---------------------------------------------------------------------------- ------------ -------------- -------------

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

F-7

SPACEDEV, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)

Accumulated
Deficit Total
---------------------------------------------------------------------------- ------------- ------------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . $(10,571,710) $(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)
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . . - 2,366,500
Common stock issued for cash from employee stock purchase plan (Note 8(b)) . - 12,627
Common stock issued from notes on revolving credit facility (Note 4( c)) . . - 4,752,378
Common stock issued from employee stock options (Note 7(b)). . . . . . . . . - 1,264,749
Common stock issued from private placement memorandum warrants (Note 8(b)) . - 88,750
Common Stock issued from convertible debt program warrants (Note 5 and 8(c)) - 1,011,302
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,967) (60,967)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,027,054) (3,027,054)
---------------------------------------------------------------------------- ------------- ------------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . $(14,905,797) $ 4,335,657
---------------------------------------------------------------------------- ------------- ------------
---------------------------------------------------------------------------- ------------- ------------

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

F-8

SPACEDEV, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, . . . . . . . . . . . . . . . . . 2004 2003
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . $(3,027,054) $(1,246,067)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . 83,531 166,971
Gain on disposal of building . . . . . . . . . . . . (117,272) (107,499)
Non-cash interest expense - convertible debt program 773,802 131,411
Non-cash loan fees . . . . . . . . . . . . . . . . . 2,480,628 126,471
Common stock issued for compensation and services. . - 9,170
Change in operating assets and liabilities:

Accounts receivable. . . . . . . . . . . . . . . . (433,035) (104,737)
Work in Progress . . . . . . . . . . . . . . . . . 110,490 (110,490)
Prepaid and other current assets . . . . . . . . . (74,587) (33,888)
Inventory. . . . . . . . . . . . . . . . . . . . . 9,961 (8,232)
Convertible debt notes payable . . . . . . . . . . - 130,661
Costs in excess of billings and estimated earnings - 281,175
Interest on revolving line of credit . . . . . . . 18,349 13,601
Accounts payable and accrued expenses. . . . . . . 27,203 (286,874)
Accrued payroll, vacation and related taxes. . . . 111,044 (90,187)
Customer deposits and deferred revenue . . . . . . - (69,402)
Provision for anticipated loss . . . . . . . . . . - (11,044)
Interest - related party . . . . . . . . . . . . . 29,256 47,023
Other accrued liabilities. . . . . . . . . . . . . (102,235) 126,919
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . . (109,919) (1,035,018)
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in investing activities:
Proceeds from the sale of building. . . . . . . . . . - 3,150,124
Purchases of fixed assets . . . . . . . . . . . . . . (225,380) (39,292)
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . (225,380) 3,110,832
----------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable . . . . . . . . . (41,464) (2,432,595)
Principal payments on capitalized lease obligations . (10,332) (35,764)
Payments on notes payable - related party . . . . . . (427,280) (199,997)
Proceeds from revolving credit facility . . . . . . . 1,504,508 963,542
Employee Stock Purchase Plan. . . . . . . . . . . . . 16,460 5,498
Proceeds from issuance of preferred stock . . . . . . 2,366,500 -
Proceeds from issuance of common stock. . . . . . . . 1,403,502 445,596
----------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . . 4,811,894 (1,511,456)
----------------------------------------------------------- ------------ ------------
Net increase in cash . . . . . . . . . . . . . . . . . . . 4,476,595 564,358
----------------------------------------------------------- ------------ ------------
CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . 592,006 27,648
----------------------------------------------------------- ------------ ------------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . . $ 5,068,601 $ 592,006
----------------------------------------------------------- ------------ ------------
----------------------------------------------------------- ------------ ------------

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

F-9

SPACEDEV, INC.
AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, . . . . . . . . . . . . . 2004 2003
--------------------------------------------------- -------- -------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . $313,978 $41,726
Income Taxes . . . . . . . . . . . . . . . . . $ 1,600 $ 1,600
--------------------------------------------------- -------- -------

NONCASH INVESTING AND FINANCING ACTIVITIES:

During the years ending December 31, 2004 and 2003, the Company issued 2,991,417
and 415,000 shares of its common stock, respectively, to the Laurus Master
Fund from conversions under its revolving credit facility, thereby
realizing a corresponding reduction in current liabilities of approximately
$2,271,750 and $228,500, respectively. The Company recorded additional
non-cash loan fees of $2,480,628 and $126,471, respectively, and charged
these fees to expense.

During the year ending December 31, 2004, the Company issued 614,853 shares of
its common stock to the participates in its' prior convertible debt program
from conversions of warrants, thereby receiving cash in the amount of
$187,500. The Company recorded additional non-cash loan fees of $773,802
and charged these fees to expense.

During 2004 the Company converted $12,627 of employee stock purchase plan
contributions into 14,010 shares of common stock.

During 2004 the Company declared dividends payable of $60,967 to the holder's of
its preferred stock.

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

During 2003, the Company issued 861,267 shares of stock under the Company's
Private Placement Memorandum for cash of $425,942.

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.

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

F-10

SPACEDEV, INC.
AND SUBSIDIARY
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 microsatellites, nanosatellites and related subsystems,
and 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 nanosatellites, hybrid rocket-based orbital Maneuvering
and orbital Transfer Vehicles 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
microsatellite and nanosatellite 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 and military customers.

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
$0.0001 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. 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 "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 the Company's 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
had been integrated into SpaceDev, Inc.

F-11

The Company had working capital of $4,897,796 and incurred an operational profit
of $144,285 as well as a net loss of $3,027,054 for the year ended December 31,
2004. For the year ended December 31, 2003, the Company had a working capital
deficit of $630,805 and a loss from operations of $890,092 as well as a net loss
of $1,246,067. On March 31, 2004, the Company was awarded a $43,362,271 contract
from the Missile Defense Agency. Management intends to continue obtaining new
commercial and government contracts and discontinue the utilization of its
revolving credit facility. The Company may raise additional equity capital in a
public or private offering in certain circumstances. 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 2005 and beyond.

(b) Principles of consolidation

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

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.

(d) Accounts Receivable and Allowances for Uncollectible Accounts

Accounts receivable are stated at the historical carrying amount net of
write-offs and allowances for uncollectible accounts. The Company establishes an
allowance for uncollectible accounts based on historical experience and any
specific customer collection issues that the Company has identified.
Uncollectible accounts receivable are written-off when a settlement is reached
for an amount that is less than the outstanding balance or when the Company has
determined that balance will not be collected. At December 31, 2004 and 2003,
the allowance for uncollectible accounts was $32,637 and $17,500 respectively.

F-12

(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 capitalized the direct costs and allocated overhead
associated with a software development product. Initial costs were 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 were charged to operations. Beginning in the second quarter
2002, and completing in 2003, capitalized software costs were 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 2004 and 2003 were derived primarily from United
States government cost plus fixed fee (CPFF) contracts compared to a
predominance of fixed price contracts prior to 2003. Revenues from the CPFF
contracts during 2004 and 2003 were recognized as expenses were incurred.
Estimated contract profits were 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, would be recorded upon
achievement of performance milestones or using the cost-to-cost method of
accounting where revenues and profits would be recorded based on the ratio of
costs incurred to estimated total costs at completion. Losses on contracts would
be recognized when estimated costs were 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 are incurred.

Deferred revenue represents amounts collected from customers for projects,
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 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. The base rent is increased by 3.5% per year (see Note
2).

F-13

(h) Research and development

The Company is engaged in design and development activities with its commercial
and government customers. The Company has SBIR (Small Business Innovation
Research) grants from the government and continues to seek new SBIR
opportunities. Costs 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 $39,473 in non-reimbursable research and development costs
during 2004, as compared to $281,280 in non-reimbursable research and
development costs during 2003.

(i) Advertising

The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was $1,113 and $1,460 in 2004 and 2003,
respectively. Although the direct cost of advertising is low, the Company
incurs costs related to general public relations and website development as part
of its general and administrative expenses.

(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 (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 had 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 2004 and 2003 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:

F-14

Years Ending December 31
--------------------------------------------------------------------------- ------------ ------------

Net Loss: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 2003

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,027,054) $(1,246,067)
ADD: Stock based employee compensation expense
included in reported net income - -
DEDUCT: Stock based employee compensation expense determined under
the fair value based method for all awards . . . . . . . . . . . . $ (390,773) $ (234,525)
--------------------------------------------------------------------------- ------------ ------------
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,417,827) $(1,480,592)
--------------------------------------------------------------------------- ------------ ------------
--------------------------------------------------------------------------- ------------ ------------
Loss per Share:

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.16) $ (0.08)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.18) $ (0.09)
--------------------------------------------------------------------------- ------------ ------------

(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, T-bills, 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 business segment and ISS business
segment in 2002 and closed ISS in 2003. The Company has one other inactive
subsidiary, SpaceDev Oklahoma, Inc. The Company follows the requirement of SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131").

F-15

(p) New accounting standards

In December 2004, FASB issued SFAS No. 123 (revised 2004) "Share Based Payment"
(SFAS No. 123R), a revision to Statement No. 123, Accounting for Stock-Based
Compensation which supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. The revised SFAS 123 eliminates the alternative to use Opinion 25's
intrinsic value method of accounting and, instead, requires entities to
recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards.
Furthermore, public entities are required to measure liabilities incurred to
employees in share-based payment transactions at fair value as well as estimate
the number of instruments for which the requisite service is expected to be
rendered. Any incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair values before and after
the modification. The Company has yet to determine the effect SFAS No. 123R may
have on its financial statements, if any.

Effective as of December 31, 2004, the Company adopted the revised
interpretation of Financial Accounting Standards Board (FASB) Interpretation No.
46 (FIN 46), "Consolidation of Variable Interest Entities," (FIN 46-R). FIN 46-R
requires that certain variable interest entities be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company does not have any
investments in entities it believes are variable interest entities for which the
Company is the primary beneficiary.

(q) Inventory

Inventories are valued at the lower of cost or market using the average cost
method, which approximates the first-in, first-out method of inventory
valuation.

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 over the remaining term of the
lease. Deferred gain of $1,172,720 will be amortized on a straight-line basis
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.

F-16

Fixed assets consisted of the following:

December 31, . . . . . . . . . . . . . . 2004 2003
---------------------------------------- ---------- ----------
Capital leases . . . . . . . . . . . . . $ 153,097 $ 153,097
Computer equipment . . . . . . . . . . . 383,512 163,721
Building improvements. . . . . . . . . . 14,124 9,488
Furniture and fixtures . . . . . . . . . 6,224 5,271
---------------------------------------- ---------- ----------
556,957 331,577
Less accumulated depreciation
and amortization. . . . . . . . . . . (277,576) (194,045)
---------------------------------------- ---------- ----------
$ 279,381 $ 137,532
---------------------------------------- ---------- ----------
---------------------------------------- ---------- ----------

Depreciation and amortization expense for fixed assets was approximately $83,500
and $53,000 for the years ending December 31, 2004 and 2003, respectively.
Depreciation and amortization expense was higher during 2004 due to the purchase
of new fixed assets, mainly new computer hardware and software, during 2004. Of
the above depreciation, approximately $33,000 and $28,000, for the year ending
December 31, 2004 and 2003, respectively, was for depreciation on equipment
under capital leases.

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 has been modified and may 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. 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 may receive a
warrant to purchase a number of shares, if revenue is 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.

F-17

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.

Other intangible assets consisted of the following:

December 31, 2004 2003
--------------------------------------------------- ----- ----------
Other intangibles . . . . . . . . . . . . . . . . . $ 0 $ 116,292
Less accumulated amortization . . . . . . . . . . . 0 (116,292)
--------------------------------------------------- ----- ----------
$ 0 $ 0
--------------------------------------------------- ----- ----------
--------------------------------------------------- ----- ----------

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

4. NOTES PAYABLE
(a) Building and settlement notes
In December 2002, the Company entered into an agreement to sell its ownership
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. In conjunction with the sale, the Company entered into a
lease agreement with the buyer to leaseback its facilities. 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. The Company's
Chief Executive Officer provided a guarantee for the leaseback. The gain of
$1,172,720 on the sale of the facility was deferred and is being amortized on a
straight-line basis over the ten (10) year term of the lease at the rate of
$117,272 per year. As of December 31, 2004 and 2003, the deferred gain was
$947,949 and $1,065,221, respectively. This amortization will be included in
the Company's non-operating income and expense and totaled $117,272 in 2004 and
$107,499 in 2003.

Deferred Gain consisted of the following:

December 31, 2004 2003
----------------- ----------- -----------

Deferred Gain $1,172,720 $1,172,720
Less Amortization (224,771) (107,499)
----------------- ----------- -----------
$ 947,949 $1,065,221
----------------- ----------- -----------
----------------- ----------- -----------

F-18

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, 2004
and 2003, the outstanding balances on these notes were $46,127 and $87,591, with
interest expense of $3,258 and $4,956, respectively.

Future minimum principal payments on notes payable are as follows:

Year Ending December 31,
------------------------ -------
2005 . . . . . . . . . . $36,670
2006 . . . . . . . . . . 9,457
2007 . . . . . . . . . . 0
------------------------ -------
Total Settlement Notes $46,127
------------------------ -------
------------------------ -------

(b) Related parties

The Company had a note payable to its CEO. At December 31, 2004 and 2003, the
balances were $0 and $585,522, 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%. As part of the Company's preferred stock
offering (see Note 8(a)), the note was paid in full during the third quarter of
2004.

Interest expense on this note was $29,256 and $47,023 for 2004 and 2003,
respectively.

On June 3, 2003, the Company entered into a Security Agreement, Secured
Convertible Note, Registration Rights Agreement and Common Stock Purchase
Warrant, with the 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 subject to the amount of eligible accounts receivables.
The net proceeds from the Convertible Note were used for general working capital
purposes. Advances on the Convertible Note are repaid at the Company's option,
in cash or through the issuance of the Company's shares of common stock provided
the market price is 118% of the fixed conversion price or greater. The
Convertible Note carries an interest rate of Wall Street Journal 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.
Approximately $19,500 in interest and approximately $5,000 in fees were expensed
under the revolving credit facility in 2004. There was no outstanding balance
on the revolving credit facility at December 31, 2004.

The Company filed a Form SB-2 registration statement on July 25, 2003 in
connection with this transaction. The shares were registered with the Securities
and Exchange Commission ("SEC") for public resale on August 6, 2003. Once the
market price exceeded 118% of the fixed conversion price, which occurred on or
about July 21, 2003, the Company obtained the ability to pay amounts outstanding
under the revolving credit facility in cash or shares of its common stock at the
fixed conversion price.

F-19

The Convertible Note includes a right of conversion in favor of Laurus. Laurus
has exercised its conversion rights from time to time on outstanding balances.
When Laurus chooses to exercise its conversion rights, the Convertible Note is
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 Agreement was modified on
March 31, 2004 to provide for a six-month waiver of the accounts receivable
restrictions and a fixed conversion price to Laurus of $0.85 per share on the
first $500,000 after the first $1 million. The agreement was further modified
on August 25, 2004 to provide for a fixed conversion price to Laurus of $1.00
per share on the next $1 million. Thereafter, the fixed conversion price will
be adjusted after conversion of a total of $2.5 million to 103% of the then fair
market value of our common stock ("Adjusted Fixed Conversion Price").

Laurus converted 2,991,417 shares to reduce the Company's debt by $2,271,750 for
the twelve-month period ending December 31, 2004. Laurus converted a total of
3,406,417 shares to reduce the debt by $2,500,000 since the inception of the
revolving credit facility. For the twelve-month period ending December 31,
2004, the Company expensed $2,480,628 for the non-cash loan fee based on the
fair market value of the stock when Laurus converted and $2,607,099 for the
non-cash loan fee expense since the inception of the revolving credit facility.
The fair market value used in 2003 was established using a 20% discount to the
closing price on the date of conversion based on the restricted and
thinly-traded nature of the Company stock in 2003 and the fair market value used
in 2004 was established using the closing price on the date of conversion with
no discount taken due to the increased volume in the Company's stock.

Availability of funds under the revolving credit facility is based on the
Company's accounts receivable, 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 have otherwise
exceeded eligible accounts receivable during the period. Laurus subsequently
extended the waiver for two additional six (6) month periods, under which Laurus
permitted a credit advance up to $1 million, which amount would have otherwise
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, which was expensed as additional interest expense in 2003. The
Company was required to pay a continuation fee of $10,000 each year thereafter.
In addition, Laurus received a warrant to purchase 200,000 shares of the
Company's common stock for the initial $1 million revolving credit facility, as
stated herein. The warrant exercise price was 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.

F-20

In addition to the initial warrant, the Company was 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 was converted under the revolving credit
facility. The value of the warrant was determined when issued, and was treated
as additional interest expense and is being amortized over the remaining term of
the Convertible Note, unless sooner terminated. On June 18, 2004, the Company
issued an additional warrant to purchase 50,000 shares at an exercise price of
$1.0625 per share in relation to the $500,000 revolving credit facility
expansion convertible at $0.85 per share. Since no more than an aggregate of
100,000 shares of the Company's common stock were authorized as additional
warrants under the Laurus Agreements, on August 25, 2004, the Company issued an
additional warrant to purchase 50,000 shares at an exercise price of $1.925 per
share in relation to the $1 million revolving credit facility expansion
convertible at $1.00 per share.

The Company may terminate its 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 the Company has: (i) provided Laurus
with an executed release of all claims which the Company may have under the
agreements; and, (ii) paid to Laurus an early payment fee in an amount equal to
(x) three percent (3%) of the Capital Availability Amount if such payment occurs
after the first anniversary (i.e., June 3, 2004) and prior to the second
anniversary of the Initial Term; and, (y) 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 the Company to Laurus if the Company terminates its Agreement after
the occurrence of an Event of Default, as defined in the agreements.

As stated above, in conjunction with the Company's Preferred Stock financing on
August 25, 2004, Laurus agreed to extend the revolving credit facility reported
on Form 8-K filed June 18, 2003 from $1.0 million to $1.5 million. The first
$1.0 million converted under the revolving credit facility was converted last
year and earlier this year at a rate of $0.55 per share during 2003 and 2004.
On March 31, 2004, the conversion price for the next $500,000 under the
revolving credit facility was set at $0.85 per share. The next $1 million under
the revolving credit facility was convertible at a rate of $1.00 per share.
There was no balance on the revolving credit facility at December 31, 2004.

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 matured. 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-21

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

As of December 31, 2004, all of the warrants under the convertible debt program
had been converted to equity and the Company received approximately $50,000 in
cash, received the reduction in $187,500 in related party debt and expensed
$773,802 in non-cash loan fees.

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 $2,350,000 and $2,190,000 as of December 31, 2004 and
2003, 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
$126,000 in 2004 from $2,190,000 at December 31, 2003 to $2,318,000 at December
31, 2004.

F-22

Significant components of the benefit for income taxes for the years ended
December 31, 2004 and 2003 are as follows:

2004 2003
------ ------
Current
Federal . . . . . $ - $ -
State . . . . . . 1,600 1,600
------ ------
1,600 1,600
Deferred
Federal . . . . . - -
State . . . . . . - -
------ ------
- -

Income tax expense $1,600 $1,600
====== ======

At December 31, 2004, the Company had federal and state tax net operating loss
and capital loss carryforwards of approximately $4,826,000 and $2,146,000,
respectively. The federal and state tax loss carryforwards will expire in 2012
and 2007, respectively, unless previously utilized. The State of California has
suspended the utilization of net operating loss for 2003 and limited them in
2004.

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

Years Ended December 31,. . . . . . . . . . 2004 2003
--------------------------------------------- ------- -------
Statutory U.S. federal rate . . . . . . . . 35.0% 34.0%
--------------------------------------------- ------- -------
State income taxes - net of federal benefit 5.7% 5.8%
Permanent differences . . . . . . . . . . . (37.8%) -
Change in valuation allowance . . . . . . . (2.9%) (39.8%)
--------------------------------------------- ------- -------
Provision for income taxes. . . . . . . . . 0.0% 0.0%
--------------------------------------------- ------- -------

F-23

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

December 31,. . . . . . . . . . . . . 2004 2003
--------------------------------------- ------------ ------------
Deferred tax assets:
--------------------------------------- ------------ ------------
Loss carryforwards . . . . . . . . . $ 1,765,000 $ 1,588,000
Deferred gain on sale of building 416,000 435,000
Temporary differences. . . . . . . . 77,000 127,000
Research and development credits . . 92,000 40,000
--------------------------------------- ------------ ------------
Gross deferred tax assets . . . . . . 2,350,000 2,190,000
--------------------------------------- ------------ ------------
Deferred tax liability. . . . . . (32,000) -
--------------------------------------- ------------ ------------
Valuation allowance . . . . . . . . . (2,318,000) (2,190,000)
$ - $ -
--------------------------------------- ------------ ------------
--------------------------------------- ------------ ------------

As of December 31, 2004, the Company recorded a valuation allowance of $214,000
related to deferred tax assets created by the exercise and/or disposition of
employee stock options in recent periods. The deferred tax asset originating
from deductions for the exercise and/or disposition of stock options and the
related valuation allowance have been recorded against additional paid-in
capital and did not effect the net earnings for the period. Any tax benefits
realized from the reduction of this valuation allowance will be recorded to
additional paid-in capital.

Pursuant to Internal Revenue Code Section 382, the Company's use of its net
operating loss carryforwards may be limited as a result of cumulative changes in
ownership of more than 50% over a three year period.

The Company has unused U.S. and state tax credits of approximately $52,000 and
$39,000, that begin to expire 2013 and 2008, respectively.

7. EMPLOYEE BENEFIT PLAN

(a) Profit sharing 401(k) plan

During 2004, the Company amended their previous 401(k) retirement savings plan
from 1997 for its employees, which allows each eligible employee to voluntarily
make pre-tax salary contributions up to 93% of their compensation or $13,000 per
year, whichever is lower, for the year ending December 31, 2004. The Company
has elected to begin making a matching contribution of 10% of employee
contributions, which matching portion vests over 5 years as specified in the
plan amendment. During 2004 and 2003, the Company contributed $2,705 and $0
to the Plan.

F-24

(b) Incentive stock option and employee stock purchase plans

At its 1999 Annual Stockholder Meeting, the shareholders adopted an Incentive
Stock Option Plan under which its Board of Directors had the ability to grant
its employees, directors and affiliates Incentive Stock Options, non-statutory
stock options and other forms of stock-based compensation, including bonuses or
stock purchase rights. Incentive Stock Options, which provided for preferential
tax treatment, were only available to employees, including officers and
affiliates, and were not issued to non-employee directors. The exercise price
of the Incentive Stock Options is 100% of the fair market value of the stock on
the date the options were granted. Pursuant to our plan, the exercise price for
the non-statutory stock options were not less than 85% of the fair market value
of the stock on the date the option was 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.

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 to 4,184,698
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 2004 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.

At the 2004 Annual Stockholder Meeting, the shareholders approved the 2004 Stock
Option Plan authorizing options on 2,000,000 shares be set apart under this
plan. As of December 31, 2004, 6,184,698 shares were authorized for issuance
under both plans, 3,878,766 of which were subject to outstanding options and
awards. Shares issuable under the 1999 plan were registered with the U.S.
Securities & Exchange Commission on Form S-8. A Form S-8 registration statement
for shares issuable under the 2004 plan will be filed simultaneously with this
report.

During 2004, the Company issued non-statutory options to purchase 287,000 shares
to its independent directors for attendance at its 2003 Board of Directors
meetings. In addition to the Stock Option Plan of 1999, the shareholders
adopted the 1999 Employee Stock Purchase Plan with 1,000,000 shares reserved
under the plan and authorized the 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 2004 and 2003 employees contributed $16,464 and $6,440 to the
employee stock purchase plan, and 14,010 and 0 shares were issued under the plan
as of December 31, 2004 and 2003, respectively. The 1999 Employee Stock
Purchase Plan was to expire in June 2005; however, the Board of Directors
extended the plan for another year at their Board meeting in November 2004.

F-25

8. STOCKHOLDERS' EQUITY

(a) Convertible preferred stock

On August 25, 2004, the Company entered into a Securities Purchase Agreement
with the Laurus Master Fund, Ltd., whereby the Company issued 250,000 shares of
its Series C Non-Redeemable Convertible Preferred Stock, par value $0.001 per
share (the "Preferred Stock"), to Laurus for an aggregate purchase price of
$2,500,000 or $10.00 per share (the "Stated Value"). The preferred shares are
convertible into shares of the Company's $0.0001 par value common stock at a
rate of $1.54 per share at any time after the date of issuance, and pay
quarterly, cumulative dividends at a rate of 6.85% with the first payment due on
January 1, 2005. As of December 31, 2004, approximately $61,000 has been
accrued for dividends and are payable in cash or shares of our common stock at
the holder's option with the exception that dividends must be paid in shares of
our common stock for up to 25% of the aggregate dollar trading volume if the
fair market value of the Company's common stock for the 20-days preceding the
conversion date exceeds 120% of the conversion rate. The preferred shares are
redeemable by the Company in whole or in part at any time after issuance for (a)
115% of the Stated Value if the average closing price of the common stock for
the 22 days immediately preceding the date of conversion does not exceed the
conversion rate or (b) the Stated Value if the average closing price of our
common stock for the 22 days immediately preceding the date of conversion
exceeds the Stated Value. The preferred shares have a liquidation right equal to
the Stated Value upon the Company's dissolution, liquidation or winding-up. The
preferred shares have no voting rights.

In conjunction with the Preferred Shares, the Company issued a five-year common
stock purchase warrant to Laurus for the purchase of 487,000 shares of the
Company's common stock at an exercise price of $1.77 per share. The Company
registered all of the shares of its common stock underlying the Preferred Shares
and the warrant, as well as an estimated number of shares payable as dividends
on the Preferred Shares, for resale.

(b) Common stock

During 2004 and 2003, the Company issued 0 and 7,500 shares, respectively, of
its common stock for employee awards and services and for summer and student
interns, and recorded expenses of $0 and $9,170, respectively. The fair value
of the shares issued was calculated using the closing price on the date of
issuance.

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.

F-26

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, 2004, all of
the warrants under the convertible debt program had been converted and the
Company received $237,500 in cash and expensed $773,802 in non-cash loan fees.
As of December 31, 2004, the Company had other warrants outstanding issued as
part of its private placement and other equity raising ventures as well as
services that allow the holders to purchase up to 2,363,827 shares of common
stock at prices between $0.435 and $2.79 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
$0.0001 par value restricted common stock.

The options are subject to the following vesting conditions, which were amended
on January 21, 2000, and further amended on July 16, 2000 with an option for the
board to award an additional 1,500,000 options at a later date:

F-27

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 $ .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 reaching $250 million $ 5.00
500,000. . . . . Upon the Company market capitalization reaching $500 million $ 10.00
750,000. . . . . Upon the Company market capitalization reaching $1 billion $ 20.00
---------------- --------- ----------------------------------------------------------- -----------------

All options expire ten (10) years from date of second amendment i.e., July 16,
2000.

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 (5) years from grant
date.

F-28

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, 2003 . 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
Granted. . . . . . . . . . . 2,218,500 1.23
Exercised. . . . . . . . . . (1,005,035) 1.26
Expired. . . . . . . . . . . (459,506) 1.04
---------------------------- ------------ ----------------

Balance at December 31, 2004 6,378,766 $ 1.50
---------------------------- ------------ ----------------
---------------------------- ------------ ----------------

The weighted average fair value of options granted to employees under the 1999
Incentive Stock Option Plan and the 2004 Equity Incentive Plan during 2004 and
2003 was $1.23 and $0.76, respectively. At December 31, 2004 and 2003, there
were 1,900,460 and 2,266,520 options exercisable at a weighted average exercise
price of $0.83 and $1.05 per share, respectively. The weighted average
remaining life of outstanding options under the plan at December 31, 2004 was
4.40 years.

Weighted-Average Weighted-
Range of . . Remaining Contractual Average Exercisable Price
Exercise . . Number of Shares Life of Shares Number of Shares Exercisable
Price . . . . Outstanding Outstanding Exercisable Price
------------ --------------------- ------------------------- ----------------- ------------
0.42-0.99 . 2,317,413 3.92 1,036,607 $ 0.64
1.00-1.99. 2,459,131 4.53 861,631 1.05
2.00-2.99. 1,102,222 5.11 2,222 2.25
3.00-3.50. 500,000 5.05 - -
------------ --------------------- ------------------------- ----------------- ------------
6,378,766. . 4.40 1,900,460 $ 0.83
------------ --------------------- ------------------------- ----------------- ------------
------------ --------------------- ------------------------- ----------------- ------------

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 2004 and 2003 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,. . . . . . . . . 2004 2003
----------------------------- ---------- ----------
Computer equipment. . . . . . $ 153,097 $ 153,097
Less accumulated depreciation (136,640) (103,857)
$ 16,457 $ 49,240
----------------------------- ---------- ----------
----------------------------- ---------- ----------

Future minimum lease payments are as follows:

Year Ending December 31, 2003
--------------------------------------- --------
2005. . . . . . . . . . . . . . . . . . $ 4,425
2006. . . . . . . . . . . . . . . . . . 1,526
2007. . . . . . . . . . . . . . . . . . -
2008. . . . . . . . . . . . . . . . . . -
Thereafter. . . . . . . . . . . . . . . -
--------------------------------------- --------
Total minimum lease payments. . . . . . 5,951
Amount representing interest. . . . . . 698
--------------------------------------- --------
Present value of minimum lease payments 5,253

Total obligation. . . . . . . . . . . . 5,253
Less current portion. . . . . . . . . . (3,784)
--------------------------------------- --------
Long-term portion . . . . . . . . . . . $ 1,469
--------------------------------------- --------
--------------------------------------- --------

(b) Other accrued liabilities

During 2004 and 2003, the Company accrued expenses in connection with current
projects, our preferred stock sale, and other commitments. The total of these
accruals were $207,262 and $248,530 as of December 31, 2004 and 2003,
respectively.

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 were recorded as other accrued liabilities. The fees include broker fees,
escrow and title fees and property taxes.

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 was $25,678 per month at lease
inception and is currently $26,577 as of December 31, 2004 and will continue to
increase by 3.5% per year. Mr. Benson, the Company's CEO, provided a guarantee
for the leaseback.

F-30

10. CONCENTRATIONS

(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 2004 and 2003, the Company had two and three major customers that
accounted for sales of approximately $3,737,000, or 76% and $1,782,600 or 60% of
consolidated revenue, respectively. At December 31, 2004 and 2003, the amount
receivable from these customers was approximately $612,900 and $160,200,
respectively.

In November 1999, the Space Missions Division was awarded a turnkey mission
contract by the Space Sciences Laboratory at the University of California at
Berkeley worth as of December 31, 2002 approximately $7.2 million, including two
change orders worth approximately $412,000 on June 12, 2002 and October 7, 2002.
This contract represented 14% of the Company's revenue in 2003. The contract
concluded on December 31, 2003.

F-31

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.
April 26, 2005

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 $15,000
Accounting Fees $10,000
Miscellaneous Expenses $ 500
Total $26,143
=================================================== =======

II-1

RECENT SALES OF UNREGISTERED SECURITIES

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-2

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, the Company entered into a Securities Purchase
Agreement (the "Agreement") with Laurus whereby the Company received a $1
million revolving credit facility in the form of a three-year Convertible
Note secured by assets of the Company. The Convertible Note was issued pursuant
to Section 4(2) of the Securities Act, as a sale to an accredited investor under
Rule 506. The shares underlying the Convertible Note registered with the
Securities and Exchange Commission ("SEC") for public resale on this
registration statement effective August 6, 2003.

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-3

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 this registration
statement effective August 6, 2003.

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. The securities were issued
pursuant to Section 4(2) of the Securities Act.

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
this registration statement effective August 6, 2003.

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
this registration statement effective August 6, 2003.

II-4

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 this
registration statement effective 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 this
registration statement effective 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 this registration statement
effective August 6, 2003.

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 this registration statement
effective August 6, 2003.

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 this registration statement
effective August 6, 2003.

II-5

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 this registration statement
effective August 6, 2003.

On May 17, 2004, we issued 353,182 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 $194,250 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 this registration statement
effective August 6, 2003.

On July 12, 2004, we issued 41,876 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 $35,595 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 July 1, 2004.

On August 25, 2004, we issued 250,000 shares of our Series C Non-Redeemable
Convertible Cumulative Preferred Stock, with a stated value of $10.00 per share
(the "Stated Value"), to the Laurus Master Fund Ltd. for a total purchase price
of $2.5 million. The preferred stock is convertible into Common Stock at a rate
of $1.54 per share at any time after the date of issuance. The preferred shares
are redeemable by the Company in whole or in part at any time after issuance for
(a) 115% of the Stated Value if the average closing price of the Common Stock
for the 22 days immediately preceding the date of conversion does not exceed the
Conversion Rate or (b) the Stated Value if the average closing price of the
Common Stock for the 22 days immediately preceding the date of conversion
exceeds the Stated Value.

The preferred stock was issued pursuant to Section 4(2) of the Securities
Act and Rule 506 promulgated thereunder. As part of the transaction, 1,845,779
shares of Common Stock underlying the preferred stock and cumulative dividends
were registered with the Securities and Exchange Commission ("SEC") for resale.

On August 25, 2004, we issued warrants to purchase 487,000 shares of common
stock to the Laurus Master Fund Ltd. The warrants were issued at an exercise
price of $1.77 per share, were immediately vested and are exercisable over a
five (5) year period. The warrants were issued pursuant to Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder. As part of the Preferred
Stock transaction, the underlying shares were registered with the Securities and
Exchange Commission ("SEC") for public resale.

On August 25, 2004, we issued warrants to purchase 50,000 shares of common
stock to the Laurus Master Fund Ltd. The warrants were issued at an exercise
price of $1.9250 per share, were immediately vested and are exercisable over a
five (5) year period. The warrants were issued pursuant to Section 4(2) of the
Securities Act. As part of this transaction, the underlying shares are being
registered with the Securities and Exchange Commission ("SEC") for public
resale.

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
SpaceDev's Articles of Amendment to Articles of Incorporation dated July 21, 2003
Increasing the Authorized Shares of Common Stock (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5
Certificate of Designations dated as of August 25, 2004, by and between SpaceDev,
Inc. and the Laurus Master Fund, Ltd.(13). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6
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
Form of Certificate of Series C Preferred Stock (13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.14
2004 Equity Incentive Plan(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.15
Certificate of Series C Preferred Stock, Dated August 25, 2004, by and among SpaceDev and Laurus(13). . . . . . 4.16
Form of Warrant, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . . . . . . . . 4.17
Opinion of Law Offices of Gretchen Cowen, APC dated April 26, 2005 . . . . . . . . . . . . . . . . . . . . . . . 5.1
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 Microsatellite Experiment(9) . . . . . . . . . . . . . . . . . . . . . . . 10.27
MDA Advanced Systems Deputate for the Microsatellite 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(10) . . . . . . . . . . . . . 10.37
Employment Offer between SpaceDev and Randall K. Simpson, dated Jan. 16, 2004(10). . . . . . . . . . . . . . . . 10.38
Confidential Separation Agreement and General Release of Claims with Mr. DaPra, dated March 18, 2004(10) . . . . 10.39
Missile Defense Agency Contract with SpaceDev, dated March 31, 2004(10). . . . . . . . . . . . . . . . . . . . . 10.40
Amendment No. 1 to Note with the Laurus Master Fund, dated March 31, 2004(10). . . . . . . . . . . . . . . . . . 10.41
Waiver Letter from Laurus Master Fund, dated March 31, 2004(10). . . . . . . . . . . . . . . . . . . . . . . . . 10.42
First Task Order Under Missile Defense Agency Contract with SpaceDev, dated April 1, 2004(10). . . . . . . . . . 10.43
Separation Agreement and General Release, by and between SpaceDev and Jeffrey Janicik dated June 18, 2004 (12). . 10.44
Modification to Small Shuttle Compatible Propulsion Module contract with AFRL dated July 7, 2004(12) . . . . . . 10.45
Lunar Enterprises of California contract with SpaceDev dated July 20, 2004(12) . . . . . . . . . . . . . . . . . 10.46
List of Subsidiaries of the Company(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.47
Security Purchase Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . . 10.48
Registration Rights Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . 10.49
Letter Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . . . . . . . 10.50
Air Force Research Laboratories contract with SpaceDev dated as of August 23, 2004(14). . . . . . . . . . . . . 10.51
Air Force Research Laboratories Statement of Work(14)*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.52
Small Business Innovation Research contract between the Air Force Research Lab and SpaceDev,
Dated September 29, 2004(15). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.53
Second Task Order Under Missile Defense Agency Contract with SpaceDev, dated October 20, 2004*(15) . . . . . . . 10.54
AFRL SBIR "mini-mo" contract extension with SpaceDev dated August 20, 2004*(15). . . . . . . . . . . . . . . . . 10.55
Air Force Research Laboratories amended contract with SpaceDev dated as of September 28, 2004(15). . . . . . . . 10.56
Consent of Independent Registered Public Accounting Firm (2004).Dated April 26, 2005. . . . . . . . . . . . . . 23.1
Consent of Law Offices of Gretchen Cowen, APC (included in Exhibit 5.1 hereto) . . . . . . . . . . . . . . . . . 23.4

* 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 six reports on Form 8-K, since fiscal year ended December 31,
2003. These reports, dated August 30, 2004, September 1, 2004, October 5, 2004,
October 26, 2004, November 19, 2004 and November 23, 2004, disclosed: 1) our
Securities Purchase Agreement with the Laurus Master Fund whereby we issued
250,000 shares of our Series C Convertible Preferred Stock to Laurus; 2) a
contract that we received from the Air Force Research Laboratory to continue
working on Phase II of a small satellite bus technology; 3) a continuation
contract that we received from the Air Force Research Laboratory to proceed with
Phase II of a small launch vehicle program; 4) the award of a second Task Order
from the Missile Defense Agency to continue working on a distributed sensing
experiment; 5) the announcement that Mr. Slansky was promoted to our President
and appointed to our Board of Directors; and 6) the property settlement
agreement between our founding Chairman and CEO, Mr. Benson, and his wife, Ms.
Susan Benson.

(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 3.5, 4.8, 4.14 and 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 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 filed on April 6, 2004.
(11) Incorporated by reference to Registrant's Form Schedule 14A Information
Proxy Statement, filed July 7, 2004.
(12) Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 previously filed
as an Exhibit to Registrant's Form 10-QSB on August 9, 2004.
(13) Incorporated by reference to Exhibits 3.1, 4.1, 4.2, 10.1, 10.2 and 10.3
previously filed as an Exhibit to Registrant's Form 8-K filed on August 30,
2004.
(14) Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as an
Exhibit to Registrant's Form 8-K filed on September 1, 2004.
(15) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4 previously
filed as an Exhibit to Registrant's Form 10-QSB on November 15, 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 this Post-Effective Amendment No. 2
toon Form SB-2 to be signed on its behalf by the undersigned, in the City of San
Diego, California, on the 26th day of April 2005 .

SpaceDev, Inc.

By: /s/ James W. Benson
-------------------------------------------------
James W. Benson, Chief Executive Officer

By: /s/ Richard B. Slansky
-------------------------------------------------
Richard B. Slansky, President and
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 April 26, 2005
---------------------- Officer and Director (principal
James W. Benson executive officer)

/s/ Richard B. Slansky Chief Financial Officer and Corporate April 26, 2005
---------------------- Secretary
Richard B. Slansky

II-10

/s/ Susan C. Benson Director April 26, 2005
----------------------------
Susan C. Benson

/s/ Curt Dean Blake Director April 26, 2005
----------------------------
Curt Dean Blake

/s/ Howell M. Estes, III Director April 26, 2005
----------------------------
Howell M. Estes, III

/s/ Wesley T. Huntress Director April 26, 2005
----------------------------
Wesley T. Huntress

/s/ Scott McClendon Director April 26, 2005
----------------------------
Scott McClendon

/s/ Stuart Schaffer Director April 26, 2005
----------------------------
Stuart Schaffer

/s/ Robert S. Walker Director April 26, 2005
----------------------------
Robert S. Walker

II-11

INDEX TO EXHIBITS FILED WITH THIS REGISTRATION STATEMENT

ITEM EXH. NO.
----------------------------------------------------------------------------------------------------------- --------

* 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:

(b) Reports on Form 8-K

We have filed two reports on Form 8-K, since fiscal year ended December 31,
2004. These reports, dated April 13, 2005 and April 15, 2005, disclosed: 1) our
appointment of Susan C. Benson to our Board of Directors; and, 2) a contract to
expand our facilities for fabrication and testing of scaled-up hybrid rocket
motors.