Edgar Filing: SPACEDEV INC

As filed with the Securities and Exchange Commission on April 28, 2006.

Registration Statement No. 333-107360

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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POST EFFECTIVE AMENDMENT NO. 3
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 (Primary standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
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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RICHARD B. SLANSKY
PRESIDENT AND CHIEF FINANCIAL OFFICER
SPACEDEV, INC.
13855 STOWE DRIVE
POWAY, CALIFORNIA 92064
(858) 375-2030
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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Copies to:
Hayden Trubitt
Heller Ehrman, LLP
12065 Rue Montereau
San Diego, CA 92131
(858) 450-5754

Approximate date of commencement of proposed sale to public: FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.

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: [ ]

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 shares 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 $31,143 .

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 3,
2006, was $1.52 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 28, 2006.

PAGE 1

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . 47
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MARKET FOR COMMON EQUITY & RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . 49
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS & CONTROL PERSONS. . . . . . . . . . . . . . 50
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EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . 61
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DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
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DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES . 66
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . 66
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EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
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LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
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WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 67
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PAGE 2

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 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.

Starsys Research Corporation was acquired by SpaceDev on January 31,
2006 in a tax-free forward triangular merger, renamed Starsys, Inc., and is now
a wholly-owned subsidiary of SpaceDev. Starsys is engaged in the design and
manufacture of mechanical and electromechanical subsystems and components for
spacecraft. Starsys' subsystems enable critical spacecraft functions such as
pointing solar arrays and communication antennas and restraining, deploying and
actuating moving spacecraft components. Starsys manufactures a wide range of
products that include bi-axis gimbals, flat plate gimbals, solar array pointing
mechanisms, deployable booms, separation systems, thermal louvers, actuators,
restraint devices and cover systems. Starsys' products are sold both as
"off-the-shelf" catalog products, which represent previously qualified devices
with spaceflight history, and as custom systems that are developed for specific
applications. Starsys' products are typically sold directly to spacecraft
manufacturers. Starsys' customer base is segregated into three major segments:
(1) domestic and international commercial spacecraft (communication and imaging
satellites), (2) civil spacecraft (NASA) that are primarily scientific in nature
and (3) defense spacecraft that support the United States' military capability.
Starsys also offers products to non-space customers, including aerospace,
maritime, and industrial customers. 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 on shares outstanding on April 3, 2006 28,910,516 shares

PAGE 3

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.

PAGE 4

SELECTED CONSOLIDATED FINANCIAL DATA

The following financial data is provided as of and for the fiscal years
ended December 31, 2005 and 2004. The financial data as of and for the
fiscal years ended December 31, 2005 and 2004 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 ENDED
DECEMBER 31,

2005 2004
------------- -------------
Net revenues $ 9,005,011 $ 4,890,743
Income from operations $ 311,500 $ 144,285
Net income/(loss) $ 501,264 $ (3,027,054)
Basic income/(loss) per share $ 0.02 $ (0.16)
Weighted average shares outstanding, basic 22,270,997 18,610,141

AS AT
DECEMBER 31,

2005 2004
------------------ ------------------
Cash and cash equivalents $ 5,750,038 $ 5,068,601
------------------ ------------------
Working capital $ 6,195,086 $ 4,897,796
------------------ ------------------
Total assets $11,008,649 $ 6,090,434
------------------ ------------------
Long-term debt, net of current portion $ 830,677 $ 963,875
------------------ ------------------
Stockholders' Equity $ 7,969,213 $ 4,335,657
------------------ ------------------

PAGE 5

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 PLAN TO REMAIN CASH FLOW POSITIVE AND BECOME PROFITABLE DEPENDS ON
OUR ABILITY TO INCREASE REVENUES, CONTROL COSTS IN A VARIETY OF AREAS, HIRE NEW
ENGINEERS AND IMPROVE OUR PROJECT MANAGEMENT EXPERTISE.

We were cashflow positive in 2005 primarily as a result of
profitable execution of our Missile Defense Agency contract and other
government and commercial contracts. 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.

PAGE 6

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, 2005
and 2004, we had a working capital of $6,195,086, and $4,897,796,
respectively, and an accumulated deficit of $14,575,489 and $14,905,797,
respectively. As of those dates, we had $5,750,038 and $5,068,601,
respectively, in cash and cash equivalents and $1,279,027 and $620,097,
respectively, of accounts receivable, net of allowance for doubtful accounts.

In the past, both SpaceDev and Starsys have relied upon cash from
financing activities to fund part of the cash requirements of their respective
businesses. We may need additional financing to fund our projected operations.
Additional financing may not be available to us on acceptable terms, or at all.
Any financing may cause additional dilution to existing shareholders. Any debt
financing or other issuance of securities senior to common stock likely will
include financial and other covenants that will restrict our operating
flexibility and our ability to pay dividends to shareholders. SpaceDev has not
paid dividends on its common stock in the past and does not anticipate paying
dividends on its common stock in the foreseeable future.

SOME OF OUR GOVERNMENT CONTRACTS ARE STAGED AND WE CANNOT GUARANTEE THAT
ALL STAGES OF THE CONTRACTS WILL BE AWARDED TO US OR AT ALL.

Some of our government contracts, including the $43,362,271 MDA contract
awarded on March 31, 2004, are phased contracts, in which the customer may
determine to terminate the contract between phases for any reason. We can give
no assurance that, as to any such agreement, the entire contract will be
realized by us. In the event that subsequent phases of some of our government
contracts, including but not limited to the MDA contract, are not awarded to us,
it would have a material adverse effect on our business operations and financial
condition, unless equivalent contracts were simultaneously awarded to us. For
example, recently, SpaceDev was informed by the Missile Defense Agency that it
would not be exercising its option for a second cluster of three microsats under
the March 31, 2004 Missile Defense Agency contract. SpaceDev estimates that the
second cluster represented approximately $10 million of the $43 million of total
potential payments under the contract. In the event that subsequent phases of
some of our government contracts, including but not limited to the Missile
Defense Agency contract, are not awarded to us, it could have a material adverse
effect on our financial position and results of operations.

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, and subsequently increased to $1,500,000 on August 25,
2004, 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. The next
$500,000 of the Convertible Note was converted into 588,235 shares of our common
stock at a fixed conversion price of $0.85 per share. The next $1,000,000 of the

PAGE 7

Convertible Note was converted into 1,000,000 shares of our common stock at a
fixed conversion price of $1.00 per share. Finally, the $2,500,000 of the
Preferred Stock and accrued dividends may be converted into up to 1,845,779
shares of our common stock at a fixed conversion price of $1.54 per share. The
3,406,417 shares issued on conversion of the Convertible Note were all issued at
less than the then current market price of our common stock. Although
we do not anticipate the need to continue drawing on the revolving credit
facility in 2006, any additional draws would be converted at a rate of 103% of
the fair market value of the common stock. The Convertible Note expires on
June 3, 2006.

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 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 Stock is convertible into shares of our
$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 us 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.

On January 13, 2006, we issued and sold to a limited number of
institutional accredited investors, including Laurus, 5,150 shares of our Series
D-1 Amortizing Convertible Perpetual Preferred Stock, par value $0.001 per
share, which we refer to as Series D-1 Preferred Stock, for an aggregate
purchase price of $5,150,000, or $1,000 per share. We also issued various
warrants to these investors under the 2006 purchase agreement.

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 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.

THE TERMS OF SPACEDEV'S OUTSTANDING SHARES OF PREFERRED STOCK, AND ANY
SHARES OF PREFERRED STOCK ISSUED IN THE FUTURE, MAY REDUCE THE VALUE OF YOUR
COMMON STOCK.

SpaceDev is authorized to issue up to 10,000,000 shares of preferred stock
in one or more series. SpaceDev currently has outstanding 248,460 shares of its
Series C Convertible Preferred Stock and 5,150 shares of its Series D Preferred
Stock. Our board of directors may determine the terms of future preferred stock
offerings without further action by our shareholders. If we issue additional
preferred stock, it could affect your rights or reduce the value of your common
stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with or sell our assets to
a third party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and sinking fund
provisions. SpaceDev's Series C Preferred Stock and Series D Preferred Stock
rank senior to the common stock with respect to dividends and liquidation and
have other important preferred rights.

WE MAY NOT SUCCESSFULLY OR TIMELY DEVELOP PRODUCTS.

Many of our products and technologies (including our hybrid rocket
technology) are currently under various stages of development. Further
development and testing of our products and technologies will be required to
prove additional performance capability beyond current levels and to confirm
commercial viability. Additionally, the final cost of development cannot be
determined until development is complete. Our ongoing and future product
development will depend, in part, on the ability to timely complete our projects
within estimated cost parameters and ultimately deploy the product in a
cost-effective manner. In addition, Starsys has contracted to execute
development programs under fixed price contracts. Under these contracts, even if
our costs begin to exceed the amount to be paid by the customer under the
contract, we are required to complete the contract without receiving any
additional payments from the customer. It is difficult to predict accurately the
total cost of executing these programs. If the costs to complete these programs
significantly exceed the payments from the customers under the contracts, our
results of operations will be harmed.

THE MARKETPLACE FOR OUR TECHNOLOGY AND PRODUCTS IS UNCERTAIN.

The demand for our technology, products and services is uncertain and we
may not obtain a sufficient market share to sustain our business or to increase
profitability. Our business plan assumes that near-term revenues will be
generated largely from government contracts for microsatellites and
electromechanical systems for spacecraft with a long-term commercial market
developing for private manned and unmanned space exploration. Microsatellites
and commercial space exploration are still relatively new concepts, and it is
difficult to predict accurately the ultimate size of the market. In addition, we
are developing new product areas such as large deployable structures, solar
array drives, slip rings and precision scanning assemblies for spacecraft. Many
of our products and services are new and unproven, and the true level of
customer demand is uncertain. Lack of significant market acceptance of our
products and services, delays in such acceptance, or failure of our markets to
develop or grow could negatively affect our business, financial condition, and
results of operations.

PAGE 8

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 OR OTHER 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, and warrants 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
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 have a limited operating history and, as a result, our historical
financial information is of limited value in projecting our future success in
these markets. We launched our first micro-satellite, CHIPSat, in January
2003 and, in June, September and October, 2004, our hybrid rocket technology
was first utilized in connection with SpaceShipOne. We hope to sell an
increasing percentage of SpaceDev's products and services in commercial markets,
but virtually all of SpaceDev's historical work has been from government
contracts and government-related work. We recently announced our intention to
enter the launch services market by providing a microsat bus, integration
services, and a launch vehicle as a package. We will be dependent on the
performance of Space Exploration Technologies, a small company with limited
operating history which has not yet had a successful launch, for our first
launch vehicle. Our microsatellites, nanosatellites and launch services may not
achieve market acceptance, and our future prospects are therefore difficult to
evaluate. 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.

PAGE 9

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

Most of our products are technologically advanced and tested, but
sometimes are not space qualified for performance 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.

A FAILURE TO LAUNCH COULD CAUSE SERIOUS ADVERSE EFFECTS.

Although our current $43,362,271 contract with the Missile Defense Agency
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. A
single launch failure of one of our microsatellites could have serious adverse
effects on our business. 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 NEW LINES OF BUSINESS MAY DIVERT MANAGEMENT'S
ATTENTION FROM OUR EXISTING OPERATIONS AND PROVE TO BE TOO COSTLY.

Our current business plan contemplates the migration of 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 distract 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.

PAGE 10

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 chairman and chief
technology officer, James W. Benson, our chief executive officer and
vice-chairman, Mark N. Sirangelo, our president and chief financial officer,
Richard B. Slansky, our vice president of engineering, Frank Macklin and our
vice president of business development and projects, Randall K. Simpson, the
managing director of SpaceDev, Scott Tibbitts, the president of Starsys, Robert
Vacek, and certain other SpaceDev and Starsys personnel. 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.

One device we have historically used to enhance our ability to retain
and incentivize key personnel is the grant of stock options which are subject to
vesting. If the employee leaves us before the vesting period has been completed,
he must forfeit a portion of the stock options. In December 2005, in order to
avoid adverse financial reporting effects in future years under a new accounting
standard, we eliminated all future vesting requirements on all of our 8,031,036
stock options then outstanding in the hands of employees, officers, and
directors.

THE U.S. FEDERAL GOVERNMENT MAY INCREASE REGULATION, WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR BUSINESS.

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 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, manufacturing license agreements 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

PAGE 11

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. We are well aware of these. At the
present time, we are not aware of any additional or unique government
regulations related to commercial space missions.

We are also subject to laws and regulations regulating the formation,
administration and performance of, and accounting for, U.S. government
contracts. With respect to such contracts, any failure to comply with applicable
laws could result in contract termination, price or fee reductions, penalties,
suspension or debarment from contracting with the U.S. government.

We are also required to obtain permits, licenses, and other authorizations
under federal, state, local and foreign laws and regulations relating to the
environment. Our failure to comply with applicable law or government
regulations, including any of the above-mentioned regulations, could have
serious adverse effects on our business.

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
particularly in industries (also like ours) where substantial value is
ascribed to a hope for future increase in the size of the total market, are
often highly volatile. The market price of our common stock has fluctuated
significantly in the past. In fact, during the 52-week period ended April 3,
2006, the high and low closing price of a share of our common stock was
$1.75 and $1.15, 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, announcement of funding, contract,
and launch dates by us or our 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.

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.

We had a net deferred tax asset of approximately $2,127,000 and $2,350,000
at December 31, 2005 and 2004, respectively, which consisted primarily of the
income tax benefits from net operating loss and capital loss carryforwards,
amortization of deferred gain on sale of building and research and development
credits. Deferred income taxes represent temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. A
valuation allowance has been recorded to fully offset the deferred tax asset as
it is more likely than not that the assets will not be utilized. The valuation
allowance decreased from $2,318,000 at December 31, 2004 to $2,075,000 at
December 31, 2005.

PAGE 12

We had federal and state tax net operating loss and capital loss
carryforwards of approximately $4,214,000 and $1,608,000 at December 31, 2005
respectively. The federal tax loss carryforwards will expire in 2023 and the
state tax loss carryforwards will expire in 2013, unless previously utilized.
The State of California suspended the utilization of net operating loss for 2002
and 2003, and limited them for 2004.

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 3, 2006, our executive officers and directors together
beneficially owned approximately 50.5% 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 COMPETITIVE POSITION WILL BE SERIOUSLY DAMAGED IF WE CANNOT PROTECT
INTELLECTUAL PROPERTY RIGHTS IN OUR TECHNOLOGY.

Our success, in part, depends on our ability to obtain and enforce
intellectual property protection for our technology. We rely on a combination of
patents, trade secrets and contracts to establish and protect our proprietary
rights in our technology. However, we may not be able to prevent
misappropriation of our intellectual property, and the agreements we enter into
may not be enforceable. In addition, effective intellectual property protection
may be unavailable or limited in some foreign countries.

There is no guarantee any patent will be issued on any patent application
that we have filed or may file. Further, any patent that we may obtain will
expire, and it is possible that it may be challenged, invalidated or
circumvented. If we do not secure and maintain patent protection for our
technology and products, our competitive position will be significantly harmed
because it will be much easier for competitors to sell products similar to ours.
Alternatively, a competitor may independently develop or patent technologies
that design around our patented technology. In addition, it is possible that
any patent that we may obtain may not provide adequate protection and our
competitive position could be significantly harmed.

As we expand our product line or develop new uses for our products, these
products or uses may be outside the scope of our current patent applications,
issued patents, and other intellectual property rights. In addition, if we
develop new products or enhancements to existing products, there is no guarantee
that we will be able to obtain patents to protect them. Even if we do receive
patents for our existing or new products, these patents may not provide
meaningful protection. In some countries outside of the United States, effective
patent protection is not available. Moreover, some countries that do allow
registration of patents do not provide meaningful redress for violations of
patents. As a result, protecting intellectual property in these countries is
difficult and our competitors may successfully sell products in those countries
that have functions and features that infringe on our intellectual property.

We may initiate claims or litigation against third parties in the future
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and divert the efforts of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed, regardless of the outcome of
the case.

PAGE 13

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 INTENSELY COMPETITIVE.

We compete 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

We have historically made strategic acquisitions of businesses and
routinely evaluates potential acquisition candidates that it believes would
enhance its business. We have 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.

WE MAY NOT ADDRESS SUCCESSFULLY THE PROBLEMS ENCOUNTERED IN CONNECTION WITH
ACQUISITIONS, INCLUDING OUR 2006 ACQUISITION OF STARSYS.

We expect to consider opportunities to acquire or make investments in other
technologies, products and businesses that could enhance our capabilities,
complement our current products or expand the breadth of our markets or customer
base. We have limited experience in acquiring other businesses and
technologies; the Starsys acquisition was the first major acquisition we have
consummated. Potential and completed acquisitions and strategic investments
involve numerous risks, including:

- problems assimilating the purchased technologies, products or business
operations;

- problems maintaining uniform standards, procedures, controls and policies;

- unanticipated costs associated with the acquisition;

- diversion of management's attention from our core business;

- adverse effects on existing business relationships with suppliers and
customers;

- incompatibility of business cultures;

- risks associated with entering new markets in which we have no or limited
prior experience;

- potential loss of key employees of acquired businesses; and

- increased legal and accounting costs as a result of the newly adopted rules
and regulations related to the Sarbanes-Oxley Act of 2002.

OUR COMPETITIVE POSITION WILL BE SERIOUSLY DAMAGED IF WE CANNOT PROTECT
INTELLECTUAL PROPERTY RIGHTS IN OUR TECHNOLOGY.

PAGE 14

MAINTENANCE OF RESALE 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 COMMON STOCK 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 contractually impact our ability to pay
dividends to our shareholders.

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

As of April 3, 2006 we are obligated to issue 9,776,177
shares of our common stock if all of our outstanding warrants are exercised and
the preferred stock is converted . In addition, as of April 3,
2006 , we have outstanding stock options to purchase an aggregate of
11,109,560 shares of our common stock, of which 10,462,560 are
currently vested. The total number of shares which could be issued upon the
exercise of currently vested warrants, options, and Preferred Stock
(20,238,737 shares) represents approximately 71% of our issued and
outstanding shares of common stock as of April 3, 2006 . 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.

BECAUSE OUR STOCK IS SUBJECT TO THE SEC'S PENNY STOCK RULES,
BROKER-DEALERS MAY EXPERIENCE DIFFICULTY IN COMPLETING CUSTOMER TRANSACTIONS AND
TRADING ACTIVITY IN OUR SECURITIES MAY BE ADVERSELY AFFECTED.

Transactions in SpaceDev common stock are currently subject to the "penny
stock" rules promulgated under the Securities Exchange Act of 1934. Under these
rules, broker-dealers who recommend SpaceDev securities to persons other than
institutional accredited investors must:
- make a special written suitability determination for the purchaser;
- receive the purchaser's written agreement to a transaction prior to sale;
- provide the purchaser with risk disclosure documents which identify certain
risks associated with investing in "penny stocks" and which describe the
market for these "penny stocks" as well as a purchaser's legal remedies;
and,
- obtain a signed and dated acknowledgment from the purchaser demonstrating
that the purchaser has actually received the required risk disclosure
document before a transaction in a "penny stock" can be completed.

As a result of these rules, broker-dealers may find it difficult to
effectuate customer transactions and trading activity in our securities may be
adversely affected. As a result, the market price of our securities may be
depressed, and you may find it more difficult to sell our securities.

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;

PAGE 15

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.

As of the date of this Prospectus, we had not drawn any additional funds
under the revolving credit facility; and, therefore, no further conversion under
the revolving credit facility have occurred.

The following table sets forth, to our knowledge, certain information about
Laurus as of March 3, 2006. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange 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.

PAGE 16

Percentage of beneficial ownership is based on 28,170,516 shares of
common stock outstanding as of April 6, 2006 . Actual ownership of the
shares is subject to conversion of the Convertible Note and exercise of the
Warrant.

Total Number
Of Shares To Total Shares
Be Offered For to Be Owned
Name Of Shares Owned Selling Upon
Selling Prior To This Shareholders Completion of
Stockholder Offering Percentage Account This Offering (1) Percentage
------------------------ ------------------ ---------- ------------- ----------------- ----------

LAURUS MASTER FUND, LTD. 2,814,234 (2) 9.99% (2) 200,000 2,614,234 9.28%

(1) The amount assumes the sale of all shares being offered under this
prospectus.
(2) Under the terms of the certificate of designations for the Series D
Preferred Stock and the warrants issued in the January 2006 private placement,
holders of such Series D Preferred Stock and warrants may not convert their
Series D Preferred Stock into common stock, or exercise such warrants, to the
extent that, after giving effect to any such conversion or exercise, the holder
would beneficially own more than 4.99% (or for holders of greater than 4.99%,
the limitation is set at 9.99%) of our outstanding common stock. In addition,
the terms of the certificate of designations for the Series C Preferred Stock
and other warrants held by Laurus similarly limit conversions and exercises to
the extent that, after giving effect to any such conversion or exercise, Laurus
would beneficially own more than 4.99% of our outstanding common stock.

As of April 3, 2006, all other selling security holders named in this
prospectus have exercised their warrants on our common stock through this
prospectus, subject 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
equivalent information for each other selling security holder.

PAGE 17

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

Charles H. Lloyd . . (1) 50,000 0 50,000 *
Lunar Enterprises. . 133,334 0 66,667 *
Craig Haffner. . . . 66,666 0 66,666 *
Alex Duncan. . . . . 95,166 0 95,166 *
Arthur Benson. . . . (2) 128,470 0 128,470 *
Curt Dean Blake. . . (3) 61,224 0 61,224 *
John Gross . . . . . 61,224 0 61,224 *
Edward Cuthbert. . . 102,040 0 102,040 *
J. Mark Grosvenor. . (4) 1,330,376 0 1,330,376 2.95%
Christopher McKellar (5) 392,158 0 392,158 *
---------- --------- ---------
2,420,658 0 2,353,991
---------- --------- ---------
* Percentage owned is less than 1%.

(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, shares owned by Mr. Lloyd prior to this offering
include 25,000 shares of our common stock.
(2) Mr. Arthur Benson is the brother of our Chief Technology Officer,
James W. Benson. In addition to the Warrants, shares owned by Arthur Benson
prior to this offering include 64,235 shares of our common stock.
(3) Mr. Blake is a current member of our Board of Directors, and owns 61,224
shares of which, 30,612 warrants were represented in this offering.
(4) In addition to the Warrants, shares owned by Mr. Grosvenor prior
to this offering include 1,330,376 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, shares owned by Mr. McKellar prior
to this offering include 392,158 shares of our common stock.

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

PAGE 18

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 of
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.

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

PAGE 19

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 this 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.

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.

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.

PAGE 20

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.

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 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;
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.

GENERAL

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

PAGE 21

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.

Starsys Research Corporation was acquired by SpaceDev on January 31, 2006
in a tax-free forward triangular merger, renamed Starsys, Inc., and is now a
wholly-owned subsidiary of SpaceDev. Starsys is engaged in the design and
manufacture of mechanical and electromechanical subsystems and components for
spacecraft. Starsys' subsystems enable critical spacecraft functions such as
pointing solar arrays and communication antennas and restraining, deploying and
actuating moving spacecraft components. Starsys manufactures a wide range of
products that include bi-axis gimbals, flat plate gimbals, solar array pointing
mechanisms, deployable booms, separation systems, thermal louvers, actuators,
restraint devices and cover systems. Starsys' products are sold both as
"off-the-shelf" catalog products, which represent previously qualified devices
with spaceflight history, and as custom systems that are developed for specific
applications. Starsys' products are typically sold directly to spacecraft
manufacturers. Starsys' customer base is segregated into three major segments:
(1) domestic and international commercial spacecraft (communication and imaging
satellites), (2) civil spacecraft (NASA) that are primarily scientific in nature
and (3) defense spacecraft that support the United States' military capability.
Starsys also offers products to non-space customers, including aerospace,
maritime, and industrial customers.

Starsys' engineering and manufacturing capabilities position the company to
provide both mechanical and electromechanical subsystems for spacecraft.
Starsys' strategy is to identify opportunities to develop products from custom
mechanical and electromechanical subsystems. To extend the product life cycle,
Starsys has developed and expanded this "product platforms" business model.
Product platforms are subsystems for which non-recurring and development
engineering have been retired and for which there is continued customer demand.
Starsys' product offerings currently include High Output Paraffin ("HOP")
actuators, hinges, battery bypass switches, thermal louvers, bi-axial gimbals
and solar array drives, among others. The product life cycle for this type of
product within the space industry is approximately 15 years.

The acquisition of Starsys fundamentally changed our profile. Starsys is a
mature operating company with 2005 revenues of approximately $18 million and
2005 losses of approximately $3.4 million. We believe there are numerous
potential synergies between the historic SpaceDev business, and Starsys'
business.

Our historic SpaceDev Business 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 NASD Over-the-Counter Bulletin Board
("OTCBB") under the symbol of "SPDV."

In February 1998, we acquired Integrated Space Systems, in San Diego.
Most of the Integrated Space Systems employees were former commercial
Atlas launch vehicle engineers and managers who worked for General Dynamics in
San Diego. As SpaceDev employees, they primarily develop systems and products
based on hybrid rocket motor technology and launch vehicle systems.

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.

PAGE 22

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 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 NRO to study small
hybrid-based "micro" kick-motors for small-satellite orbital transfer
applications. During the contract, we successfully developed three Secondary
Payload Orbital Transfer Vehicle design concepts. We subsequently created a
prototype, which lead to the development of our capability to apply the
Secondary Payload Orbital Transfer Vehicle concept to our subsequent
Maneuvering and orbital Transfer Vehicle development programs.

In November 1999, we won a $4.9 million mission contract by the Space
Sciences Laboratory at the UCB . 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. The satellite achieved 3-axis stabilization with all individual
components and systems successfully operating and continues to work well in
orbit. The CHIPSat program generated approximately $2.1 million, $3.2
million, $1.7 million, $0.4 million and $0.1 million of revenue in 2000, 2001,
2002, 2003 and 2004, respectively.

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:

- family of small versatile orbital Maneuver and orbit Transfer Vehicles
using clean, safe hybrid rocket propulsion technology; and,
- 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. SpaceDev powered SpaceShipOne well
beyond the 50 mile altitude required to be considered a space flight, and
helped to create 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.

PAGE 23

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.

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 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. 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 became available in
late 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 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. 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 Task Order, originally expected to be
completed by January 2006, was extended at the request of the Missile Defense
Agency, and was completed in late March 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 began on April 1, 2006.

On July 18, 2005, we were awarded a subcontract to provide scientific,
engineering, development and programmatic support to the development and
demonstration of innovative SSA (space situational awareness) nanosatellite
(<15kg) spacecraft. SSA is the ability to search, identify and monitor
spacecrafts for the purpose of obtaining space superiority. The subcontract
covers the conceptual/preliminary phase of development and includes all aspects
of potential systems from the platforms and associated payloads to the links and
nodes and ground support. The cost plus fixed fee subcontract resulted in
revenues of approximately $120,000. We completed this subcontract in December
2005. We submitted a proposal and were awarded the next-phase subcontract in
the amount of $1.2 million, and expect to begin work on this phase in March,
2006.

PAGE 24

STARSYS - CUSTOMERS

Starsys' business is focused on mechanical and electro-mechanical systems,
sub-systems and components that support assembly of spacecraft by its customers.
Those customers, primarily the Prime Contractors in the aerospace market,
support the government and commercial end users by integrating its products into
higher level assemblies and spacecraft. Lockheed Martin Companies, Boeing
Company, Northrop Grumman Space Technologies, ITT Industries, and Swales
Aerospace are prime contract customers, which have each accounted for 10% or
more of Starsys' consolidated revenues in recent years. Starsys has multiple
contracts with each of these customers and we do not believe any single customer
contract is material to Starsys. The remainder of Starsys' business is with
multiple customers that support the Department of Defense through the prime
contractors, and the commercial spacecraft market, the civil spacecraft market,
and NASA, including through Small Business Innovative Research (SBIR) grants and
Long Term Agreements (LTA's) with the prime contractors.

Starsys' business development process is generally competitive bid in
response to a request for proposal (RFP) that is generated by Starsys' potential
customers. These proposals have various bases, including firm fixed price, cost
plus fixed fee, and time and materials. Starsys typically prepares between ten
and twenty proposals in a given month and it usually has one to three weeks to
respond to the request.

These proposals are managed by product area. Starsys defines three specific
product areas for its business: electromechanical systems, which include motors,
control, and logic; mechanical systems, which include spring and paraffin driven
mechanisms as well as deployable structures; and catalog products, which include
release mechanisms, hinges and thermal control devices. Starsys also executes on
long term build to print contracts with some of the prime contractors.

Starsys averages between 55 and 70 active programs at any time and the
average duration of its programs is 11 months, with programs as short as 60 days
and as long as three years. Currently this mix is approximately 70% in support
of governmental work, both open and classified, 20% commercial, and 10% with
NASA, but this mix changes frequently with new contract awards.

During 2005 and 2004, approximately 82% and 78%, respectively of Starsys'
total annual revenues were derived from contracts with the U.S. government and
its agencies or from subcontracts with other U.S. government prime contractors.
Most of Starsys' U.S. government contracts are funded incrementally on a
year-to-year basis.

Major contracts with the U.S. government primarily fall into two
categories: cost-reimbursable contracts and fixed-price contracts. Approximately
9% of revenues from U.S. government contracts in 2005 were derived from
cost-reimbursable contracts and 91% of revenues from U.S. government contracts
were derived from fixed price contracts. Approximately 5% of revenues from U. S.
government contracts in 2004 were derived from cost-reimbursable contracts and
95% of revenues from U.S. government contracts were derived from fixed-price
contracts. Under a cost-reimbursable contract, Starsys recovers its actual
allowable costs incurred, allocable overhead costs and a fee consisting of a
base amount that is fixed at the inception of the contract and/or an award
amount that is based on the customer's evaluation of its performance in terms of
the criteria stated in the contract. Starsys' fixed-price contracts include firm
fixed-price and fixed-price incentive fee contracts. Under firm fixed-price
contracts, work performed and products shipped are paid for at a fixed price
without adjustment for actual costs incurred in connection with the contract.
Therefore, Starsys bears the risk of loss due to increased cost, although some
of this risk may be passed on to subcontractors. Fixed-price incentive fee
contracts provide for sharing by Starsys and the customer of unexpected costs
incurred or savings realized within specified limits, and may provide for
adjustments in price depending on actual contract performance other than costs.
Costs in excess of the negotiated maximum (ceiling) price and the risk of loss
by reason of such excess costs are borne by Starsys, although some of this risk
may be passed on to subcontractors.

All of Starsys' U.S. government contracts and, in general, its subcontracts
with other U.S. government prime contractors provide that such contracts may be
terminated for convenience by the U.S. government or the prime contractor,
respectively. Furthermore, any of these contracts may become subject to a
government-issued stop work order under which Starsys would be required to
suspend production. In the event of a termination for convenience, contractors
generally are entitled to receive the purchase price for delivered items,
reimbursement for allowable costs for work in process and an allowance for
reasonable profit thereon or adjustment for loss if completion of performance
would have resulted in a loss. Starsys derives a significant portion of its
revenues from U.S. government contracts.

PAGE 25

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 for our historical SpaceDev operations is to:

- 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;

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

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

- 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;

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

- Produce and fly commercial missions, in conjunction with partners and
investors, throughout the inner solar system ;

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

- 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:

- 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;

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

- Tends to create 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
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.

PAGE 26

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.

PAGE 27

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 Dream Chaser(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. Unlike the more
complex SpaceShipOne, for which SpaceDev provided critical proprietary hybrid
rocket motor propulsion technologies and components, the SpaceDev Dream
Chaser(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 Dream Chaser(TM) would have an altitude goal of approximately
160 km (about 100 miles) and would 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 Dream
Chaser(TM) motor would 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.

PAGE 28

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.

Starsys purchases a significant percentage of its product components,
structural assemblies and certain key satellite components and instruments from
third parties. Starsys also occasionally obtains from the U.S. government parts
and equipment that are used in the production of its products or in the
provision of its services. Generally, Starsys has not experienced material
difficulty in obtaining product components or necessary parts and equipment, and
believes that alternatives to its existing sources of supply are available,
although increased costs and possible delays could be incurred in securing
alternative sources of supply. Starsys relies upon sole source suppliers for
potentiometers, slip ring assemblies, specialized impellers, specialized heaters
and paraffin material. While alternative sources would be available, the
inability of any such supplier to provide Starsys with these items to qualified
specifications would result in an adverse effect on Starsys' ability to
manufacture its products.

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
microsatellites, unmanned deep space micro-spacecraft and microsatellite
subsystems as well as software systems comes from other small companies such as
AeroAstro, Orbital Sciences and Spectrum Astro. The most established
international competitors are Surrey Satellite Technology Limited in the United
Kingdom, OHB Systems in Germany, an OHB Technology AG Company, and EADS Astrium
with locations throughout Western Europe. 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
microsatellites; these include Weber State in Ogden, Utah and Colorado
University in Boulder, Colorado.

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

PAGE 29

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. However, they have resources,
expertise, and contracts that would make them formidable competitors if they
chose to enter our markets.

We also compete with each of our competitors for qualified engineers. There
is a limited number of individuals with all of the requirements that we seek and
there can be no assurance that we can locate and recruit these individuals in a
timely and cost-effective manner. Many of our competitors have greater resources
than we do and can offer higher salaries or better incentives to attract these
individuals.

Starsys' competition varies by business segment and product areas. The
following summarizes principal organizations that compete with Starsys.

Mechanical subsystems range from customized hinges and latching devices to
cover systems and integrated structures for payloads, typically not requiring
customized, or Starsys-supplied, electromagnetic devices. Competition includes:
Alliance Spacesystems Inc. and Swales Aerospace. Starsys provides clamp band
systems for small satellite separations and deployable structures. We believe
Starsys' primary competitor in the small satellite separations market is
Planetary Systems Inc. We believe that the primary competitors in the deployable
structures market are ATK Space Systems (formerly AEC Able Engineering), NGST
Astro (formerly SPAR Astro Aerospace) and Harris Corporation.

Electromechanical subsystems range from motors and actuators (typically
motors with transmissions and various ancillary elements) to sophisticated
systems that incorporate control electronics for applications such as antenna
and solar array pointing, and instruments that sweep a pattern or actively
track. We believe that the competition for motors and actuators are MPC Products
Corporation, CDA Astro, Aeroflex (a subsidiary of UMTC), Moog Inc. and ATK
Satellite Systems. As these products become more specialized the competition may
include Aeroflex, MOOG and the Ball Aerospace & Technologies Corp. Some
competitors of Starsys are also customers of SpaceDev.

Starsys believes the alternatives for its restraint and release products
are pyrotechnic devices built by Hi-Shear and Pacific Scientific and
non-pyrotechnic products, supplied by NEA, TiNi Aerospace, and G&H Technologies.

Many of Starsys' competitors are larger and have substantially greater
resources than we do. Furthermore, it is possible that other domestic or foreign
companies or governments, some with greater experience in the space and defense
industry and many with greater financial resources than we possess, will seek to
provide products or services that compete with our products or services. Any
such foreign competitor could benefit from subsidies from or other protective
measures by its home country.

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 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.
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.

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 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.

PAGE 30

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 on some of our missions.
The Deep Space Network is a United States funded network of large 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. The Telecommunications and Mission Operations Directorate manages
the program within the Jet Propulsion Laboratory. Coordination for the use of
this facility is arranged with the Telecommunications and Mission Operations
Command.

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. We received certification for classified computer system
processing in early 2005, which was subsequently renewed in early 2006.

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. 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. There was no
outstanding balance on the revolving credit facility at December 31, 2005 or
December 31, 2004.

Once the market price exceeded 118% of the fixed conversion price,
which occurred on or about July 21, 2003, we obtained the ability to pay amounts
outstanding under the revolving credit facility in cash or shares of our common
stock at the fixed conversion price of $0.55 per share on the first $1 million
of principal.

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 agreement was modified on March
31, 2004 to provide for a six-month waiver to us and a fixed conversion price to
Laurus of $0.85 per share on the first $500,000 converted after the first $1
million converted. The agreement was modified again as part of the Preferred
Stock transaction to increase the maximum principal balance that could be
outstanding at any one time under the Convertible Note from $1.0 million to $1.5
million and set the fixed conversion price on the next $1 million at $1.00 per
share and thereafter, the fixed conversion price will be adjusted to 103% of the
then fair market value of our common stock ("Adjusted Fixed Conversion
Price").

PAGE 31

Laurus converted 2,991,417 shares to reduce the debt we owed by
$2,271,750 for the twelve-months 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, we 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. There
were no draws on the revolving credit facility or conversions under it during
2005. 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 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 of the stock trading.

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 two additional six (6) month periods, under which Laurus permitted a
credit advance up to $1 million, which amount would otherwise have exceeded
eligible accounts receivable during the period. The credit facility was
modified again in March 31, 2004, to provide additional waivers in exchange for
a fixed conversion rate of $0.85 per share on the next $500,000 converted under
the Convertible Note. 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. We
were required to pay a continuation fee of $10,000 in June 2004 and each year
thereafter. In addition, Laurus received a warrant to purchase 200,000 shares of
our common stock and two subsequent warrants to purchase 50,000 shares each, 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 two additional 50,000 share warrants carry an
exercise price of $1.0625 per share and $1.9250 per share, respectively. The
warrant exercise price may be paid in cash, in shares of our common stock, or by
a combination of both. The warrant expiration dates for these warrants are June
3, 2008, June 18, 2009 and August 25, 2009, respectively. The warrant exercise
prices and the number of shares underlying the warrants are subject to
adjustments for stock splits, combinations and dividends.

In addition to the initial warrant, we are 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 our common stock may be purchased by
Laurus under such additional warrants.

PAGE 32

On March 31, 2004, we agreed to amend our Security Agreement and Secured
Convertible Note with Laurus to change certain terms of the conversion price to
allow for the next Five Hundred Thousand Dollars ($500,000) converted under the
Convertible Note to be converted at eighty-five cents ($0.85) per share of
common stock. As part of our Preferred Stock transaction, we agreed to amend our
Laurus agreements again to extend the revolving credit facility to $1.5 million
and fix the conversion price on the next $1 million converted at $1.00 per share
of common stock. The Convertible Note was exercised as to all such amounts
during 2004. The fixed conversion price on all future draws will be 103% of the
volume weighted average closing price of the common stock for the ten (10)
trading days prior to the last day on which such five hundred thousand dollars
($500,000) has been converted. In exchange, Laurus agreed to waive certain over
advance compliance provisions for six (6) months.

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. There have been no additional draws under the revolving credit facility
since that time.

EMPLOYEES

At December 31, 2005, we employed approximately fifty (50) persons
full and part-time, most of whom are aerospace, mechanical and electrical
engineers. At March 3, 2006, after the Starsys acquisition, we employed a
total of approximately 200 people full and part-time. In addition to its
manufacturing operations, Starsys has a team of experienced engineers focused on
advanced engineering of mechanical and electromechanical subsystems. The
engineering group includes mechanical and aerospace engineers, engineering
technicians and designers. Areas of expertise include mechanical and
electromechanical subsystem design, analysis, test, and program management.
In addition, due to the nature of our business, although we do not anticipate
the need for a reduction in force, 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 have
protected and intend to continue to protect our intellectual property through a
combination of patents, license agreements, trademarks, service marks,
copyrights, trade secrets and other methods of restricting disclosure and
transferring title. In this regard, we have filed patent applications relating
to our hybrid propulsion and satellite technology. There can be no assurance
that such applications will be granted. Starsys relies, in part, on patents,
trade secrets and know-how to develop and maintain its competitive position and
technological advantage, particularly with respect to its launch vehicle and
satellite products. Starsys holds U.S. and foreign patents relating to release
devices, deployable truss structures and battery cell shorting mechanisms. The
majority of Starsys' U.S. patents relating to the noted technologies expire
between 2019 and 2022. We have entered into 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 American Rocket Company , 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 from the
original technology acquisition. To date, we have issued warrants to
purchase a total of 100,000 shares of our common stock under the agreement,
of which none of the warrants have been exercised and 25,000 warrants expired
unexercised. We acquired some of our expertise in hybrid propulsion technology
from the American Rocket Company; however, we are using our own technology to
develop the responsive, affordable SpaceDev Streaker(TM) small launch vehicle
under an Air Force contract.

PAGE 33

STARSYS - QUALITY ASSURANCE AND TESTING

Starsys is ISO-9001 certified and AS9100 compliant. Starsys is currently
engaged in AS9100 certification.

Starsys utilizes test equipment that is calibrated and traceable to NBS
standards. Starsys also maintains access to certified suppliers for vibration,
shock and electromagnetic interference (EMI) testing.

STARSYS - RESEARCH AND DEVELOPMENT

Starsys invests in product-related research and development to conceive and
develop new products and to enhance existing products. Starsys' research and
development expenses totaled approximately $10,525,000 in the year ended
December 31, 2004, and approximately $11,782,000 in the year ended December 31,
2005. In addition, a large portion of Starsys' total new product development and
enhancement programs is funded under customer contracts.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW

Historic SpaceDev Business

We are engaged in the conception, design, development, manufacture,
integration and operation 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 which are provided 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 and 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 future,
virtually all of our current work is for branches of the United States military.
We are also developing commercial hybrid rocket motors for use in small launch
vehicles, targets and sounding rockets, and small, high-performance space
vehicles and subsystems for commercial customers.

During 2005, approximately 91% of our net sales were generated from direct
government contracts, approximately 7% were generated from government-related
work through subcontracts with others, while the remaining 2% was generated from
commercial contracts. In 2004, approximately 90% of our net sales were
generated by government or government-related work. We will continue to seek
both government and commercial business and anticipate that net sales from
government sources will continue to represent in excess of 70% of our historic
SpaceDev business' net sales for the next several years as we increase
government and commercial marketing efforts for both 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

PAGE 34

export control regulations, including International Traffic in Arms Regulations,
which may limit our ability to develop market opportunities outside the United
States.

At this time, over 90% of our historic SpaceDev forecasted sales for 2006
are under contract or near contract award. We may not be able to win enough new
business to achieve our targeted growth projection or to maintain a positive
cash flow position. During 2005, we submitted nine bids for government or
commercial programs and continued our work with the United States Congress to
identify directed funding for our programs.

In order to perform the Missile Defense Agency contract on schedule and
successfully execute other existing and new business opportunities, we may need
to increase our staff and hire new engineers and continue to subcontract the
work to third parties. We are investigating various partnership arrangements to
increase resource availability.

STARSYS

On October 24, 2005, we entered into an Agreement and Plan of Merger and
Reorganization, which we refer to as the merger agreement, with Starsys, and
Scott Tibbitts, its largest shareholder. Pursuant to the merger agreement,
Starsys merged with and into a newly-created, wholly-owned subsidiary of
SpaceDev.

On January 31, 2006, we closed the Starsys merger. In connection with the
Starsys merger, we paid approximately $1.5 million in cash consideration and
issued approximately 3.8 million shares of common stock to the former Starsys
shareholders. Of the approximately 3.8 million shares of common stock issued in
the merger, approximately 1.8 million shares have been placed in escrow to
satisfy indemnification obligations of the former Starsys shareholders, if
applicable, and to pay certain expenses of the Starsys shareholder agent. In
addition, former Starsys shareholders may be entitled to receive, based on the
achievement of the Starsys business of certain performance criteria following
the closing of the merger, additional performance consideration consisting of up
to an aggregate of $1,050,000 in cash and shares of common stock valued at up to
$18,000,000, subject to reduction for some merger related expenses and the
escrow arrangements described above. As part of the merger with Starsys, we
agreed to cancel and terminate the $1.2 million bridge loan, including all
accrued interest and premiums.

The acquisition of Starsys fundamentally changed our profile. Starsys is a
mature operating company with 2005 revenues of approximately $18 million and
2005 losses of approximately $3.4 million We believe there are numerous
potential synergies between the historic SpaceDev business, and Starsys'
business.

FINANCING

In October 2005, we entered into a securities purchase agreement with
Laurus Master Fund, Ltd. pursuant to which we issued and sold 2,032,520 shares
of our common stock to Laurus for an aggregate purchase price of $2,500,000 or
$1.23 per share. The price per share represented 80% of the 20-day volume
weighted average price of our common stock through October 28, 2005. We also
issued to Laurus a warrant to purchase up to 450,000 shares at $1.93 per share.
The warrant is exercisable from October 31, 2005 until October 31, 2010.

PAGE 35

of our Series D-1 Amortizing Convertible Perpetual Preferred Stock, par value
$0.001 per share, which we refer to as Series D-1 Preferred Stock, for an
aggregate purchase price of $5,150,000, or $1,000 per share. We also issued
various warrants to these investors under the 2006 purchase agreement.

SELECTION OF SIGNIFICANT CONTRACTS

On July 18, 2005, we were awarded a subcontract to provide scientific,
engineering, development and programmatic support to the development and
demonstration of innovative SSA (space situational awareness) nanosatellite
(<15kg) spacecraft. SSA is the ability to search, identify and monitor
spacecrafts for the purpose of obtaining space superiority. The subcontract
covers the conceptual/preliminary phase of development and includes all aspects
of potential systems from the platforms and associated payloads to the links and
nodes and ground support. The cost plus fixed fee subcontract resulted in
revenues of approximately $120,000. We completed this subcontract in December
2005. We submitted a proposal and were awarded the next-phase subcontract in
the amount of $1.2 million. We expect to begin work on this phase in March,
2006.

On March 31, 2004, we were awarded a 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. The total five-year
contract provides for a maximum of $43,362,271 in aggregate payments. We expect
to complete the work under the contract before March 2009. The contract is a
milestone-based, multiyear, multiphase contract and had an effective start date
of March 1, 2004. The first phase, or "Task Order," was completed on September
30, 2004 and generated approximately $1.14 million of revenue. The second Task
Order of the contract began in October 2004, and is expected to generate a total
of approximately $8.3 million to $9.8 million of revenue over approximately 16
to 18 months. During the year ended December 31, 2005, we recognized
approximately $6,767,000 of revenue from the second Task Order. The overall
contract called 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. In addition to the three networked microsats under
our second Task Order, the $43 million contract also envisioned an option for a
second cluster of three microsats using laser communication technology. We were
informed that the Missile Defense Agency had re-routed the laser communications
experiment that would use this option to another program and that they would not
be exercising their option for the additional microsats at this time; however,
the contract vehicle remains at $43 million and leaves open the opportunity for
some other purchase to take its place. We continue on-time and on-budget for
delivery of the first three microsats. We estimate that the second cluster would
have represented approximately $10 million of the $43 million contract, and have
reduced our current backlog accordingly. We believe the remaining billed and
unbilled contract amount of $33 million to be secure. We recently proposed our
Phase III Task Order for fabrication, integration and testing of the
microsatellite cluster. The Missile Defense Agency has agreed to proceed, and we
are awaiting a contract to formalize our Phase III Task Order

On October 2, 2003, we were awarded an exclusive, follow-on contract to
provide the hybrid rocket motor systems and components for SpaceShipOne. We
provided our facilities, resources and a team of launch vehicle and hybrid
propulsion engineers and technical personnel to support 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

PAGE 36

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 ended December 31, 2004, with approximately $180,000 from
engineering change orders and the remaining $506,000 from the contract. There
were no revenues generated from SpaceShipOne in 2005.

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 $1.6 million. 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 became available in late
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 ended December 31, 2005 was approximately $750,000 for
Phase II. Revenue from this project for the year ended December 31, 2004 was
approximately $58,000 for Phase I and approximately $161,000 for Phase II.

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 ended 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. There was no revenue
generated from this program in 2005.

RESULTS OF OPERATIONS

Year Ended December 31, 2005 -vs.- Year Ended December 31, 2004

Net Sales

Our net sales increased by 84% to $9,005,000 for the year ended December
31, 2005 compared to net sales of $4,891,000 for the same period in 2004. Net
sales increased due to our obtaining and our performance under new and existing

PAGE 37

government contracts. Net sales in 2005 reflected our continued work on the
Missile Defense Agency Task Order 2 contract of $6,767,000 which is part of our
March 31, 2004 Missile Defense Agency contract described above. To date,
contract revenue from Task Order 2 is $7,341,500. We also recorded net sales on
ongoing Small Business Innovation Research contracts with the Air Force Research
Laboratory. These contracts are both for Phase II efforts, and are for our
Small Launch Vehicle and our micro and nanosatellite bus and subsystem designs
work. Net sales for these contracts totaled $750,000 and $616,000 respectively
for the year ended December 31, 2005. In addition, we started our Phase I
effort with Andrews Space which had revenues for the year ended December 31,
2005 of $393,000 and smaller projects with approximately $479,000 in revenue,
which included the lunar lander project, our subcontract support and first Phase
SBIR grants.

Net sales for the year ended December 31, 2004 included $1,400,000 from the
Air Force Research Laboratory Phase II contract, $574,500 and $1,140,000 from
the Missile Defense Agency Task Order 2 and Task Order 1, respectively, $319,000
also from the Missile Defense Agency Phase 0 contract (which was the precursor
to the larger contract with multiple task orders), $686,000 from the
SpaceShipOne program and $240,000 from our Defense Advanced Research Projects
Agency contract for the study of Novel Satcom Microsat Constellation Deployment.

Cost of Sales

For the year ended December 31, 2005, cost of sales was approximately
$6,906,000, or 76.69% of net sales, as compared to approximately $3,821,000, or
78.12% of net sales, during the same period in 2004. Cost of sales consists of
direct and allocated costs associated with individual contracts. The increase in
cost of sales was directly tied to increases in net sales, and the decrease in
cost of sales as a percentage of net sales was due to improved systems and
processes for management of our projects and improved labor productivity. Gross
margin improvement has been limited due to the cost plus fixed fee nature of our
contracts.

Operating Expenses

Operating expenses increased from approximately $926,000, or 18.93% of net
sales, for the year ended December 31, 2004 to approximately $1,788,000, or
19.85% of net sales, for the same twelve months ended December 31, 2005.
Operating expenses include general and administrative expenses, research and
development costs and marketing and sales expenses.

- General and administrative expenses increased from approximately $507,000,
or 10.37% of net sales, for the year ended December 31, 2004 to
approximately $1,114,000, or 12.37% of net sales, for the year ended
December 31, 2005. The increase was attributable to the increase in
personnel, including a human resources director and a contract
administrator, and compliance efforts, including those related to the
Sarbanes-Oxley Act of 2002 and FAS No. 123(R).

- We have most of our research and development expenses for new products and
services paid for by our government programs and projects.

- Marketing and sales expenses increased from approximately $419,000, or
8.56% of net sales, for the year ended December 31, 2004, to approximately
$674,000, or 7.48% of net sales, during the same period in 2005. Although
the total percent of sales decreased in 2005 the actual dollar increase was
attributable to the allocation of a portion of the personnel costs of our
vice president of new business development and our then chief executive
officer to marketing and sales expenses as well as costs associated with
the preparation and submission of proposals for new projects.

PAGE 38

Non-Operating Expense (Income)

Non-operating expense (income) consisted of amortization of deferred gain
on the sale of our building, other non-cash loan fees and expenses, and interest
expense and interest income. Interest expense did not comprise a significant
portion of non-operating expense during the year ended December 31, 2005 or
2004. For the first time, we recorded a net non-operating income for the year
ended December 31, 2005.

- We expensed approximately $3,000 and $52,000 in interest for the years
ended December 31, 2005 and 2004, 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 recognized approximately $106,000 and $19,500 in interest income in 2005
and 2004, respectively. The increase is due to an increase in cash balances
from various financing activities.

- We recognized approximately $117,000 of amortized deferred gain on the sale
of our building during each of the years ended December 31, 2005 and 2004,
and we will continue to amortize the remaining deferred gain of
approximately $831,000 into non-operating income over the remainder of the
lease of the building, which is scheduled to expire in 2013.

- We recorded loan fees related to our revolving credit facility of
approximately $29,000 and $3,254,000 of net sales for the years ended
December 31, 2005 and 2004, respectively. Although we did not have a
balance on our revolving credit facility during 2005, we recorded
approximately $29,000 in non-cash loan fees upon Laurus' exercise of
warrants to acquire 50,000 shares of our common stock, which were granted
in 2004 in connection with the revolving credit facility. Additional
non-cash loan fees will be recorded as the warrants granted to Laurus
related to the revolving credit facility are exercised. The large non-cash
2004 charge reflected a beneficial debt to equity conversion feature.

Net Income and EBITDA

Net income was approximately $501,000, or 5.57% of net sales, compared to a
net loss of approximately $3,027,000 for the years ended December 31, 2005 and
2004, respectively. During the year ended December 31, 2005, we had earnings
before interest, taxes, depreciation and amortization, or EBITDA, of
approximately $503,000, or 5.59% of net sales, compared to approximately
$228,000, or 4.65% of net sales, for the year ended December 31, 2004.

PAGE 39

The following table reconciles EBITDA to net income (loss) for the years ended
December 31, 2005 and 2004:

FOR THE YEAR ENDING. . . . . . DECEMBER 31, 2005 December 31, 2004

NET INCOME (LOSS). . . . . . . $ 501,264 $ (3,027,054)
------------------------------ ------------------- -------------------

Interest Income. . . . . . . . (105,840) (19,497)
Interest Expense . . . . . . . 2,873 52,077
Gain on Building Sale. . . . . (117,272) (117,272)
Loan Fee - Equity Conversion. 28,875 3,254,430
Provision for income taxes . . 1,600 1,600
Depreciation and Amortization. 191,978 83,531
------------------------------ ------------------- -------------------
EBITDA . . . . . . . . . . . . $ 503,578 $ 227,815
------------------------------ ------------------- -------------------

EBITDA is a non-GAAP financial measure and 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. Our management regularly evaluates our progress based on
EBITDA. Beginning in 2003 through the year ended December 31, 2005, we showed
continued improvement in net sales as well as in EBITDA.

[GRAPHIC OMITED]

PAGE 40

[GRAPHIC OMITED]

FOR THE THREE MONTHS
ENDING 12/31/05 9/30/05 6/30/05 3/31/05 12/31/04 9/30/04 6/30/04 3/31/04
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------------- ------------ --------- --------- --------- ---------- ---------- ----------- ---------
NET INCOME (LOSS) $ 152,851 $ 136,251 $ 110,938 $ 101,223 $ (694,750) $ (602,888) $(1,286,866) $(442,549)
-------------------- ------------ --------- --------- --------- ---------- ---------- ----------- ---------
Interest Income (36,208) (24,848) (36,823) (7,960) (13,386) (5,619) - -
Interest Expense 590 452 609 1,222 (6,707) 23,110 19,736 19,788
Non-Cash Interest exp.
(Debt Discount) - - 28,875 - 797,636 663,481 1,329,313 464,000
Gain on Building Sale. (29,318) (29,318) (29,318) (29,318) (29,319) (29,318) (29,318) (29,318)
Loan Fee - Equity
Conversion - - - - - - - -
Provision for income
taxes 400 400 400 400 1,600 - - -
Depreciation and
Amortization 83,708 44,078 35,077 29,061 28,250 22,749 16,533 15,954
-------------------- ------------ --------- --------- --------- ---------- ---------- ----------- ---------
EBITDA $ 172,023 $ 127,015 $ 109,758 $ 94,628 $ 83,325 $ 71,515 $ 49,398 $ 27,875
-------------------- ------------ --------- --------- --------- ---------- ---------- ----------- ---------
-------------------- ------------ --------- --------- --------- ---------- ---------- ----------- ---------

PAGE 41

LIQUIDITY AND CAPITAL RESOURCES

CASH POSITION FOR YEAR ENDED DECEMBER 31, 2005 -VS.- YEAR ENDED DECEMBER
31, 2004

Net increase in cash during the twelve months ended December 31, 2005 was
approximately $681,000 compared to a net increase of approximately $4,477,000
for the same twelve-month period in 2004. Net cash provided by operating
activities totaled approximately $397,000 for the year ended December 31, 2005,
an increase of approximately $507,000 compared to approximately $110,000 used
operating activities during 2004. The improvement in cash from operating
activities resulted from our obtaining and our performance under new and
existing government contracts.

Net cash used in investing activities totaled approximately $2,716,000 for
the year ended December 31, 2005, compared to approximately $225,000 used in
investing activities during the same twelve-month period in 2004. The increase
in cash used in investing activities was attributable to the $1.2 million bridge
loan we entered into with Starsys, our purchase of certain fixed assets related
to the construction of our fabrication and test facility for hybrid rocket
motors and the purchase of additional computer hardware and software tools.

Net cash provided by financing activities totaled approximately $3,000,000
for the year ended December 31, 2005, which is a decrease of approximately
$1,812,000 from the approximately $4,812,000 provided by financing activities
during 2004. The difference is attributable to warrant and option exercises and
the receipt of $2.5 million from the sale of preferred stock to Laurus in August
2004. While we did raise capital in exchange for the sale of our common stock
in the third quarter of 2005, the funds raised from preferred stock issuances
and common stock option exercises in 2004 exceeded the 2005 levels.

Our cash, cash reserves and cash available for investment increased
slightly to approximately $5,750,000 at December 31, 2005, compared to
approximately $5,069,000 at December 31, 2004. The increase was attributable to
cash generated from operations and the capital raised in late 2005 offset by an
increase in accounts payable from materials purchased under contract. Cash plus
accounts receivable increased from approximately $5.7 million at December 31,
2004 to approximately $7.0 million at December 31, 2005.

Our backlog of funded and non-funded business was approximately $28.6
million at December 31, 2005, compared to approximately $47 million at December
31, 2004. We were informed in September 2005 that the Missile Defense Agency
had re-routed the laser communications experiment to another program and that
they would not be exercising their option for a second cluster, at this time;
however, the Missile Defense Agency also informed us of several other
opportunities that might replace the laser communications experiment and while
we cannot be assured of any new business, the Missile Defense Agency was
interested in continuing a productive business relationship with us. As a result
of this notification, we reduced our backlog by approximately $10 million. The
Missile Defense Agency contract is an IDIQ contract, meaning it is an indefinite

PAGE 42

delivery, indefinite quantity contract which can be re-funded up to the $43
million ceiling with other microsatellites or new business without further
signature authority for the five year period of the contract. 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.

CASH POSITION

Although we were cash flow positive in 2005, we also raised over $3 million
in cash during the year, mainly through the sale of our common stock through the
exercise of stock options and warrants as well as the securities purchase
agreement we entered into in October 2005. 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 at
all, or if awarded, 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 have
substantially increased our staff and hired new engineers as well as
subcontracted the work to third parties. Although we continue to actively seek
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.

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.

On October 31, 2005, we entered into a Securities Purchase Agreement with
Laurus Master Fund, Ltd. pursuant to which we issued and sold 2,032,520 shares
of our common stock to Laurus for an aggregate purchase price of $2,500,000 or
$1.23 per share. The price per share represented 80% of the 20-day volume
weighted average price of our common stock through October 28, 2005. We also
issued to Laurus a warrant to purchase up to 450,000 shares at $1.93 per share.

PAGE 43

The warrant is exercisable from October 31, 2005 until October 31, 2010. During
the year ended 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 warrants 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.

We have sustained ourselves over the last few years primarily from
government contracts and capital raised in the private market. We did not
utilize our revolving credit facility in 2005.

We expect that in 2006 Starsys will be a net provider of cash for us.

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 the Notes to SpaceDev's 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
Statement of Financial Accounting Standards (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 No. 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 the
Notes to SpaceDev's 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.

PAGE 44

SFAS No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. In December 2004, the
FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R),
which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. In addition, the adoption of SFAS No. 123R requires additional
accounting related to the income tax effects and additional disclosure regarding
the cash flow effects resulting from share-based payment arrangements. SFAS No.
123R is effective January 1, 2006 for calendar year companies. Accordingly, we
will implement the revised standard in the first quarter of 2006. [See Note 7 to
our consolidated financial statements for additional information.]

On December 20, 2005, in response to SFAS No. 123R, our Board of Directors
approved accelerating the vesting of all unvested stock options held by current
employees, including executive officers, and members of the Board of Directors.
The accelerated vesting was effective as of December 20, 2005.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 153, Exchanges of Nonmonetary Assets- An Amendment of APB Opinion No.
29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions,
is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in that
Opinion, however, included certain exceptions to that principle. SFAS No. 153
amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions of
SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Early application was permitted and
companies must apply the standard prospectively. The adoption of this standard
is not expected to have any effect on our financial position or results of
operations.

In December 2004, FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). FAS No. 123R
revised SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123R will require compensation costs related
to share-based payment transactions to be recognized in the financial statement
(with limited exceptions). The amount of compensation cost will be measured
based on the grant-date fair value of the equity or liability instruments
issued. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award.

In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 (SAB No. 107), Share-Based Payment, providing
guidance on option valuation methods, the accounting for income tax effects of
share-based payment arrangements upon adoption of SFAS No. 123R, and the
disclosures in MD&A subsequent to the adoption. In April 2005, the Securities
and Exchange Commission adopted a rule which delayed the compliance date for
small business issuers to the start of the first fiscal year beginning after
December 15, 2005. We will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123R in January 2006 and are currently evaluating the
impact the adoption of the standard will have on our financial condition and
results of operations.

In June 2005, FASB issued SFAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement
applies to all voluntary changes in accounting principle, and changes the

PAGE 45

requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 is not expected to have any effect on our financial position or
results of operations.

In February 2006, the FASB issued FAS No. 155, Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140
(FAS No. 155). This statement resolves issues addressed in FAS No. 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest
in Securitized Financial Assets. FAS No. 155 (a) permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation; (b) clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of FAS No. 133; (c) establishes a requirement to evaluate
beneficial interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation; (d) clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and (e) eliminates restrictions on a qualifying special-purpose
entity's ability to hold passive derivative financial instruments that pertain
to beneficial interests that are or contain a derivative financial instrument.
FAS No. 155 also requires presentation within the financial statements that
identifies those hybrid financial instruments for which the fair value election
has been applied and information on the income statement impact of the changes
in fair value of those instruments. We are required to apply FAS No. 155 to all
financial instruments acquired, issued or subject to a remeasurement event
beginning January 1, 2007. We do not expect the adoption of FAS No. 155 to have
a material impact on our financial statements.

DESCRIPTION OF PROPERTY

In January 2003, we entered into a lease for our 25,000 square foot
facility in Poway, California. Our facility includes a small Spacecraft
Assembly and Test facility with an 1,800 square foot Class 100,000 clean room,
avionics development lab, machine shop with rocket motor casting capability,
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.

PAGE 46

We originally purchased our headquarters facility in December 1998, and
we sold the facility and entered into a sale-leaseback in January 2003. The rent
is approximately $26,000 per month with a 3.5% COLA increase annually. We are
responsible for property tax and liability insurance on the facility. We were
required to make an advance payment in the form of a security deposit of
approximately $25,700, which we carry as an asset on our balance sheet. Our then
Chief Executive Officer, Mr. Benson, provided a guarantee for the leaseback.

As a result of our acquisition of Starsys, we acquired a lease for a 41,400
square foot facility in Boulder, Colorado and a 5,000 square foot facility in
Durham, North Carolina. These facilities are designed for the development,
manufacture, assembly, integration and test of our projects and products.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

James W. Benson, our chief technology officer and Chairman of the
Board of Directors, and Susan Benson, our former Corporate Secretary and
currently a director, are married but separated. Mr. Benson has personally
guaranteed the building lease on our facility and has placed his home in Poway
as collateral.

Until joining SpaceDev, Mark N. Sirangelo, chief executive officer, vice
chairman and a director of SpaceDev, was a member of QS Advisors, LLC, and also
a member of The QuanStar Group LLC, business advisors to SpaceDev. SpaceDev and
QS Advisors entered into an agreement for which QS Advisors was paid a monthly
fee of $5,000. In addition, under the agreement (as later amended), upon the
consummation of the merger with Starsys, and for services performed in relation
to the merger, QS Advisors received $200,000 cash and 250,000 shares of SpaceDev
common stock. This agreement terminated upon consummation of Mr. Sirangelo's
employment with SpaceDev.

On January 31, 2006, SpaceDev entered into a non-competition agreement with
Scott Tibbitts, pursuant to which Mr. Tibbitts has agreed not to be employed by
or have any interest in an entity that engages in a similar business to Starsys
related to the aerospace industry for three years, shall not solicit any
business from any past or present customer of SpaceDev, not solicit or encourage
any SpaceDev employee to leave or reduce his or her employment, not to encourage
a consultant under contract with SpaceDev to cease or diminish his or her work
with SpaceDev, not to use SpaceDev's intellectual property other than for the
benefit of SpaceDev and not to make any negative or disparaging statements
regarding SpaceDev to any third party. Mr. Tibbitts will receive $100,000
annually each year he abides by the covenant not to compete.

From October 14, 2002 through November 14, 2002, we sold an aggregate of
$475,000 of 2.03% convertible debentures to three of our then directors and
officers. 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.
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. 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. 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. The debt discount
was 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. We 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. Of
the 614,852 remaining warrants, all were exercised in 2004 and none remained
outstanding at December 31, 2004 and December 31, 2005.

PAGE 47

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
-------------- ---------- ----------
3/31/2004. . . $ 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
6/30/2005. . . $ 1.75 $ 1.51
9/30/2005. . . $ 1.70 $ 1.43
12/31/2005 . . $ 1.65 $ 1.36
3/31/2006 . . $ 1.52 $ 1.10

HOLDERS

As of March 3, 2006, there were over 600 holders of record of our
common stock.

PAGE 48

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.

PAGE 49

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.

Our management and directors' business activities are under the control of
our Board of Directors. Our chief executive officer, Mark N. Sirangelo, our
chief technology officer, James W. Benson, our president and chief
financial officer, Richard B. Slansky, our vice president of engineering, Frank
Macklin, our vice president of new business development and project
management, Randall K. Simpson, managing director, Scott Tibbitts, and
president of Starsys, Robert Vacek manage our daily operations. Our Board
currently consists of eleven directors. Below is a list of our
executive officers and directors.

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

Mark N. Sirangelo Chief Executive Officer,
13855 Stowe Drive Director, Vice Chairman of the Board
Poway, California 92064

James W. Benson Chief Technology 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

Scott Tibbitts Managing Director, Director
13855 Stowe Drive
Poway, California 92064

Robert Vacek President of Starsys, Inc.
13855 Stowe Drive
Poway, California 92064

Susan Benson Director
13855 Stowe Drive
Poway, CA 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

PAGE 50

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

James W. Benson, age 61, is our founder and has served as our
Chairman of the Board since October 1997. Mr. Benson also served as our chief
executive officer from October 1997 until December 2005, at which time he was
succeeded by Mark N. Sirangelo in such position, and became our chief technology
officer. 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. Mr. Benson and Susan C. Benson are married but separated.

Mark N. Sirangelo, age 45, was a member of QS Advisors, LLC, and also a
member of The QuanStar Group LLC, strategic and business advisors to SpaceDev,
until he was appointed vice chairman and chief executive officer of SpaceDev in
December 2005. Mr. Sirangelo's roles were as a managing member from December
2003 and chief executive officer of the Quanstar Group, LLC from December 2003
until November 2005 and the managing member of QS Advisors, LLC from February
1998 to December 2005. Mr. Sirangelo actively participated in the development in
a number of early-stage companies in aerospace, technical, scientific and other
industries. His work at Quanstar also included hands-on involvement with
technology commercialization transfer for university and government
laboratories. From 2001 until 2003, Mr. Sirangelo also served as a senior
officer of Natexis Bleichroeder, Inc., an international investment banking firm.
Mr. Sirangelo has a bachelor's degree in science, a master's degree in business
and juris doctorate, all from Seton Hall University. Mr. Sirangelo is a director
for the National Center for Missing and Exploited Children in addition to
serving as a director and treasurer of the International Center for Missing and
Exploited Children.

Richard B. Slansky, age 49, 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.

Scott Tibbitts, age 48, was appointed managing director and a director of
SpaceDev at the closing of the Starsys merger on January 31, 2006. Mr. Tibbitts
co-founded Starsys Research Corporation in 1988 and has served as president,
chief executive officer and a member of the Board of Directors from 1988 until
May 2005; and since May 2005 has served as chief executive officer and a member
of the Board of Directors. From 1986 to 1988, Mr. Tibbitts served as the
engineering manager for Maus Technologies, Inc., a developer of high technology
domestic water heaters and thermal actuator technologies. Mr. Tibbitts has a
bachelor's degree in chemical engineering from the University of Wisconsin.

Robert Vacek, age 44, was appointed president of Starsys at the closing of
the Starsys merger on January 31, 2006. Mr. Vacek previously served as president
and general manager of Starsys since June 2005. From November 2004 to June 2005,
Mr. Vacek served as vice president of programs of Starsys. From 1996 until
joining Starsys, Mr. Vacek held a variety of management positions at Ball
Aerospace and Technologies Corp., a provider of advanced imaging, communications
and information solutions to the aerospace market, including director of Defense
Systems. Mr. Vacek holds a bachelor's degree in electrical engineering from the
University of Minnesota and a master's degree from the University of New Mexico.

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 59, 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.

PAGE 51

Stuart Schaffer, age 46, 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 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.

PAGE 52

Curt Dean Blake, age 48, 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 64, 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 63, 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. Mr. 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 board
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.

PAGE 53

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 data storage and transfer
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.

Susan C. Benson, age 60, was appointed to SpaceDev's Board of Directors
in April 2005. Ms. Benson joined SpaceDev in 1997, serving as corporate
secretary until 2003. From approximately 1998 to 2004, Ms. Benson was, in part,
responsible for SpaceDev's investor relations and public relations activities,
managing SpaceDev's strategic messaging to build industry and media awareness
and strengthen shareholder relations. Ms. Benson currently sits on the Board of
Directors of Space Development Institute, a non-profit organization founded by
James W. Benson and Ms. Benson. Ms. Benson and James W. Benson are married but
separated.

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. We do not maintain any pension, retirement or other
arrangements other than as disclosed in the table on page 63 for compensating
our Directors. Our Board of Directors took action sixteen (16) times
during the last fiscal year, with fifteen (15) being at regular or special
meetings attended by the members of the Board either personally or
telephonically. There was one unanimous written consent in 2005. Our
Audit Committee took separate action four (4) 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.

PAGE 54

EXECUTIVE COMPENSATION

EXECUTIVE OFFICER COMPENSATION

Our "Named Executive Officers" are each of the two persons who served as
our chief executive officer in 2005 and each of our four other highest-paid
executive officers at December 31, 2005. Total compensation paid to the Named
Executive Officers for the past three fiscal years is set forth below:

SUMMARY COMPENSATION TABLE

OTHER ANNUAL SECURITIES ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) OPTIONS (#) ($)
----------------------- ---- ------- ------ ----------- ----------- ------------
Mark N. Sirangelo 2005 1,038 - - 1,900,000 -
Chief Executive Officer 2004 - - - - -
2003 - - - - -
----------------------- ---- ------- ------ ----------- ----------- ------------
James W. Benson 2005 180,000 2,587 - 1,100,000 1,400
Chief Technology Officer 2004 177,923 40,000 3,894 - 285
and former Chief 2003 150,000 - - - -
Executive Officer
----------------------- ---- ------- ------ ----------- ----------- ------------
Richard B. Slansky 2005 150,000 2,448 - 1,400,000 111,254
President and 2004 150,000 - - 395,000 27,672
Chief Financial Officer 2003 94,625 - - 355,000 2,482
----------------------- ---- ------- ------ ----------- ----------- ------------
Randall K. Simpson 2005 131,923 1,797 - 42,400 1,255
Vice President 2004 114,231 - - 250,000 600
New Business Development 2003 - - - - -
----------------------- ---- ------- ------ ----------- ----------- ------------
Frank Macklin 2005 124,231 1,667 - 40,000 1,400
Vice President 2004 109,110 4,067 - 50,000 100
Engineering 2003 - - - - -
----------------------- ---- ------- ------ ----------- ----------- ------------
David J. Streich (1) 2005 106,154 1,088 - 55,000 -
Vice President 2004 - - - 240,000 -
Human Resources 2003 - - - - -
----------------------- ---- ------- ------ ----------- ----------- ------------
----------------------- ---- ------- ------ ----------- ----------- ------------

(1) The Board of Directors has determined that Mr. Streich is not a Section 16
officer; however we are providing compensation information regarding Mr. Streich
in the interest of full disclosure.

OPTION GRANTS IN LAST FISCAL YEAR

The following table shows all stock options granted during 2005 to the
Named Executive Officers. No stock appreciation rights were granted during
fiscal year 2005.

Percent of Total
Number of Securities Options Granted to Exercise
Underlying Options Employees in Fiscal Price Expiration
Name Granted (#) Year ($/Share) Date
------------------ -------------------- ------------------- --------- -----------
Mark N. Sirangelo 1,900,000 30% 1.40 12/20/2010
James W. Benson 1,100,000 17% 1.40 12/20/2010
Richard B. Slansky 1,400,000 22% 1.40 12/20/2010
Randall K. Simpson 42,400 1% 1.40 12/20/2010
Frank Macklin 40,000 1% 1.40 12/20/2010
David J. Streich 55,000 1% 1.40 12/20/2010
------------------ -------------------- ------------------- --------- -----------
------------------ -------------------- ------------------- --------- -----------

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

The following table reflects information for the Named Executive Officers,
effective December 31, 2005:

Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options/SARs at FY-End
Options/SARs at FY-End (#) ($)
--------------------------- ------------------------------
Name Shares Acquired on Value Realized Exercisable / Unexercisable Exercisable / Unexercisable
Exercise (#) ($)
------------------ ------------------ -------------- --------------------------- ------------------------------
Mark N. Sirangelo - - 1,900,000 / - $2,660,000 / -
------------------ ------------------ -------------- --------------------------- ------------------------------
James W. Benson - - 1,610,000 / - 1,839,469 / -
------------------ ------------------ -------------- --------------------------- ------------------------------
Richard B. Slansky 25,000 12,750 2,125,000 / - 2,491,700 / -
------------------ ------------------ -------------- --------------------------- ------------------------------
Randall Simpson - - 292,400 / - 357,436 / -
------------------ ------------------ -------------- --------------------------- ------------------------------
Frank Macklin - - 93,000 / - 104,583 / -
------------------ ------------------ -------------- -------------------------- -------------------------------
David J. Streich - - 295,000 / - 77,000 / -
------------------ ------------------ -------------- --------------------------- ------------------------------
------------------ ------------------ -------------- --------------------------- ------------------------------

PAGE 55

DIRECTOR COMPENSATION

Our non-employee directors received options for attending meetings of the
Board as follows: each director received 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 non-employee directors also received compensation for attending
committee meetings as follows: each director received 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 received an option to purchase 2,500 shares
for each Nominating/Governance Committee meeting attended, which options were
not subject to a cap. In addition to the above, non-employee directors receive
options for 5,000 shares on the date of election or appointment. All such
options were issued pursuant to the 1999 Stock Option Plan at fair market value
as of the date of the meeting attended, with an original vesting schedule of 50%
on the first anniversary date of the date of grant and 50% on the second
anniversary date of grant, and expiring 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, 2005, including options issued to
directors for projected service in 2006. We issued 2006 compensation in advance
to our December 2005 directors in order to reduce earnings charges for future
director consideration as a result of FAS No. 123R. The Board will address
non-employee director compensation for 2007 and beyond in 2006. 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
----------------------------- -------- ------- ---------- --------- ------------
Name
----------------------------- -------- ------- ---------- --------- ------------
Mark N. Sirangelo - - - - -
----------------------------- -------- ------- ---------- --------- ------------
James W. Benson - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Richard B. Slansky - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Susan C. Benson - - - - -
----------------------------- -------- ------- ---------- --------- ------------
Curt Dean Blake - - - - 177,000
----------------------------- -------- ------- ---------- --------- ------------
General Howell M. Estes, III - - - - 103,000
----------------------------- -------- ------- ---------- --------- ------------
Wesley T. Huntress - - - - 108,000
----------------------------- -------- ------- ---------- --------- ------------
Scott McClendon - - - - 152,000
----------------------------- -------- ------- ---------- --------- ------------
Stuart Schaffer - - - - 72,000
----------------------------- -------- ------- ---------- --------- ------------
Robert S. Walker - - - - 77,000
----------------------------- -------- ------- ---------- --------- ------------
----------------------------- -------- ------- ---------- --------- ------------

On December 20, 2005, the vesting on all outstanding options, including
those held by independent directors, was accelerated such that all outstanding
options became fully-vested.

EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE OF
CONTROL AGREEMENTS

On January 31, 2006, SpaceDev entered into a three year executive
employment agreement with Scott Tibbitts, pursuant to which Mr. Tibbitts is
employed as managing director of SpaceDev. Under the agreement, Mr. Tibbitts
earns an annual base salary of $150,000 and will be eligible for quarterly
performance bonuses, as determined by SpaceDev's board of directors or
compensation committee, up to an annual aggregate amount of 50% of his base
salary. Bonus milestones will be mutually agreed upon in good faith by Mr.
Tibbitts and by SpaceDev's Board of Directors or Compensation Committee.
SpaceDev will pay severance to Mr. Tibbitts if his employment is terminated by
SpaceDev without cause or by Mr. Tibbitts for good reason. The severance
payment is equal to: (1) if Mr. Tibbitts' employment is terminated by SpaceDev
without cause, his then-current base salary per month multiplied by the number
of months remaining in the term of the agreement (prorated with respect to any
partial month); or, (2) if Mr. Tibbitts' employment is terminated by Mr.
Tibbitts for good reason, his then-current base salary per month multiplied by
the lesser of twelve months and the number of months remaining in the term of
the agreement. Under the agreement, SpaceDev will indemnify Mr. Tibbitts to the
extent provided in SpaceDev's articles of incorporation, as may be amended from
time to time, and pursuant to SpaceDev's standard indemnification agreement with
its officers and directors, provided that SpaceDev will have no obligation to
indemnify or defend Mr. Tibbitts for any action, suit or other proceeding to the
extent based on acts, omissions, events or circumstances occurring prior to the
Starsys merger.

PAGE 56

On January 31, 2006, SpaceDev entered into an executive employment
agreement with Robert Vacek pursuant to which Mr. Vacek was employed as the
president of Starsys, Inc., a subsidiary of SpaceDev, Inc. The agreement has an
initial term of two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Vacek provides written notice of an intent not to
renew. Under the agreement, Mr. Vacek is entitled to receive; (1) a base salary
of $17,000 per month, subject to adjustment up to $19,000 per month upon the
happening of certain events or by the sixteenth month of service; (2)
performance-based cash bonuses based on the achievement of specific goals set
forth in the agreement; and, (3) an option to purchase up to 825,000 shares of
SpaceDev common stock under the terms and conditions of SpaceDev's 2004 Equity
Incentive Plan, as amended. The option has an exercise price equal to $1.46 per
share, which was the closing sale price reported on the OTCBB on the date of
grant, and will expire upon the termination of Mr. Vacek's continuous
employment. SpaceDev will pay severance to Mr. Vacek if his employment is
terminated by SpaceDev without cause or by Mr. Vacek for good reason. The
severance payment is equal to: (1) if Mr. Vacek's employment is terminated by
SpaceDev without cause, his then-current base salary per month multiplied by the
greater of (A) 12 months or (B) the number of months remaining in the term of
the agreement (prorated with respect to any partial month); or, (2) if Mr.
Vacek's employment is terminated by Mr. Vacek for good reason, his then-current
base salary per month multiplied by the lesser of (A) 12 months or (B) the
number of months remaining in the term of the agreement provided that such
number of months will not be deemed to be less than six months. Under the
agreement, SpaceDev will indemnify Mr. Vacek to the extent provided in
SpaceDev's articles of incorporation, as may be amended from time to time, to
the maximum extent permitted by law and pursuant to SpaceDev's standard
indemnification agreement, if any, with its officers and directors.

On December 20, 2005, SpaceDev entered into an executive employment
agreement with Mark N. Sirangelo pursuant to which Mr. Sirangelo was employed as
SpaceDev's chief executive officer and vice chairman. The agreement has an
initial term of two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Sirangelo provides written notice of an intent not
to renew. Under the agreement, Mr. Sirangelo is entitled to receive; (1) a base
salary of $22,500 per month, subject to adjustment up to $27,500 per month upon
the happening of certain events or by the sixteenth month of service; (2)
performance-based cash bonuses based on the achievement of specific goals set
forth in the agreement (including a bonus of $25,000 upon the completion of the
merger with Starsys); and, (3) a fully-vested option to purchase up to 1,900,000
shares of SpaceDev common stock under the terms and conditions of a non-plan
stock option agreement between SpaceDev and Mr. Sirangelo. The option has an
exercise price equal to $1.40 per share, which was the closing sale price
reported on the OTCBB on the date of grant, and will expire five years after the
date of grant. Some of the shares subject to the option are subject to sale
restrictions that expire upon the achievement of certain specific milestones or
four years from the date of grant, whichever comes first. Subject to certain
limitations, the option may be exercised by means of a net exercise provision by
surrendering shares with a fair market value equal to the exercise price upon
exercise. SpaceDev will pay severance to Mr. Sirangelo if his employment is
terminated by SpaceDev without cause or by Mr. Sirangelo for good reason. The
severance payment is equal to: (1) if Mr. Sirangelo's employment is terminated
by SpaceDev without cause, his then-current base salary per month multiplied by
the greater of (A) 12 months or (B) the number of months remaining in the term
of the agreement (prorated with respect to any partial month); or (2) if Mr.
Sirangelo's employment is terminated by Mr. Sirangelo for good reason, his
then-current base salary per month multiplied by the lesser of (A) 12 months or
(B) the number of months remaining in the term of the agreement provided that
such number of months will not be deemed to be less than six months.

On December 20, 2005, SpaceDev entered into an amended and restated
executive employment agreement with Richard B. Slansky pursuant to which Mr.
Slansky is employed as SpaceDev's president and chief financial officer. The
agreement supersedes in full the employment agreement dated February 10, 2003
between SpaceDev and Mr. Slansky. The agreement has an initial term of two
years, and will be automatically renewed for a third year unless either SpaceDev
or Mr. Slansky provides written notice of an intent not to renew. Under the
agreement, Mr. Slansky is entitled to receive: (1) a base salary of $14,500 per
month, subject to adjustment up to $20,000 per month upon the happening of
certain events or by the sixteenth month of service; (2) performance-based cash
bonuses based on the achievement of specific goals set forth in the agreement
(including a bonus of $25,000 upon the completion of the merger with Starsys);
and, (3) a fully-vested option to purchase up to 1,400,000 shares of SpaceDev
common stock under the terms and conditions of a non-plan stock option agreement
between SpaceDev and Mr. Slansky. The option has an exercise price equal to
$1.40 per share, which was the closing sale price reported on the OTCBB on the
date of grant, and will expire five years after the date of grant. Some of the
shares subject to the options are subject to sale restrictions that expire upon
the achievement of certain specific milestones or four years from the date of
grant, whichever comes first. Subject to certain limitations, the option may be
exercised by means of a net exercise provision by surrendering shares with a
fair market value equal to the exercise price upon exercise. SpaceDev will pay
severance to Mr. Slansky if his employment is terminated by SpaceDev without
cause or by Mr. Slansky for good reason. The severance payment is equal to: (1)
if Mr. Slansky's employment is terminated by SpaceDev without cause, his
then-current base salary per month multiplied by the greater of (A) 12 months or
(B) the number of months remaining in the term of the agreement (prorated with
respect to any partial month); or (2) if Mr. Slansky's employment is terminated
by Mr. Slansky for good reason, his then-current base salary per month
multiplied by the lesser of (A) 12 months or (B) the number of months remaining
in the term of the agreement provided that such number of months will not be
deemed to be less than six months.

PAGE 57

On December 20, 2005, SpaceDev entered into an executive employment
agreement with James W. Benson pursuant to which Mr. Benson is employed as
SpaceDev's chairman and chief technology officer. The agreement supersedes all
prior employment agreements between SpaceDev and Mr. Benson. The agreement has
an initial term of two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Benson provides written notice of an intent not to
renew. Under the agreement, Mr. Benson is entitled to receive: (1) a base
salary of $14,000 per month, subject to adjustment up to $17,000 per month upon
the happening of certain events or by the sixteenth month of service; (2)
performance-based cash bonuses based on the achievement of specific goals set
forth in the agreement (including a bonus of $22,500 upon the completion of the
merger with Starsys); and, (3) a fully-vested option to purchase up to 950,000
shares of SpaceDev common stock under the terms and conditions of a non-plan
stock option agreement between SpaceDev and Mr. Benson. The option has an
exercise price equal to$1.40 per share, which was the closing sale price
reported on the OTCBB on the date of grant, and will expire five years after the
date of grant. Some of the shares subject to the options are subject to sale
restrictions that expire upon the achievement of certain specific milestones or
four years from the date of grant, whichever comes first. Subject to certain
limitations, the option may be exercised by means of a net exercise provision by
surrendering shares with a fair market value equal to the exercise price upon
exercise. SpaceDev will pay severance to Mr. Benson if his employment is
terminated by SpaceDev without cause or by Mr. Benson for good reason. The
severance payment is equal to: (1) if Mr. Benson's employment is terminated by
SpaceDev without cause, his then-current base salary per month multiplied by the
greater of (A) 12 months or (B) the number of months remaining in the term of
the agreement (prorated with respect to any partial month); or (2) if Mr.
Benson's employment is terminated by Mr. Benson for good reason, his
then-current base salary per month multiplied by the lesser of (A) 12 months or
(B) the number of months remaining in the term of the agreement provided that
such number of months will not be deemed to be less than six months.

On December 20, 2005, Mr. Benson also received an option to purchase up to
150,000 shares of SpaceDev common stock in connection with his services as
chairman of SpaceDev pursuant to the terms of a separate non-plan stock option
agreement between SpaceDev and Mr. Benson. The option has an exercise price
equal to $1.40 per share, which was the closing sale price reported on the OTCBB
on the date of grant, and will expire five years after the date of grant. Some
of the shares subject to the option are subject to sale restrictions that expire
upon the achievement of certain specific milestones or four years from the date
of grant, whichever comes first. Subject to certain limitations, the option may
be exercised by means of a net exercise provision by surrendering shares with a
fair market value of the exercise price upon exercise.

PAGE 58

EMPLOYEE BENEFITS

In 1999 we adopted an Incentive Employee Stock Option Plan under
which our 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.

In 2000 we amended 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.

In 2004 we 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. 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, 2005, 8,184,698 shares were authorized for issuance
under the 1999 Stock Option Plan and the 2004 Equity Incentive Plan, 4,706,460
of which are currently subject to outstanding options and awards.

At the special meeting of our stockholders held on January 30, 2006, we
sought and obtained approval from our stockholders to increase the amount of
shares of common stock available for award under our 2004 Equity Incentive Plan
by 3,000,000 shares. This increase was obtained to provide sufficient reserves
for the issuance of options to Starsys officers and key employees as part of our
acquisition of Starsys.

In addition to the 1999 Stock Option Plan and the 2004 Equity Incentive
Plan, we have adopted a 1999 Employee Stock Purchase Plan, which
authorized our Board of Directors to make twelve consecutive offerings of our
common stock to our employees. 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.

PAGE 59

EQUITY COMPENSATION PLAN INFORMATION

The following table reflects information as of December 31, 2005.

(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 5,447,560 $ 1.19 1,458,103
approved by
security holders

------------------ --------------------------- ------------------- --------------------------
Equity . . . . . . 4,900,000 (1) $ 1.36 -
compensation plans
not approved by
security holders

------------------ --------------------------- ------------------- --------------------------
Total. . . . . . . 10,347,560 $ 1.27 1,458,103
------------------ --------------------------- ------------------- --------------------------

(1) Mark N. Sirangelo, Richard B. Slansky and James W. Benson were granted
non-qualified stock options on 4,400,000 shares pursuant to the employment
agreements effective December 20, 2005. James W. Benson was granted
non-qualified stock options on 500,000 shares pursuant to the employment
agreement effective July 16, 2000. All options are vested.

PAGE 60

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table provides information as of March 3, 2006
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.

Amount and
Nature of
Beneficial
Name and Address of Beneficial Owner Ownership(1)
---------------------------------------------- ---------- ----- ------
James W. Benson. . . . . . . . . . . . . . . . 7,799,707 (2) 25.98%

Susan C. Benson. . . . . . . . . . . . . . . . 7,762,907 (3) 25.86%

Mark N. Sirangelo. . . . . . . . . . . . . . . 1,900,000 (4) 6.27%

Richard B. Slansky . . . . . . . . . . . . . . 2,235,723 (5) 7.32%

Scott F. Tibbitts. . . . . . . . . . . . . . . 845,501 2.98%

Wesley T. Huntress Jr. . . . . . . . . . . . . 293,515 (6) 1.02%

Curt Dean Blake. . . . . . . . . . . . . . . . 332,224 (7) 1.16%

General Howell M. Estes, III . . . . . . . . . 219,667 (8) 0.77%

Robert S. Walker . . . . . . . . . . . . . . . 176,667 (9) 0.62%

Stuart Schaffer. . . . . . . . . . . . . . . . 290,206 (10) 1.02%

Scott McClendon. . . . . . . . . . . . . . . . 272,460 (11) 0.95%
---------------------------------------------- ---------- ----- ------
Officers and Directors as a group (15 Persons) 18,392,060 (12) 50.78%
---------------------------------------------- ---------- ----- ------
---------------------------------------------- ---------- ----- ------

The business address for each of these persons is 13855 Stowe Drive, Poway, CA
92064.

PAGE 61

(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 3, 2006, 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 28,414,531 on March 3, 2006.

(2) Represents 3,000,000 shares held directly by Mr. James W. Benson as a
result of a stipulated order entered May 24, 2005 identifying the shares as
a separate property asset of Mr. Benson, plus beneficial ownership in
2,692,294 shares held jointly with Susan C. Benson, as to which he shares
voting and investing power with Ms. Benson, indirect beneficial ownership
interest in 497,413 shares held in Space Development Institute (where Mr.
Benson is a member of the Board of Directors along with Susan C. Benson),
as to which he shares voting and investing power with Ms. Benson, and
beneficial ownership in vested options to purchase up to an aggregate of
1,610,000 shares (which may constitute as community property with Susan C.
Benson). Excludes approximately 1.2 million shares held by children of Mr.
Benson, for which Mr. Benson disclaims beneficial ownership.

(3) Represents 2,963,200 shares held directly by Ms. Susan Benson as a result
of a stipulated order entered May 24, 2005 identifying the shares as a
separate property asset of Ms. Benson, plus beneficial ownership in
2,692,294 shares held jointly with James W. Benson, as to which she shares
voting and investing power with Mr. Benson, indirect beneficial ownership
interest in 497,413 shares held in Space Development Institute (where Ms.
Benson is a member of the Board of Directors along with James W. Benson),
as to which she shares voting and investing power with Mr. Benson, and
beneficial ownership in vested options issued in the name of James W.
Benson on 1,610,000 shares (which may constitute as community property with
James W. Benson), but as to which she no longer has shared voting and
investment power. Excludes approximately 1.2 million shares held by
children of Ms. Benson, for which Ms. Benson disclaims beneficial
ownership.

(4) Mr. Sirangelo holds vested options to purchase up to an aggregate of
1,900,000 common shares.

(5) Includes vested options to purchase up to an aggregate of 2,125,000 common
shares.

(6) Includes vested options to purchase up to an aggregate of 259,647 common
shares.

(7) Includes vested options to purchase up to an aggregate of 271,000 common
shares.

(8) Includes vested options to purchase up to an aggregate of 219,667 common
shares.

(9) Includes vested options to purchase up to an aggregate of 176,667 common
shares.

(10) Includes vested options to purchase up to an aggregate of 162,000 common
shares.

(11) Includes vested options to purchase up to an aggregate of 272,460 common
shares.

(12) Officers and directors as a group include our eleven Board members, four of
whom are also executive officers, and Messrs. Simpson, Macklin, Streich and
Vacek who are deemed for this purpose to be executive officers.

PAGE 62

DESCRIPTION OF SECURITIES

COMMON STOCK

We are authorized to issue up to 100,000,000 shares of our $.0001 par value
common stock, of which 28,710,516 shares are issued and outstanding as of April
3, 2006.

The Board of Directors may issue additional shares of Common Stock without
the consent of the holders of Common Stock.

PAGE 63

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.

On January 11, 2006, we entered into a securities purchase agreement,
which we refer to as the 2006 purchase agreement, with a limited number of
institutional accredited investors, led by Omicron Capital. On January 13, 2006,
we issued and sold to these investors 5,150 shares of our Series D-1 Amortizing
Convertible Perpetual Preferred Stock, par value $0.001 per share, which we
refer to as Series D-1 Preferred Stock, for an aggregate purchase price of
$5,150,000, or $1,000 per share. We also issued various warrants to these
investors under the 2006 purchase agreement.

VOTING RIGHTS

The Series C and Series D-1 Shares have no voting rights.

LIQUIDATION RIGHTS

The Series C and Series D-1 Shares carry a liquidation preference
equal to the then stated value ($10.00 per share) of the then outstanding Series
C and Series D-1 Shares. As a result, the holders of the Series C and
Series D-1 Shares will receive a distribution out of the assets of the
Company upon liquidation equal to the number of Series C and Series D-1
Shares then outstanding multiplied by $10.00 before the holders of our Common
Stock will be entitled to any distribution.

DIVIDENDS

We accrued dividends on our Series C Cumulative Convertible Preferred Stock
from August 25, 2004 through December 31, 2004 of approximately $61,000 and
approximately $171,000 for the year ended December 31, 2005. The original
accrued dividends of $61,000 became payable in January 2005 and were converted
into shares of SpaceDev common stock at a conversion rate of $1.54 per share.
Approximately $114,000 of the 2005 accrued dividends was satisfied by the
issuance of SpaceDev common stock during the twelve-months ended December 31,
2005. We also paid dividends of approximately $98,900 on our Series C Cumulative
Convertible Preferred Stock on April 1, 2006. Payment of future dividends on our
Series C Cumulative Convertible Preferred Stock may be in cash or shares of
common stock, provided that the payment of cash dividends on the Series C
Cumulative Convertible Preferred Stock is prohibited in the event of our
noncompliance with our obligations under the certificate of designations for any
series of Series D Preferred Stock.

We first issued shares of Series D Preferred Stock on January 13, 2006. We
paid our first dividends of approximately $98,700 for the Series D Preferred
Stock on March 31, 2006.

CONVERSION

The Series C and Series D-1 Shares are convertible into the $0.0001
par value Common Stock of the Company at a rate of $1.54 and $1.48 per share,
respectively (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).

PAGE 64

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. We may redeem the Series D shares in
whole or in part based on certain conditions.

Under the purchase agreement, from the date of the effectiveness of the
initial registration statement filed pursuant to the registration rights
agreement (February 14, 2006), until the one-year anniversary of that date, if
(1) on any trading day during such period the volume weighted average price of
SpaceDev common stock for each of the 20 trading days immediately prior to such
date exceeds $1.63 and (2) the average daily trading volume of SpaceDev common
stock exceeds $100,000 on each of those days, then we have the option, subject
to a number of additional conditions, to put to the investors "units" at $1,000
per unit for an aggregate purchase price of up to $2,000,000 (or a lesser amount
to the extent the preferred stock warrants issued at the initial closing of the
financing, which are described below, have been exercised to purchase these
units). Each "unit" consists of one share of Series D Preferred Stock and a
common stock warrant, which entitles the holders to purchase up to an aggregate
of 440,829 shares of common stock at an exercise price of $1.51 and otherwise
has the same terms as the warrants described in the following paragraph.

WARRANTS

The Series C 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. The
Series D Warrants are exercisable immediately upon issuance.

Certain warrants we issued to the investors at the closing entitle the
investors to purchase up to an aggregate of 1,135,138 shares of SpaceDev common
stock at an exercise price of $1.51 per share. The warrants are exercisable for
five years following the date of grant. The warrants have "ratchet"
anti-dilution provisions reducing the warrant exercise price if the Company
issues equity securities (other than in specified exempt transactions) at an
effective price below the warrant exercise price to such lower exercise price.

We also issued certain other warrants to the investors at the
closing (the "preferred stock warrants"). These warrants entitle the holder to
purchase an aggregate number of 2,000 "units", which are identical to the
"units" described above, at an exercise price of $1,000 per unit. The preferred
stock warrants are exercisable from the effective date (February 14, 2006) until
the one-year anniversary of that date. If any units subject to the preferred
stock warrants remain unsold after (1) their expiration date and (2) the
exercise of the Company's put option, if applicable, and any holder of a
preferred stock warrant issued in the financing has exercised the warrant in
full, then the preferred stock warrant grants that holder the right to purchase
a proportionate share of the unsold units.
Other Provisions.

The Series D purchase agreement contains a number of covenants by us,
which include:

- A grant of preemptive rights to the investors to participate in future
financings until the first anniversary of the closing date of the
financing;

- An agreement not to issue any shares of our common stock or
securities or other rights to acquire shares of common stock until six (6)
months after the effective date, except under specified conditions intended
to ensure the terms are no less favorable to us than the terms of
this financing; and,

- An agreement not to effect any transaction involving the issuance of
securities convertible, exercisable or exchangeable for our
common stock at a price per share or rate which may change over time.

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.
Continental Stock Transfer can be contacted via telephone at (212)
845-3215.

PAGE 65

DISCLOSURE OF COMMISSION POSITION ON 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

None

PAGE 66

EXPERTS

The financial statements included in the Prospectus have been audited by
PKF , independent certified public accountants, for the years ending December
31, 2005 and 2004, 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

None

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 100 F Street, NE, 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.

PAGE 67

SPACEDEV, INC.
AND SUBSIDIARIES

CONTENTS

CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2

FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-11

PAGE 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 SUBSIDIARIES as of December 31, 2005 and 2004, respectively, and the related
consolidated statements of operations, stockholders' equity 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 SUBSIDIARIES as of December 31, 2005 and 2004, 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 3, 2006 Certified Public Accountants
A Professional Corporation

PAGE F-2

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,. . . . . . . . . . . . . . . . . . . . 2005 2004
---------------------------------------------------- ----------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Notes 1(m) and 10(a)) $ 5,750,038 $5,068,601
Accounts receivable (Notes 1(d) and 10(b)) . . . 1,279,027 620,097
Work in progress . . . . . . . . . . . . . . . . 21,340 -
Note receivable (Note 11). . . . . . . . . . . . 1,353,440 -
---------------------------------------------------- ----------- ----------
Total Current Assets. . . . . . . . . . . . . . . . 8,403,845 5,688,698

FIXED ASSETS - Net (Notes 1(f) and 2) . . . . . . . 1,073,773 279,381

OTHER ASSETS (NOTE 1 (N)) . . . . . . . . . . . . . 1,531,031 122,355
---------------------------------------------------- ----------- ----------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . $11,008,649 $6,090,434
---------------------------------------------------- ----------- ----------
---------------------------------------------------- ----------- ----------

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

PAGE F-3

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004
----------------------------------------------------------------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable (Note 4(a)). . . . . . . . . . . . $ 9,457 $ 36,670
Current portion of capitalized lease obligations (Note 9(a)). . . . 1,469 3,784
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 1,237,099 338,809
Accrued payroll, vacation and related taxes . . . . . . . . . . . . 290,914 195,045
Employee stock purchase plan (Note 7(b)). . . . . . . . . . . . . . 29,375 9,332
Deferred revenue (Note 11). . . . . . . . . . . . . . . . . . . . . 153,440 -
Other accrued liabilities (Note 9(b)) . . . . . . . . . . . . . . . 487,005 207,262
----------------------------------------------------------------------- ------------- -------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . 2,208,759 790,902

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

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

DEFERRED GAIN - ASSETS HELD FOR SALE (NOTES 2 AND 4) . . . . . . . . . 830,677 947,949

DEFERRED REVENUE (NOTE 1(E)) . . . . . . . . . . . . . . . . . . . . . - 5,000
----------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,039,436 1,754,777

COMMITMENTS AND CONTINGENCIES (NOTE 9)

STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value, 10,000,000 shares
authorized, and 248,460 and 250,000 shares issued and outstanding,
respectively (Note 8(a)). . . . . . . . . . . . . . . . . . . . . . 248 250
Common stock, $.0001 par value; 50,000,000 shares authorized, and
24,606,275 and 21,153,660 shares issued and outstanding,
respectively (Note 8(b)). . . . . . . . . . . . . . . . . . . . . . 2,460 2,114
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 22,541,994 18,739,090
Additional paid-in capital - stock options (Note 8(d)). . . . . . . - 750,000
Deferred compensation (Note 8(d)) . . . . . . . . . . . . . . . . . - (250,000)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (14,575,489) (14,905,797)
----------------------------------------------------------------------- ------------- -------------
TOTAL STOCKHOLDERS, EQUITY . . . . . . . . . . . . . . . . . . . . . . 7,969,213 4,335,657
----------------------------------------------------------------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . $ 11,008,649 $ 6,090,434
----------------------------------------------------------------------- ------------- -------------
----------------------------------------------------------------------- ------------- -------------

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

PAGE F-4

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, . . . . . . . . . . . . . . . 2005 % 2004 %
------------------------------------------------------- ------------ ------------ ------------ -------
NET SALES. . . . . . . . . . . . . . . . . . . . . . . $ 9,005,011 100.00% $ 4,890,743 100.00%
------------------------------------------------------- ------------ ------------ ------------ -------
COST OF SALES. . . . . . . . . . . . . . . . . . . . . 6,905,902 76.69% 3,820,683 78.12%
------------------------------------------------------- ------------ ------------ ------------ -------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . . 2,099,109 23.31% 1,070,060 21.88%

OPERATING EXPENSES
Marketing and sales expense . . . . . . . . . . . . 673,636 7.48% 418,831 8.56%
General and administrative. . . . . . . . . . . . . 1,113,973 12.37% 506,944 10.37%
------------------------------------------------------- ------------ ------------ ------------ -------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . 1,787,609 19.85% 925,775 18.93%
------------------------------------------------------- ------------ ------------ ------------ -------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . 311,500 3.46% 144,285 2.95%
------------------------------------------------------- ------------ ------------ ------------ -------
NON-OPERATING (INCOME)/EXPENSE
Interest income . . . . . . . . . . . . . . . . . . (105,840) -1.18% (19,497) -0.40%
Interest expense. . . . . . . . . . . . . . . . . . 2,873 0.03% 52,077 1.06%
Gain on building sale (Note 4(d)) . . . . . . . . . (117,272) -1.30% (117,272) -2.40%
Loan fee - equity compensation (Notes 4(c) and 5) . 28,875 0.32% 3,254,430 66.54%
------------------------------------------------------- ------------ ------------ ------------ -------
TOTAL NON-OPERATING (INCOME)/EXPENSE . . . . . . . . . (191,364) -2.13% 3,169,739 64.81%
------------------------------------------------------- ------------ ------------ ------------ -------
INCOME (LOSS) BEFORE INCOME TAXES. . . . . . . . . . . 502,864 5.58% (3,025,454) -61.86%
Income tax provision (Notes 1(i) and 6). . . . . . . . 1,600 0.02% 1,600 0.03%
------------------------------------------------------- ------------ ------------ ------------ -------
NET INCOME/(LOSS). . . . . . . . . . . . . . . . . . . $ 501,264 5.57% $(3,027,054) -61.89%
------------------------------------------------------- ------------ ------------ ------------ -------
NET INCOME/(LOSS) PER SHARE:
Net income/(loss) . . . . . . . . . . . . . . . . $ 0.02 $ (0.16)
------------------------------------------------------- ------------ ------------ ------------ -------
Weighted-Average Shares Outstanding . . . . . . . 22,270,997 18,610,141

FULLY DILUTED NET INCOME/(LOSS) PER SHARE:
Net income/(loss) . . . . . . . . . . . . . . . . $ 0.02 $ (0.16)
------------------------------------------------------- -------------------------- ---------------------
Fully Diluted Weighted-Average Shares Outstanding. 29,631,118 18,610,141
------------------------------------------------------- -------------------------- ---------------------
------------------------------------------------------- -------------------------- ---------------------

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

PAGE F-5

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Preferred Stock Common Stock
------------------ --------------------
Shares Amount Shares Amount
----------------------------------------------------------------------------- ---------- ------ ----------- -------
BALANCE AT JANUARY 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . - $ - 16,413,260 $ 1,641
Preferred stock issued for cash (Note 8(a)) . . . . . . . . . . . . . . 250,000 250 - -
Common stock issued for cash from employee stock purchase plan (Note 7(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 (Notes 7(b) and 8(d)) . . . . - - 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 (Notes 5 and 8(c)) - - 614,853 61
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -

Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
----------------------------------------------------------------------------- ---------- ------ ----------- -------
BALANCE AT DECEMBER 31, 2004. . . . . . . . . . . . . . . . . . . . . . . . . 250,000 250 21,153,660 2,114
Preferred stock issued for cash (Note 8(a)) . . . . . . . . . . . . . . - - - -
Common stock issued for cash from employee stock purchase plan (Note 7(b)). . - - 27,540 3
Common stock issued from conversion of preferred stock (Note 8(a)). . . . . . (1,540) (2) 10,000 1
Common stock issued from employee stock options (Notes 7(b) and 8(d)) . . . . - - 237,000 24
Common stock issued from private placement memorandum warrants (Note 8(b)). . - - 1,014,327 101
Common stock issued from convertible debt program warrants (Notes 5 and 8(c)) - - 17,607 2
Common stock issued from securities purchase agreement (Note 8(b)). . . . . . - - 2,032,520 204
Common stock issued from conversion of declared dividends (Note 8(a)) . . . . - - 113,621 11
Stock option forfeiture (Notes 7(b) and 8(d)) . . . . . . . . . . . . . . . . - - - -
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -

Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -
----------------------------------------------------------------------------- ---------- ------ ----------- -------
BALANCE AT DECEMBER 31, 2005. . . . . . . . . . . . . . . . . . . . . . . . . 248,460 $ 248 24,606,275 $ 2,460
----------------------------------------------------------------------------- ---------- ------ ----------- -------
----------------------------------------------------------------------------- ---------- ------ ----------- -------

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

PAGE F-6

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Additional
Additional Paid-In
Paid-in Capital - Deferred
Capital Stock Options Compensation
----------------------------------------------------------------------------- ----------- -------------- -------------
BALANCE AT JANUARY 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,243,507 $ 750,000 $ (250,000)
Preferred stock issued for cash (Note 8(a)) . . . . . . . . . . . . . . 2,366,250 - -
Common stock issued for cash from employee stock purchase plan (Note 7(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 (Notes 7(b) and 8(d)) . . . . 1,264,649 - -
Common stock issued from private placement memorandum warrants (Note 8(b)). . 88,738 - -
Common stock issued from convertible debt program warrants (Notes 5 and 8(c)) 1,011,241 - -
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -

Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -
----------------------------------------------------------------------------- ----------- -------------- -------------
18,739,090 750,000 (250,000)
BALANCE AT DECEMBER 31, 2004
Preferred stock issued for cash (Note 8(a)) . . . . . . . . . . . . . . -
Common stock issued for cash from employee stock purchase plan (Note 7(b)). . 38,323 - -
Common stock issued from conversion of preferred stock (Note 8(a)). . . . . . 1 - -
Common stock issued from employee stock options (Notes 7(b) and 8(d)) . . . . 241,021 - -
Common stock issued from private placement memorandum warrants (Note 8(b)). . 500,840 - -
Common stock issued from convertible debt program warrants (Notes 5 and 8(c)) 28,874 - -
Common stock issued from securities purchase agreement (Note 8(b)). . . . . . 2,318,880 - -
Common stock issued from conversion of declared dividends (Note 8(a)) . . . . 174,965 - -
Stock option forfeiture (Notes 7(b) and 8(d)) . . . . . . . . . . . . . . . . 500,000 (750,000) 250,000
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - -

Net Income - - -
----------------------------------------------------------------------------- ----------- -------------- -------------
BALANCE AT DECEMBER 31, 2005. . . . . . . . . . . . . . . . . . . . . . . . . $22,541,994 $ - $ -
----------------------------------------------------------------------------- ----------- -------------- -------------
----------------------------------------------------------------------------- ----------- -------------- -------------

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

PAGE F-7

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Accumulated
Deficit Total
----------------------------------------------------------------------------- ------------- ------------
BALANCE AT JANUARY 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . . $(11,817,776) $(2,072,628)
Preferred stock issued for cash (Note 8(a)) . . . . . . . . . . . . . . - 2,366,500
Common stock issued for cash from employee stock purchase plan (Note 7(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 (Notes 7(b) and 8(d)) . . . . - 1,264,749
Common stock issued from private placement memorandum warrants (Note 8(b)). . - 88,750
Common stock issued from convertible debt program warrants (Notes 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
Preferred stock issued for cash (Note 8(a)) . . . . . . . . . . . . . . - -
Common stock issued for cash from employee stock purchase plan (Note 7(b)). . - 38,326
Common stock issued from conversion of preferred stock (Note 8(a)). . . . . . - -
Common stock issued from employee stock options (Notes 7(b) and 8(d)) . . . . - 241,045
Common stock issued from private placement memorandum warrants (Note 8(b)). . - 500,941
Common stock issued from convertible debt program warrants (Notes 5 and 8(c)) - 28,876
Common stock issued from securities purchase agreement (Note 8(b)). . . . . . - 2,319,084
Common stock issued from conversion of declared dividends (Note 8(a)) . . . . - 174,976
Stock option forfeiture (Notes 7(b) and 8(d)) . . . . . . . . . . . . . . . . - -
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (170,956) (170,956)
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501,264 501,264
----------------------------------------------------------------------------- ------------- ------------
BALANCE AT DECEMBER 31, 2005. . . . . . . . . . . . . . . . . . . . . . . . . $(14,575,489) $ 7,969,213
----------------------------------------------------------------------------- ------------- ------------
----------------------------------------------------------------------------- ------------- ------------

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

PAGE F-8

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, . . . . . . . . . . . . . . . . . . . 2005 2004
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . $ 501,264 $(3,027,054)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 191,978 83,531
Closing Costs from sale of building
Gain on disposal of building . . . . . . . . . . . . . . (117,272) (117,272)
Non-cash interest expense - convertible debt program . . - 773,802
Non-cash loan fees . . . . . . . . . . . . . . . . . . . 28,874 2,480,628
Change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . (658,930) (433,035)
Work in Progress . . . . . . . . . . . . . . . . . . . (21,340) 110,490
Prepaid and other current assets . . . . . . . . . . . (605,721) (74,587)
Inventory. . . . . . . . . . . . . . . . . . . . . . . - 9,961
Interest on revolving line of credit . . . . . . . . . - 18,349
Accounts payable and accrued expenses. . . . . . . . . 898,290 27,203
Accrued payroll, vacation and related taxes. . . . . . 95,869 111,044
Customer deposits and deferred revenue . . . . . . . . (5,000) -
Interest - related party . . . . . . . . . . . . . . . - 29,256
Other accrued liabilities. . . . . . . . . . . . . . . 89,008 (102,235)
--------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . . . . 397,020 (109,919)
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Notes receivable. . . . . . . . . . . . . . . . . . . . . (1,353,440) -
Other assets, capitalized acquisition costs . . . . . . . (375,930) -
Purchases of fixed assets . . . . . . . . . . . . . . . . (986,370) (225,380)
--------------------------------------------------------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . (2,715,740) (225,380)
--------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable . . . . . . . . . . . (36,670) (41,464)
Principal payments on capitalized lease obligations . . . (3,784) (10,332)
Payments on notes payable - related party . . . . . . . . - (427,280)
Proceeds from revolving credit facility . . . . . . . . . - 1,504,508
Employee stock purchase plan. . . . . . . . . . . . . . . 58,369 16,460
Other assets, capitalized preferred stock issuance costs. (78,828) -
Proceeds from issuance of preferred stock . . . . . . . . - 2,366,500
Proceeds from issuance of common stock. . . . . . . . . . 3,061,070 1,403,502
--------------------------------------------------------------- ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . . . 3,000,157 4,811,894
--------------------------------------------------------------- ------------ ------------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . 681,437 4,476,595
--------------------------------------------------------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . . . 5,068,601 592,006
--------------------------------------------------------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . $ 5,750,038 $ 5,068,601
--------------------------------------------------------------- ------------ ------------
--------------------------------------------------------------- ------------ ------------

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

PAGE F-9

SPACEDEV, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31 2005 2004
--------------------------------------------------------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . $ 2,873 $ 313,978
Income Taxes. . . . . . . . . . . . . . . . . . . 1,600 1,600

NONCASH INVESTING AND FINANCING ACTIVITIES:

During 2005 and 2004, the Company converted $38,326 and $12,627 of employee
stock purchase plan contributions into 27,540 and 14,010 shares of common
stock, respectively.

During 2005 and 2004, the Company declared dividends payable of $170,956 and
$60,967, respectively to the holders of its preferred stock.

During 2005, the Company converted dividends payable to the holders of its
preferred stock of $174,976 into 113,621 shares of common stock.

During the year ending December 31, 2004, the Company issued 2,991,417 shares of
its common stock to Laurus Master Fund, Ltd. from conversions of
indebtedness under its revolving credit facility, thereby realizing a
corresponding reduction in current liabilities of approximately $2,271,750.
The Company recorded additional non-cash loan fees of $2,480,628, 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 participants in its prior convertible debt program
from conversions of warrants, thereby receiving cash in the amount of
$237,500. The Company recorded additional non-cash loan fees of $773,802
and charged these fees to expense.

During the year ending December 31, 2005, the Company issued 17,607 shares of
its common stock to the participants in its' prior convertible debt program
from conversions of warrants. In the noncash transaction 25,000 warrants
were converted into 17,607 shares. The Company recorded additional non-cash
loan fees of $28,875 for the difference in the warrant price versus the
current share price, and charged these fees to expense.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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

PAGE F-10

SPACEDEV, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies 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, subsystems, 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
Nevada"), 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 Nevada's common stock owned by SpaceDev, LLC. Upon the acquisition of
the SpaceDev Nevada stock, SpaceDev Nevada 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. For accounting purposes, the
transaction was accounted for as a reverse merger with the Company as the
acquirer. Since SpaceDev Nevada 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 provider of 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 Company common stock.

On March 31, 2004, the Company was awarded a $43,362,271 contract from the
Missile Defense Agency. Management intends to continue efforts to obtain new
commercial and government contracts.

(b) Principles of consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned inactive subsidiaries, SpaceDev Oklahoma, Inc., and Monoceros
Acquisition Corp., a Colorado Corporation.

PAGE F-11

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, 2005 and 2004,
the allowance for uncollectible accounts was $32,281 and $32,637 respectively.

(e) Revenue recognition

The Company's revenues in 2005 and 2004 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 2005 and 2004 were recognized as expenses were incurred.
Estimated contract profits were taken into earnings in proportion to expenses
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.

(f) Depreciation and amortization

Fixed assets are depreciated over their estimated useful lives of Three-
to-fifteen 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 sale 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 this sale, 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).

(g) Research and development

The Company is engaged in design and development activities with its commercial
and government customers. The Company has Small Business Innovation Research
("SBIR") grants from the government and continues to seek new SBIR
opportunities. Costs incurred under SBIR grants are charged against revenues

PAGE F-12

received under SBIR grants. Non-reimbursable research and development
expenditures relating to possible future products are expensed as incurred. The
Company incurred $31,940 and $39,473 in non-reimbursable research and
development costs during 2005 and 2004, respectively.

(h) 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.

(i) Stock-based compensation

The Company has elected to account for its stock-based compensation plans under
APB Opinion No. 25. However, the Company has computed, for pro forma disclosure
purposes, the value of all options granted during the years ended December 31,
2005 and 2004 using the minimum value method as prescribed by SFAS No. 123 and
amended by SFAS No. 148. Under this method, the Company used the risk-free
interest rate at the 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 was 73% to 117%, the dividend yield was assumed to be zero,
and the expected life of the options was assumed to be three to five years based
on the average vesting period of options granted.

If the Company had accounted for these options in accordance with SFAS No. 123,
the total value of options granted during the years ended December 31, 2005 and
2004 would be amortized over the vesting period of the options. Thus, on a pro
forma basis, the Company's consolidated net income (loss) would have been as
follows:

-------------------------------------------------- ------------ ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . 2005 2004
-------------------------------------------------- ------------ ------------
As reported. . . . . . . . . . . . . . . . . . . $ 501,264 $(3,027,054)
Add: Stock based employee compensation expense. $ -
included in reported net income
Deduct: Stock based employee compensation . . . $(7,488,859) $ (390,773)
expense determined under the
fair value based method for all awards
-------------------------------------------------- ------------ ------------
Pro forma. . . . . . . . . . . . . . . . . . . . $(6,987,595) $(3,417,827)
-------------------------------------------------- ------------ ------------
NET INCOME (LOSS) PER SHARE:

As reported - basic. . . . . . . . . . . . . . . $ 0.02 $ (0.16)
As reported - diluted. . . . . . . . . . . . . . $ 0.02 $ (0.16)
Pro forma - basic. . . . . . . . . . . . . . . . $ (0.31) $ (0.18)
Pro forma - diluted. . . . . . . . . . . . . . . $ (0.24) $ (0.18)
-------------------------------------------------- ------------ ------------
-------------------------------------------------- ------------ ------------

PAGE F-13

SFAS No. 123, Accounting for Stock-Based Compensation, established accounting
and disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123 and supersedes
APB Opinion No. 25. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. In addition, the adoption of
SFAS No. 123R requires additional accounting related to the income tax effects
and additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. SFAS No. 123R is effective January 1, 2006 for
calendar year companies. Accordingly, the Company will implement the revised
standard in the first quarter of 2006 (See Note 7).

On December 20, 2005, in response to SFAS No. 123R the Company's Board of
Directors approved accelerating the vesting of all unvested stock options held
by current employees, including executive officers, and members of the Board of
Directors. In order to avoid adverse financial reporting effects in future years
under the new accounting standard, we eliminated all future vesting requirements
on approximately 8.0 million stock options then outstanding in the hands of
employees, officers, and directors which had a calculated future value of
approximately $5.5 million.

(j) Net profit (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 was not computed in 2004, as the
computation would result in anti-dilution.

YEAR ENDED DECEMBER31,
-------------------------------------------------

2005 2004
----------------------- -------------------
Numerator:
Net income (loss) $ 501,264 $ (3,027,054)

Plus: Dividends on convertible preferred stock 174,976 N/A
----------------------- -------------------
$ 676,240 $ (3,027,054)
----------------------- -------------------
Denominator:
Weighted-average shares used to compute basic EPS 22,270,997 18,610,141

Adjusted weighted-average shares for
conversion of preferred stock, options, and warrants 7,360,121 N/A
----------------------- -------------------
Weighted-average shares used to compute diluted EPS 29,631,118 18,610,141
----------------------- -------------------
Net earnings per share:
Basic $ 0.02 $ (0.16)
----------------------- -------------------
Diluted $ 0.02 $ N/A
----------------------- -------------------
----------------------- -------------------

PAGE F-14

The potential shares, which are included in the computation of diluted net
income per share are as follows:

YEAR ENDED DECEMBER31,
-----------------------------

2005 2004
----------------------- ----
Incremental shares from assumed conversions:
Warrants . . . . . . . . . . . . . . . . 1,897,579 -
Options. . . . . . . . . . . . . . . . . 5,967,128 -
Convertible preferred stock. . . . . . . 1,620,637 -
----------------------- ----
Dilutive potential common shares . . . . . . 9,485,345 -
Anti-dilutive shares . . . . . . . . . . . . (2,125,224)
----------------------- ----
Adjusted weighted-average shares . . . . . . 7,360,121 -
----------------------- ----
----------------------- ----

(k) Financial instruments

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

(l) Segment reporting

The Company has determined that it operates in one business segment dedicated to
space technology.

(m) New accounting standards

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets-
An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of SFAS No. 153 are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Early application was permitted and companies must apply the standard
prospectively. The adoption of this standard is not expected to have any effect
on the Company's financial position or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). FAS No. 123R
revised SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123R will require compensation costs related
to share-based payment transactions to be recognized in the financial statement
(with limited exceptions). The amount of compensation cost will be measured
based on the grant-date fair value of the equity or liability instruments
issued. Compensation cost will be recognized over the period that an employee
provides service in exchange for the award.

PAGE F-15

In March 2005, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing guidance on
option valuation methods, the accounting for income tax effects of share-based
payment arrangements upon adoption of SFAS No. 123R, and the disclosures in MD&A
subsequent to the adoption. In April 2005, the Securities and Exchange
Commission adopted a rule which delayed the compliance date for small business
issuers to the start of the first fiscal year beginning after December 15, 2005.
The Company will provide SAB No. 107 required disclosures upon adoption of SFAS
No. 123R in January 2006 and is currently evaluating the impact the adoption of
the standard will have on the Company's financial condition and results of
operations.

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement
applies to all voluntary changes in accounting principle, and changes to the
requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impractical. APB Opinion No. 20 previously required that most voluntary changes
in accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 is not expected to have any effect on the Company's financial
position or results of operations.

In February 2006, the FASB issued FAS No. 155, Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140 ("FAS No.
155"). This statement resolves issues addressed in FAS No. 133 Implementation
Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized
Financial Assets. FAS No. 155: (a) permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation; (b) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of FAS No. 133; (c)
establishes a requirement to evaluate beneficial interests in securitized
financial assets to identify interests that are freestanding derivatives or that
are hybrid financial instruments that contain an embedded derivative requiring
bifurcation; (d) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives; and, (e) eliminates restrictions on
a qualifying special-purpose entity's ability to hold passive derivative
financial instruments that pertain to beneficial interests that are or contain a
derivative financial instrument. FAS No. 155 also requires presentation within
the financial statements that identifies those hybrid financial instruments for
which the fair value election has been applied and information on the income
statement impact of the changes in fair value of those instruments. The Company
is required to apply FAS No. 155 to all financial instruments acquired, issued
or subject to a remeasurement event beginning January 1, 2007. The Company does
not expect the adoption of FAS No. 155 to have a material impact on the
Company's financial statements.

(n) Other Assets

Other assets are made up of a variety of prepaid and other cash advances for
items which will occur at a future date. Following is a description of what
makes up our other assets total at December 31, 2005 and 2004.

PAGE F-16

Other Assets - December 31,. . . . . . . . . . . . . . . . . . . 2005 2004
------------------------------------------------------------------ --------- -------
Cost Accrued in Conjunction with Starsys Acquisition. . . . . . . 724,127 -
SpaceDev Launch Package - Deposit . . . . . . . . . . . . . . . . 650,000 -
Cost Accrued in Conjunction with 2006 Security Purchase Agreement 78,828 -
Software Prepaid License. . . . . . . . . . . . . . . . . . . . . 17,788 -
Insurance Prepaid . . . . . . . . . . . . . . . . . . . . . . . . - 81,186
2006 Property Tax Prepayment. . . . . . . . . . . . . . . . . . . 14,562 -
All Other Deposits. . . . . . . . . . . . . . . . . . . . . . . . 45,727 41,169
------------------------------------------------------------------ --------- -------
Total Other Assets. . . . . . . . . . . . . . . . . . . . . . . . 1,531,031 122,355
------------------------------------------------------------------ --------- -------
------------------------------------------------------------------ --------- -------

(o) Cash and Cash Equivalents

Cash and cash equivalents are made up of cash as well as short term treasury
strips that will mature in a relatively short amount of time and represents only
the present value of the strip. These treasury strips can be redeemed at any
time, which is also why they are deemed to be cash and cash equivalents.

(p) Advertising Costs

Direct advertising costs are expensed as they are incurred by the Company.

2. FIXED ASSETS

In January 2003, the Company sold 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 this facility (see Note 9(c)). The gain
on the sale of the facility was deferred and is being amortized over the
remaining term of the lease. This amortization is included in the Company's
non-operating income and expense.

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, 2005 and 2004, the deferred
gain was $830,677 and $947,949, respectively. This amortization is included in
the Company's non-operating income and expense and totaled $117,272 in 2005 and
2004.

PAGE F-17

Deferred Gain consisted of the following:

December 31,. . . . . . . 2005 2004
------------------------- ----------- -----------

Deferred Gain . . . . . . $1,172,720 $1,172,720
Less Amortization to date (342,043) (224,771)
------------------------- ----------- -----------
$ 830,677 $ 947,949
------------------------- ----------- -----------
------------------------- ----------- -----------

Fixed assets consisted of the following:

December 31, . . . . . . . . . . . . . . 2005 2004
---------------------------------------- ----------- ----------
Capital leases . . . . . . . . . . . . . $ 155,499 $ 155,499
Computer equipment . . . . . . . . . . . 699,592 383,512
Building improvements. . . . . . . . . . 230,588 14,124
Furniture and fixtures . . . . . . . . . 10,976 6,224
Construction in Process. . . . . . . . . 446,621 -
---------------------------------------- ----------- ----------
1,543,276 559,360
Less accumulated depreciation
and amortization. . . . . . . . . . . (469,503) (279,979)
---------------------------------------- ----------- ----------
$1,073,773 $ 279,381
---------------------------------------- ----------- ----------
---------------------------------------- ----------- ----------

Depreciation and amortization expense for fixed assets was approximately
$192,000 and $83,500 for the years ended December 31, 2005 and 2004,
respectively. Depreciation and amortization expense was higher during 2005 due
to the purchase of new fixed assets, mainly new computer hardware and software,
during 2005 and the construction of our fabrication and test facilities for our
hybrid rock motor systems, also located in Poway, California. Of the above
depreciation, approximately $17,000 and $33,000, for the years ended December
31, 2005 and 2004, 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.

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

PAGE F-18

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
and 25,000 additional warrants expired on March 19, 2005.

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%, a 0% 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.

4. NOTES PAYABLE

(a) Building and settlement notes

In January 2003, the company sold 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 this facility. Net fixed assets were
reduced by approximately $1.9 million and notes payable were reduced by
approximately $2.4 million, while a deferred gain was recorded.

In 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, 2005
and 2004, the outstanding balances on these notes were $9,457 and $46,127, with
interest expense of $1,474 and $3,258, respectively.

(b) Related parties
The Company had a note payable to its CEO, which was part of the Company's
preferred stock offering (see Note 8(a)), and was paid in full during the third
quarter of 2004.

Interest expense on this note was $29,256 for 2004.

In June 2003, the Company entered into a Security Agreement, Secured Convertible
Note, Registration Rights Agreement and Common Stock Purchase Warrant, with
Laurus Master Fund, Ltd. ("Laurus"). Pursuant to the agreements, the Company
received a $1 million revolving credit facility, later modified to increase the
facility to $1.5 million, in the form of a three-year Convertible Note secured
by the Company's 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 may be repaid in cash or through the
issuance of shares of the Company's common stock at the Company's option,
provided the market price of the common stock was 118% of the fixed conversion
price or greater. The Convertible Note carries an interest rate of Prime plus
0.75% on any outstanding balance. In addition, the Company is required to pay a

PAGE F-19

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, 2005 and 2004.

The Convertible Note includes a right of conversion in favor of Laurus. Laurus
exercised its conversion rights from time to time in 2004 on outstanding
balances. 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 to 103% of the then fair
market value of the Company's common stock ("Adjusted Fixed Conversion Price").

Laurus converted 2,991,417 shares to reduce the Company's debt by $2,271,750 for
the year ended December 31, 2004. For the year ended 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. The fair market value of the common
stock used in 2004 was established using the closing price on the date of
conversion.

Availability of funds under the revolving credit facility is based on the
Company's accounts receivable, except as waivers provided by Laurus. An initial
three 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. Laurus subsequently extended the waiver for two additional
six-month periods in 2004, under which Laurus permitted a credit advance up to
$1 million, which amount would have otherwise exceeded eligible accounts
receivable.

In conjunction with this transaction, Laurus was paid a fee of $10,000, which
was recorded as additional interest expense in 2004. The Company paid a
continuation fee of $10,000 for 2005. In addition, Laurus received a warrant to
purchase 200,000 shares of the Company's common stock. 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 may be exercised for the balance of the
shares at any time or from time to time until June 3, 2008.

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. 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 March 31, 2004 credit facility modification. This additional warrant was
exercised by Laurus in April 2005 and resulted in a non-cash interest expense of
$28,875 for the year ended December 31, 2005. Since no more than an aggregate
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

PAGE F-20

additional warrant to purchase 50,000 shares at an exercise price of $1.925 per
share in relation to the August 25, 2004 credit facility modification, i.e.,
there was a 100,000 share ceiling on the number of warrants to be issued
regardless of the amount converted under the revolving credit facility.

The Company may terminate its agreements with Laurus before the end of the
initial three year term, i.e., June 3, 2006, 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 two percent (2%) of the total amount available under
the revolving credit facility if such payment occurs after June 3, 2005 and
prior to June 3, 2006. The early payment fee is also due and payable by the
Company to Laurus if Laurus terminates its Agreement after the occurrence of an
Event of Default, as defined in the agreements.

As a result of the amendments and modifications discussed above, at December 31,
2005 the revolving credit facility provided for up to a maximum of $1.5 million
in principal amount of aggregate borrowing. The fixed conversion price for
future amounts under the revolving credit facility will be set at 103% of the
fair market value of the Company's common stock.

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 months from issue date. On March 25, 2003, an
amendment was executed which extended these notes an additional six 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 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.

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

PAGE F-21

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 $2,127,000 and $2,350,000 as of December 31, 2005 and
2004, respectively, consisted primarily of the income tax benefits from net
operating loss, amortization of the financial reporting gain on the
sale-leaseback arrangement, and research and development credits. A valuation
allowance has been recorded to fully offset the deferred tax asset as the
Company believes it is more likely than not that the assets will not be
utilized. The valuation allowance decreased approximately $243,000 in 2005 from
$2,318,000 at December 31, 2004 to $2,075,000 at December 31, 2005.
Significant components of the benefit for income taxes for the years ended
December 31, 2005 and 2004 are as follows:

2005 2004
------------------ ------ ------
Current
Federal . . . . . $ - $ -
State . . . . . . 1,600 1,600
------------------ ------ ------
1,600 1,600

Deferred
Federal . . . . . - -
State . . . . . . - -
------------------ ------ ------
- -

Income tax expense $1,600 $1,600
------------------ ------ ------
------------------ ------ ------

At December 31, 2005, the Company had federal and state tax net operating loss
and capital loss carryforwards of approximately $4,214,000 and $1,608,000,
respectively. The federal and state tax loss carryforwards will begin to expire
in 2012 and 2007, respectively, unless previously utilized.

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

Years Ended December 31,. . . . . . . . . . 2005 2004
------------------------------------------- -------- --------
Statutory U.S. federal rate . . . . . . . . 35.00% 35.00%
State income taxes - net of federal benefit 5.70% 5.70%
Permanent differences . . . . . . . . . . . 7.40% (37.80%)
Change in valuation allowance . . . . . . . (48.10%) (2.90%)
------------------------------------------- -------- --------
Provision for income taxes. . . . . . . . . 0.00%) 0.00%
------------------------------------------- -------- --------
------------------------------------------- -------- --------

PAGE F-22

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

December 31,. . . . . . . . . . . . . 2005 2004
--------------------------------------- ------------ ------------
Deferred tax assets:
Loss carryforwards. . . . . . . . $ 1,567,000 $ 1,765,000
Deferred gain on sale of building 338,000 416,000
Other . . . . . . . . . . 123,000 77,000
Research and development credits. 99,000 92,000
--------------------------------------- ------------ ------------
Gross deferred tax assets . . . . . . 2,127,000 2,350,000
Deferred tax liability-Depreciation (52,000) (32,000)
--------------------------------------- ------------ ------------
2,075,000 2,318,000
Valuation allowance . . . . . . . . . (2,075,000) (2,318,000)
--------------------------------------- ------------ ------------
$ - $ -
--------------------------------------- ------------ ------------
--------------------------------------- ------------ ------------

As of December 31, 2005, the Company recorded a valuation allowance of $218,000
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 affect 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.

The Company has unused U.S. and state tax credits of approximately $69,000 and
$47,000, that begin to expire 2013 and 2008, respectively.

7. EMPLOYEE BENEFIT PLAN

(a) Profit sharing 401(k) plan

During 2004, the Company amended its 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 statutory
limits per year, whichever is lower, for the year ended December 31, 2005. 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 2005 and 2004, the Company contributed $18,235 and
$2,705 to the Plan, respectively.

(b) Incentive stock option and employee stock purchase plans

In 1999, the Company adopted a 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 the plan, the exercise price for the non-statutory stock options was
to be not less than 95% of the fair market value of the stock on the date the
option was granted.

In 2000, the Company amended the 1999 Stock Option Plan, 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 has not made any such
adjustment since.

PAGE F-23

In 2004, the Company adopted the 2004 Equity Incentive Plan authorizing options
on 2,000,000 shares. An amendment increasing this to 4,000,000 shares was
adopted in August 2005. As of December 31, 2005, 8,184,698 shares were
authorized for issuance under both plans, 5,447,560 of which were subject to
outstanding options and awards and 1,279,035 which have been exercised for the
Company's common stock.

During 2005, the Company issued non-statutory options to purchase 629,000 shares
to its independent directors for attendance at its 2005 and 2006 Board of
Directors meetings.

In 1999, the Company 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 common stock to its employees. 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 95% of the fair
market value of the stock on the date the stock is purchased. During 2005 and
2004 employees contributed $58,369 and $16,464 to the Employee Stock Purchase
Plan, and 27,540 and 14,010 shares were issued under the plan as of December 31,
2005 and 2004, 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.

8. STOCKHOLDERS' EQUITY

(a) Convertible preferred stock

In August 2004, the Company entered into a Securities Purchase Agreement with
Laurus, whereby the Company issued 250,000 shares of its Series C Convertible
Preferred Stock, par value $0.001 per share, 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 common stock at a rate of
$1.54 per share at any time after the date of issuance, and are entitled to
quarterly, cumulative dividends at a rate of 6.85% beginning on January 1, 2005.
For the year ended December 31, 2005 and 2004, approximately $170,000 and
$61,000 has been accrued for dividends earned in 2005 and 2004, respectively.
Approximately $175,000 of accrued dividends was satisfied by the issuance of the
Company's common stock during the year ended December 31, 2005. Dividends are
payable in cash or shares of the Company's common stock at the holder's option
with the exception that dividends must be paid in shares of the Company's 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 $1.85 per share. In January 2005, $60,967 was converted into
39,589 shares of the Company's common stock from previous dividend accruals. In
May 2005, $56,300 was converted into 36,559 shares of the Company's common stock
from dividends accrued from January through April 2005 and in September 2005,
$57,708 was converted into 37,473 shares of the Company's common stock from
dividends accrued from May through August 2005. 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 preferred stock
conversion exceeds the Stated Value. The preferred shares have a liquidation
preference equal to the Stated Value upon the Company's dissolution, liquidation
or winding-up. The preferred shares have no voting rights. As of December 31,
2005, 1,540 preferred shares had been converted into 10,000 shares of the
Company's common stock

In conjunction with the preferred stock, 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.

PAGE F-24

(b) Common stock

On October 31, 2005, the Company entered into a Securities Purchase Agreement
with Laurus Master Fund, Ltd. pursuant to which the Company issued and sold
2,032,520 shares of the Company's common stock to Laurus for an aggregate
purchase price of $2,500,000 or $1.23 per share. The price per share represents
80% of the 20-day volume weighted average price of the Company's common stock
through October 28, 2005. The Company also issued to Laurus a warrant to
purchase up to 450,000 shares at $1.93 per share. The warrant is exercisable
from October 31, 2005 until October 31, 2010. The Company also paid Laurus a fee
equal to $87,500 in connection with this financing.

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, 2005, 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 1,755,750 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 and employment agreements

In November 1997, the Company entered into an employment agreement with Mr.
James W. Benson, its chief executive officer. On July 16, 2000, the Company
amended the employment agreement with Mr. Benson extending the term until July
16, 2005. As part of the amendment to the original employment agreement, the
Company granted options to Mr. Benson to purchase up to 2,500,000 of non-plan,
non-registered shares of the Company's common stock. Options for 500,000 of
these shares were vested prior to the expiration of Mr. Benson's employment
agreement and those options remain outstanding, and the balance expired
unvested. The vested options have an exercise price of $1.00 and expire in
January 2010.

On December 20, 2005, the Company entered into employment agreements and
non-qualified stock option agreements with each of Mark N. Sirangelo, Richard B.
Slansky and James W. Benson. Each employment agreement has an initial term of
two years, and will be automatically renewed for a third year unless either
party provides written notice of its intent not to renew.

The employment agreement with Mr. Sirangelo sets forth the terms of his
employment with the Company as chief executive officer and vice chairman and
provides for, among other matters: a base salary, performance-based cash

PAGE F-25

bonuses based on the achievement of specific goals set forth in the agreement
and an option to purchase up to 1,900,000 shares of the Company's common stock.

The employment agreement with Mr. Slansky amends and restates the employment
agreement with Mr. Slansky dated February 10, 2003. This agreement sets forth
the terms of his continued employment with the Company as president and chief
financial officer and provides for, among other matters: a base salary,
performance-based cash bonuses based on the achievement of specific goals set
forth in the agreement and an option to purchase up to 1,400,000 shares of the
Company's common stock.

The employment agreement with Mr. Benson sets forth the terms of his employment
with the Company as chief technology officer and provides for, among other
matters: a base salary, performance-based cash bonuses based on the achievement
of specific goals set forth in the agreement and an option to purchase up to
950,000 shares of the Company's common stock. Mr. Benson also received an
additional option to purchase up to 150,000 shares of the Company's common stock
in connection with his services as chairman.

Under each of the above employment agreements, the executive is an "at-will"
employee, which means that either the Company or the executive may terminate
employment at any time. However, if the executive's employment with the Company
is terminated without cause (as that term is defined in the employment
agreements), that executive will be entitled to a severance payment equal to his
then-current base salary per month multiplied by the greater of (A) 12 months or
(B) the number of months remaining in the term. If the executive's employment
is terminated for good reason (as that term is defined in the employment
agreements), that executive will be entitled to a severance payment equal to his
then-current base salary per month multiplied by the lesser of (A) 12 months or
(B) the number of months remaining in the term, but in no event less than six
months.

The options granted to each executive are fully vested and exercisable on the
date of grant, have an exercise price of $1.40 per share, which was the closing
sale price reported on the OTCBB on the date of grant, and will expire five
years after the date of grant. Some of the shares subject to the options are
subject to sale restrictions that expire upon the achievement of certain
milestones or four years from the date of grant, whichever comes first. Subject
to certain limitations, these options may be exercised by means of a net
exercise provision by surrendering shares with a fair market value equal to the
exercise price upon exercise.

PAGE F-26

Weighted
Options Average
Outstanding Exercise Prices
---------------------------- ------------ -----------------
Balance at January 1, 2004 . 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 1.39
Granted. . . . . . . . . . . 6,368,000 1.45
Exercised. . . . . . . . . . (237,000) (1.02)
Expired. . . . . . . . . . . (2,162,206) (2.19)
---------------------------- ------------ -----------------

Balance at December 31, 2005 10,347,560 $ 1.27
---------------------------- ------------ -----------------
---------------------------- ------------ -----------------

The weighted average fair value of options granted to employees under the 1999
Stock Option Plan and the 2004 Equity Incentive Plan during 2005 and 2004 was
$1.45 and $1.23, respectively. At December 31, 2005 and 2004, there were
10,347,560 and 1,900,460 options exercisable at a weighted average exercise
price of $1.27 and $0.83 per share, respectively. The weighted average
remaining life of outstanding options under the plans at December 31, 2005 was
4.25 years.

Weighted-Average Weighted-
Range of Remaining Contractual Average
Exercise Number of Shares Life of Shares Number of Shares Exercisable
Price Outstanding Outstanding Exercisable Price
------------ --------------------- ------------------------- ----------------- ------------
$ 0.42-0.99 2,206,413 2.96 2,206,413 $ 0.72
1.00-1.99 7,998,925 4.60 7,998,925 1.40
2.00-2.99 102,222 4.72 102,222 2.11
3.00-3.99 20,000 5.58 20,000 3.20
4.00-4.80 20,000 5.58 20,000 4.80
------------ --------------------- ------------------------- ----------------- ------------
10,347,560 4.25 10,347,560 $ 1.27
------------ --------------------- ------------------------- ----------------- ------------
------------ --------------------- ------------------------- ----------------- ------------

On December 20, 2005, in response to SFAS No. 123R, the Company's Board of
Directors approved accelerating the vesting of all unvested stock options held
by current employees, including executive officers, and members of the Board of
Directors. The accelerated vesting was effective as of December 20, 2005.

PAGE F-27

9. COMMITMENTS AND CONTINGENCIES

(a) Capital leases

The Company leases certain equipment under non-cancelable capital leases, which
are included in fixed assets as follows:

December 31,. . . . . . . . . 2005 2004
----------------------------- ---------- ----------
Computer equipment. . . . . . $ 155,499 $ 155,499
Less accumulated depreciation (153,974) (136,640)
----------------------------- ---------- ----------
$ 1,526 $ 18,859
---------- ----------
---------- ----------

Future minimum lease payments are as follows:

Year Ending December 31:
2006 $ 1,526
--------------------------------------- --------
Total minimum lease payments. . . . . . $ 1,526
--------------------------------------- --------
Amount representing interest. . . . . . 57
--------------------------------------- --------
Present value of minimum lease payments 1,469

Total obligation. . . . . . . . . . . . 1,469
Less current portion. . . . . . . . . . (1,469)
--------------------------------------- --------
Long-term portion . . . . . . . . . . . $ -
--------------------------------------- --------
--------------------------------------- --------

(b) Other accrued liabilities

During 2005 and 2004, the Company accrued expenses in connection with current
projects, its preferred stock sale, and other commitments. The total of these
accruals were $487,005 and $207,262 as of December 31, 2005 and 2004,
respectively and consisted of the following:

Other Accrued Liabilities - December 31, . . . . 2005 2004
--------------------------------------------------- -------- --------

Employee Bonus & Relocation Accrual. . . . . . . . $160,000 $108,583
Legal Expenses Accrued through 12-31-05. . . . . . 243,608 20,000
Property and Income Tax Accruals through 12-31-05. 26,452 17,711
Laurus - Dividend (Preferred Stock Series C) . . . 56,945 60,967
--------------------------------------------------- -------- --------
Total Other Accrued Liabilities. . . . . . . . . . $487,005 $207,261
--------------------------------------------------- -------- --------
--------------------------------------------------- -------- --------

PAGE F-28

In conjunction with the sale of its headquarters facility, the Company entered
into a non-cancelable operating lease with the buyer to lease-back its
facilities for ten years (see Note 2). The base rent was $25,678 per month at
lease inception and is currently $27,507 as of December 31, 2005 and will
continue to increase by 3.5% per year. Total expense for 2005 and 2004 amounted
to approximately $325,000 and $319,000, respectively.

On April 14, 2005, the Company entered into a 16-month lease to expand its
fabrication and test facilities. The additional facility is also located in
Poway, California. It is approximately 11,000 square feet and is dedicated to
fabrication of the Company's hybrid rocket motors. The cost to the Company is
approximately $107,000 over the term of the lease.

Year Ending December 31,
2006 $ 451,276
2007 353,597
2008 365,973
2009 378,782
2010 392,039
Thereafter 825,722
---------------------------- ----------
Total minimum lease payments 2,767,388
Less current portion . . . . 451,276
---------------------------- ----------
Long-term portion. . . . . . $2,316,112
---------------------------- ----------

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 2005 and 2004, the Company had two major customers that accounted for
sales of approximately $8,133,000, or 90% and $3,737,000, or 76% of consolidated
net sales, respectively. At December 31, 2005 and 2004, the amount receivable
from these customers was approximately $967,400 and $612,900, respectively.

11. NOTE RECEIVABLE

On September 8, 2005, the Company made a secured loan in the principal amount of
$1.2 million to Starsys Research Corporation ("Starsys"), a design, engineering,
and manufacturing company located in Boulder, Colorado which provides mechanical
systems to the aerospace industry. The loan accrues interest at 8% per annum
and matured on January 31, 2006, as amended or earlier in certain circumstances.
No principal or interest payments are due before maturity. The loan is secured
by a security interest in all of the assets of Starsys, subject to an
intercreditor agreement with Vectra Bank Colorado, National Association. In

PAGE F-29

addition, Starsys agreed to pay the Company a placement agent fee and to
reimburse the Company expenses in the aggregate amount of $120,000. This amount
was deferred until the closing of the contemplated merger agreement with Starsys
(see Note 12) and added to the principal balance of the note evidencing the
loan.

In connection with making the loan, the Company entered into an exclusivity
agreement with Starsys which provides that Starsys will not discuss a material
sale of its assets, a material sale of its stock, a merger, or similar
transaction with any other party until October 31, 2005. Prior to completion of
the loan described above, the Company and Starsys entered into a non-binding
letter of intent concerning an acquisition. On October 26, 2005, the Company and
Starsys entered into a definitive merger agreement and on January 31, 2006 the
Company completed the Merger with Starsys, and cancelled and terminated the
secured note as well as all interest and fees related to the note. (See Note
12).

12. SUBSEQUENT EVENTS

On January 12, 2006, the Company entered into a Securities Purchase Agreement
with a limited number of institutional accredited investors, led by Omicron
Capital and including Laurus Master Fund, Ltd. On January 13, 2006, the Company
issued and sold to these investors 5,150 shares of its Series D-1 Amortizing
Convertible Perpetual Preferred Stock, par value $0.001 per share, for an
aggregate purchase price of $5,150,000, or $1,000 per share. The Company also
issued various warrants to these investors as described below. The Company paid
cash fees and expenses of $119,209 to a finder for the introduction of potential
investors in this financing, and paid $60,000 to the lead investor's counsel for
legal expenses incurred in the transaction.

Under the purchase agreement, from the date of the effectiveness of the initial
registration statement filed pursuant to the registration rights agreement
(February 15, 2006), until the one-year anniversary of that date, if (1) on any
trading day during such period the volume weighted average price of the
Company's common stock for each of the 20 trading days immediately prior to such
date exceeds $1.63 and (2) the average daily trading volume of the Company's
common stock exceeds $100,000 on each of those days, then the Company has the
option, subject to a number of additional conditions, to put to the investors
"units" at $1,000 per unit for an aggregate purchase price of up to $2,000,000
(or a lesser amount to the extent the preferred stock warrants issued at the
initial closing of the financing, which are described below, have been exercised
to purchase these units). Each "unit" consists of one share of Series D
Preferred Stock and a common stock warrant, which entitles the holders to
purchase up to an aggregate of 440,829 shares of common stock at an exercise
price of $1.51 and otherwise has the same terms as the warrants described in the
following paragraph.

Certain warrants the Company issued to the investors at the closing entitle the
investors to purchase up to an aggregate of 1,135,138 shares of the Company's
common stock at an exercise price of $1.51 per share. The warrants are
exercisable for five years following the date of grant. The warrants have
"ratchet" anti-dilution provisions reducing the warrant exercise price if the
Company issues equity securities (other than in specified exempt transactions)
at an effective price below the warrant exercise price to such lower exercise
price.

The Company also issued certain other warrants to the investors at the closing
(the "preferred stock warrants"). These warrants entitle the holder to purchase
an aggregate number of 2,000 "units", which are identical to the "units"
described above, at an exercise price of $1,000 per unit. The preferred stock
warrants are exercisable from the effective date (February 15, 2006) until the
one-year anniversary of that date. If any units subject to the preferred stock
warrants remain unsold after (1) their expiration date and (2) the exercise of

PAGE F-30

the Company's put option, if applicable, and any holder of a preferred stock
warrant issued in the financing has exercised the warrant in full, then the
preferred stock warrant grants that holder the right to purchase a proportionate
share of the unsold units.

Other Provisions.

The purchase agreement contains a number of covenants by the Company, which
include:

- A grant of preemptive rights to the investors to participate in future
financings until the first anniversary of the closing date of the
financing;

- An agreement not to issue any shares of the Company's common stock or
securities or other rights to acquire shares of common stock until six (6)
months after the effective date, except under specified conditions intended
to ensure the terms are no less favorable to the Company than the terms of
this financing; and,

- An agreement not to effect any transaction involving the issuance of
securities convertible, exercisable or exchangeable for the Company's
common stock at a price per share or rate which may change over time, which
the Company refers to as a variable-rate transaction, so long as any shares
of Series D Preferred Stock are outstanding.

In connection with this financing, Laurus consented to and waived certain
contractual rights in respect of the authorization and issuance of one or more
series of Series D Preferred Stock and the other transactions described below,
and certain other transactions. The Company paid Laurus Capital Management,
L.L.C., the manager of Laurus, $87,000 in connection with Laurus's delivery of
the consent and $1,000 to Laurus's counsel for their related fees.

Acquisition of Starsys

On January 31, 2006, the Company completed the acquisition of Starsys Research
Corporation pursuant to a merger agreement with Starsys Research Corporation,
Scott Tibbitts, its largest shareholder, and Scott Tibbitts, as shareholder
agent for the other shareholders of Starsys. The merger agreement was dated
October 24, 2005 and amended on December 7, 2005 and January 31, 2006.

Starsys shareholders received approximately $411,000 in cash and 3.8 million
shares of the Company's common stock at the consummation of the merger. The
Company also paid approximately $705,000 in Starsys transaction expenses
connected to the merger, and reclassified from Other Assets to Investment in
Subsidiaries approximately $500,000 in certain legal and accounting expenses
incurred during the merger.

Following the merger, the pre-merger Starsys shareholders may also be entitled
to receive additional performance consideration, based on the achievement by the
Starsys business of specific financial performance criteria for fiscal years
2005, 2006 and 2007. This consideration could consist of up to an aggregate of
$1,050,000 in cash and shares of the Company's common stock valued at up to $18
million, subject to reduction for some merger related expenses and to escrow
arrangements, as follows:

For the fiscal year ended December 31, 2005, up to $350,000 in cash and up to
an aggregate number of shares of the Company's common stock equal to (A) up
to $3.0 million divided by (B) the volume weighted average price of the

PAGE F-31

Company's common stock for the 20 trading days preceding the date of the
audit opinion for Starsys' fiscal year ended December 31, 2005, but not
less than $2.00 per share;

For the fiscal year ended December 31, 2006, up to $350,000 in cash and up to
an aggregate number of shares of the Company's common stock equal to (A) up
to $7.5 million divided by (B) the volume weighted average price of the
Company's common stock for the 20 trading days preceding the date of the
audit opinion for Starsys' fiscal year ended December 31, 2006, but not
less than $2.50 per share; and

For the fiscal year ended December 31, 2007, up to $350,000 in cash and up to
an aggregate number of shares of the Company's common stock equal to (A) up
to $7.5 million divided by (B) the volume weighted average price of the
Company's common stock for the 20 trading days preceding the date of the
audit opinion for Starsys' fiscal year ended December 31, 2007, but not
less than $3.00 per share.

Starsys shareholders will be entitled to receive the maximum amount of
performance consideration for a particular fiscal year if the Company breaches
specified covenants of the merger agreement and is unable to cure the breach
within applicable the cure period set forth in the merger agreement.

Approximately one-half of the shares issued to Starsys shareholders at the
closing have been placed in escrow to satisfy any indemnification obligations of
Starsys shareholders under the merger agreement and to pay reasonable expenses
of the shareholder agent. In addition, approximately one-half of the shares (if
any) to be issued for the first performance period will similarly be placed in
escrow. The indemnification escrow will generally last until ten days following
the date of audited financial statements prepared for the Starsys business for
the fiscal year ending December 31, 2006 (approximately April 2007). In
addition, 1% of any shares of SpaceDev common stock payable as performance
consideration will be paid as transaction expenses to Robert Vacek, who became
our president, Starsys division, after the merger and who was the president of
Starsys prior to the merger.

Working Capital Contribution.

Under the merger agreement, the Company was obligated to contribute $2.5 million
to the working capital of the Starsys business through the end of 2006.
Approximately $2.25 million has already been contributed, from SpaceDev to
Starsys, Inc., after the merger on January 31, 2006.

Reservation of Options.

Under the merger agreement, the Company has agreed to reserve for issuance to
Starsys officers, employees and consultants options to buy a number of shares of
the Company's common stock equal to at least 15% of the number of shares of its
common stock issued at the closing of the merger, or approximately 570,000
shares, or as performance consideration. At the special meeting of our
stockholders held on January 30, 2006, the Company sought and obtained approval
from its stockholders to increase the amount of shares of common stock available
for awards under the Company's 2004 Equity Incentive Plan by 3,000,000 shares to
provide sufficient reserves for the issuance of the options referenced above.

Termination of Loans

On March 30, 2005, Starsys entered into a secured credit facility with Vectra
Bank Colorado. The facility included a $4.25 million line of credit, which
accrued interest at a prime rate plus 0.5% and matured March 30, 2006, a $2.1

PAGE F-32

million term note A which accrued interest at 7.25% and matured April 1, 2010,
and a $1.25 million term note B which accrued interest at LIBOR plus 5% and
matured March 30, 2006. On June 24, 2005, Starsys entered into a forbearance
agreement for various financial covenant and other violations under its existing
loans with Vectra, which provided for default interest rates of prime rate plus
3.5% on the line of credit, 10.25% on the term note A and LIBOR plus 8% on the
term note B. The forbearance agreement also required Starsys to raise the
necessary capital to bring Starsys in compliance with its borrowing base and
other financial covenants and to provide progress payments toward repayment of
the outstanding loans via cash equity infusions. The forbearance agreement also
accelerated and amended the maturity date of the term note B from March 30, 2006
to the earlier of the required cash equity amounts received or January 31, 2006.

On July 26, 2005, Starsys raised $800,000 from its current shareholders to make
the first progress payment under the Vectra forbearance agreement. The
shareholder loans had a 10% premium, which was capitalized to principal, and
accrued interest at 15% per annum. These loans would have matured on March 31,
2006.

On September 8, 2005, the Company entered into a secured bridge loan facility
with Starsys under which the Company loaned Starsys $1.2 million for the purpose
of Starsys making the second progress payment under the Vectra forbearance
agreement. The bridge loan accrued interest at 8% per annum and was originally
set to mature on December 31, 2005, or earlier in certain circumstances. On
December 20, 2005, the Company agreed to extend the final maturity date of the
bridge loan until January 31, 2006. No principal or interest payments were due
before maturity.

In connection with the consummation of the merger with Starsys on January 31,
2006, pursuant to which, Starsys became a wholly-owned subsidiary of the
Company:

The Company paid off in full the remaining principal and interest of all loans
extended to Starsys by Vectra pursuant to the credit facility and forbearance
agreement, together with all other costs incurred in connection with those
loans, which aggregated approximately $3.7 million. The credit facility and
associated security agreements with Vectra were terminated upon receipt of the
payment;

The Company cancelled and terminated its $1.2 million secured bridge loan to
Starsys, together with accrued interest, in accordance with the terms of the
merger agreement; and,

The Company paid off in full the remaining principal and interest of all
subordinated loans extended to Starsys by four of its shareholders, which
aggregated approximately $944,000.

Shareholder Agent

At the closing of the merger, on behalf of the pre-merger Starsys shareholders,
the Company transferred 69,754 shares of common stock from the escrow account to
a separate escrow account. The escrow agent will maintain the expense fund
solely for the purpose of paying the out-of-pocket fees and expenses, including
independent accounting firm fees and attorneys' fees, reasonably incurred by the
shareholder agent in connection with performing and exercising his duties under
the merger agreement and escrow agreement. The shares held in the expense fund
may not be sold or otherwise transferred until October 28, 2006. The expense
fund will be terminated after the escrow period has lapsed and the final
determination of the performance consideration (if any) for the final
performance period. Upon termination any remaining assets will be transferred
to the escrow account for release and distribution in accordance with its terms.

PAGE F-33

Entry into Non-Competition Agreement.

In connection with the consummation of the merger, the Company also entered into
a non-competition agreement with Scott Tibbitts, pursuant to which Mr. Tibbitts
has covenanted for a period of three years not to be employed by or have any
interest in an entity that engages in a similar business to Starsys related to
the aerospace industry, not to solicit any business from any past or present
customer of the Company, not to solicit or encourage any of the Company's
employees to leave or to reduce his or her employment, not to encourage a
consultant under contract with us to cease or diminish his or her work with us,
not to use our intellectual property other than for our benefit, and not to make
any negative or disparaging statements regarding the Company to any third party.
We have agreed to pay Mr. Tibbitts $100,000 annually if he abides by these
covenants. In the event Mr. Tibbitts breaches his covenants, the agreement
provides that he will no longer be entitled to his annual payments and, if the
breach was willful and material, the Company will not be required to pay Mr.
Tibbitts any further consideration under the merger agreement.

Entry into Standstill and Lock-up Agreements

In connection with the consummation of the merger, the Company entered into
standstill and lock-up agreements with 16 re-merger stockholders of Starsys,
including Messrs. Tibbitts and Vacek, each of whom individually may have been
entitled to receive more than 50,000 aggregate shares at the closing of the
merger and as performance consideration for the first performance period
pursuant to the merger. The standstill and lock-up agreement prevents the
locked-up shareholders from selling or otherwise transferring the shares of the
Company's common stock received at the closing of the merger, or to transfer an
economic interest in these shares, for a period of 270 days after the closing,
except for some exempt transactions. In addition, for a period of three years
after the closing, the standstill and lock-up agreements restrict the locked-up
shareholders from attempting to obtain control of the company, including by
prohibiting those shareholders from soliciting other shareholders and from
acquiring beneficial ownership of any shares of the Company's common stock if,
after the acquisition, the shareholder would beneficially own more than 5% of
the outstanding shares of the Company's common stock.

Amendment of 2004 Equity Incentive Plan.

In November 2005, the Company's Board of Directors approved Amendment No. 2 to
the 2004 Equity Incentive Plan, subject to stockholder approval. On January 30,
2006, at the special meeting of stockholders described herein, the Company's
stockholders approved the plan amendment. The plan amendment increased by
3,000,000 shares the number of authorized shares under the plan; added per
person annual share grant limits; and, clarified the limitation on the number of
shares which may be issued per participant as incentive stock options.

Entry into Executive Employment Agreements

In connection with the merger agreement, the Company entered into employment
agreements with Scott Tibbitts and Robert Vacek, former executives of Starsys
Research Corporation.

The employment agreement with Mr. Tibbitts sets forth the terms of his
employment with the Company as the Company's managing director and provides for,
among other matters: (1) an initial term of three years, with the option to

PAGE F-34

renew the agreement for additional one-year terms; (2) a base salary of $12,500
per month; and, (3) performance-based cash bonuses up to 50% of his base salary
per year, based on the achievement of specific goals set forth in the agreement.

The employment agreement with Mr. Vacek sets forth the terms of his employment
with the Company as president of Starsys, Inc., a subsidiary of SpaceDev, Inc.,
and provides for, among other matters: (1) an initial term of two years, with
automatic renewal for a third year unless either party provides written notice
of its intent not to renew; (2) a base salary of $17,000 per month, subject to
adjustment to $18,000 per month after eight months and $19,000 per month after
sixteen months; (3) performance-based cash bonuses up to $75,000 for fiscal year
2006 and $50,000 for fiscal year 2007 based on the achievement of specific goals
set forth in the agreement; and, (4) an option to purchase up to 825,000 shares
of the Company's common stock, the vesting of which is based on the achievement
of specific goals in the agreement and under the terms and conditions of the
Company's form of stock option agreement under the 2004 Equity Incentive Plan
between us and Mr. Vacek. The vesting of the option will accelerate in full
upon the occurrence of a change in control of the company.

Under each employment agreement, the executive is an "at-will" employee, which
means that either the Company or the executive may terminate employment at any
time. However, if the executive's employment with the Company is terminated
without cause (as that term is defined in the employment agreements), that
executive will be entitled to a severance payment equal to his then-current base
salary per month multiplied by, in the case of Mr. Tibbitts, the number of
months remaining in the term, and in the case of Mr. Vacek, the greater of (A)
12 months or (B) the number of months remaining in the term. If the executive
terminates his employment with the Company for good reason (as that term is
defined in the employment agreements), that executive will be entitled to a
severance payment equal to his then-current base salary per month multiplied by
the lesser of (A) 12 months or (B) the number of months remaining in the term,
but in no event less than six months. If the Company opts not to renew the
employment agreement with Mr. Vacek, he will be entitled to a severance payment
equal to his then-current base salary per month multiplied by six months.

Election of New Director.

The Company's board of directors appointed Scott Tibbitts as a director,
commencing February 1, 2006, pursuant to the terms of the merger agreement. Mr.
Tibbitts was also appointed as managing director of the Company, an executive
officer position, commencing on January 31, 2006.

Prior to the merger, Mr. Tibbitts was a guarantor of Starsys' obligations under
a forbearance agreement between Starsys and Vectra Bank of Colorado, Starsys'
primary lender, dated June 24, 2005. Pursuant to the merger agreement, the
Company paid approximately $3.7 million to satisfy in full Starsys' obligations
to Vectra under the forbearance agreement at the closing of the merger.

Jack Tibbitts, Steve Tibbitts, and Ted Tibbitts, relatives of Scott Tibbitts,
each loaned $100,000 to Starsys pursuant to subordinated notes issued by
Starsys. Each of these loans had a loan premium of $10,000 and bore interest at
15% per annum. Pursuant to the merger agreement, the Company paid $354,000 to
satisfy in full Starsys' obligations under these loans at the closing of the
merger.

Appointment of President, Starsys Division.

On January 31, 2006, Robert Vacek was appointed as president of the Company's,
Starsys Inc. subsidiary, pursuant to the terms of his employment agreement
described above.

PAGE F-35

Pursuant to his employment agreement with Starsys entered into prior to the
merger on June 10, 2005, Mr. Vacek was entitled to a bonus in connection with
the merger agreement. The amount of the bonus equaled 1% of the total
consideration for the merger. Pursuant to that employment agreement and the
merger agreement, the Company paid Mr. Vacek approximately $65,000 in cash and
38,000 shares of the Company's common stock, valued at approximately $56,000, at
the closing (half of which stock is subject to the escrow provisions described
above), and will pay him 1% of the performance consideration, if any, to be paid
in cash and stock to Starsys shareholders for fiscal years 2005, 2006 and 2007.

Increase in Authorized Shares

On February 1, 2006, the Company amended its articles of incorporation to
increase the authorized number of shares of common stock from 50,000,000 to
100,000,000.

Increase in Board Size.

Effective January 30, 2006, the Company's board of directors increased the
number of authorized directors from 10 to 11, and appointed Mr. Tibbitts to fill
the vacancy created by the new board seat.

PAGE F-36

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 28, 2006

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

ITEM 25. 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 $18,000
Accounting Fees $12,000
Miscellaneous Expenses $ 500
Total $31,143
=================================================== =======

II-1

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

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 SEC for
public resale on the 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 SEC for
public resale on the registration statement effective August 6, 2003.

II-2

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 SEC for
public resale on the 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 SEC for
public resale on the 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 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 SEC for resale.

On August 25, 2004, we issued warrants to purchase 487,000 shares of common
stock to 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 SEC for
public resale.

On August 25, 2004, we issued warrants to purchase 50,000 shares of common
stock to 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 SEC for public
resale.

On October 31, 2005, we issued 2,032,520 shares of our common stock to
Laurus, pursuant to our Securities Purchase Agreement, Registration Rights
Agreement, and Warrant with Laurus dated October 31, 2005. As part of the
transaction, the shares were registered with the SEC for public resale on
the registration statement effective February 14, 2006.

On December 20, 2005, we issued non-plan options to purchase 4,400,000
shares of SpaceDev common stock to three of our executive officers pursuant to
the employment agreements dated December 20, 2005.

On January 13, 2006, we issued and sold to a limited number of
institutional accredited investors, including Laurus Master Fund, Ltd., 5,150
shares of our Series D-1 Amortizing Convertible Perpetual Preferred Stock, par
value $0.001 per share, which we refer to as Series D-1 Preferred Stock, for an
aggregate purchase price of $5,150,000, or $1,000 per share. We also issued
various warrants to these investors under the 2006 purchase agreement.

On January 31, 2006 we issued 3,796,756 shares of SpaceDev common stock to
Starsys shareholders and Zions Trust pursuant to the merger agreement dated
January 31, 2006.

Also, on January 31, 2006 we became obligated to issue, and later did issue
250,000 shares of SpaceDev common stock to QS Advisors, LLC for advisory
services provided in relation to the Starsys Merger.

II-3

ITEM 27. EXHIBITS

Exhibit No. Description Filed Incorporated Form Date Filed with Exhibit
Herewith by Reference SEC No.
----------- ---------------------------------- -------- ------------ -------- --------------- -------
2.1 . . . . Agreement and Plan of Merger
and Reorganization dated as of
October 24, 2005 (Starsys) X 8-K Oct. 26, 2005 2.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
2.2 . . . . Amendment No. 1 to the
Agreement and Plan of Merger
and Reorganization dated
December 7, 2005 (Starsys) X 8-K Dec. 13, 2005 2.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
2.3 . . . . Amendment No. 2 to the
Agreement and Plan of Merger
and Reorganization dated
January 31, 2006 (Starsys) X 8-K Feb. 6, 2006 2.3
----------- ---------------------------------- -------- ------------ -------- --------------- -------
2.2 . . . . Escrow Agreement dated January
31, 2006 (Starsys) X 8-K Feb. 6, 2006 2.4
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.1 . . . . Articles of Incorporation dated
December 20, 1996 X 10-SB Jan. 18, 2000 2.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.2 . . . . Articles of Amendment to
Articles of Incorporation dated
November 4, 1997 X 10-SB Jan. 18, 2000 2.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.3 . . . . Articles of Amendment to
Articles of Incorporation dated
December 17, 1997 X 10-SB Jan. 18, 2000 2.3
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.4 . . . . Articles of Amendment to
Articles of Incorporation dated
February 1, 2006 X 10-KSB Mar. 28, 2006 3.4
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.5 . . . . Amended and Restated Bylaws X 8-K Dec. 23, 2005 3.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.6 . . . . Certificate of Designation of
Series C Convertible Preferred
Stock X 8-K Aug. 30, 2004 3.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.7 . . . . Certificate of Designation of
Series D-1 Preferred Stock X 8-K Jan. 17, 2006 3.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.8 . . . . Certificate of Designation of
Series D-2 Preferred Stock X 8-K Jan. 17, 2006 3.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
3.9 . . . . Form of Warrant issued to Laurus
Master Fund August 25, 2004 X 8-K Aug. 30, 2004 4.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
4.1 . . . . Form of Common Stock
Certificate X 10-SB Jan. 18, 2005 3.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
5.1 . . . . Legal Opinion of Law Offices of
Gretchen Cowen, APC X POS AM Apr. 27, 2005 5.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.1. . . . Secured Loan Agreement with
Starsys Research Corporation
dated September 8, 2005 X 10-QSB Nov. 14, 2005 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.2. . . . Promissory Note with Starsys
Research Corporation dated
September 8, 2005 X 10-QSB Nov. 14, 2005 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.3. . . . Subcontract Agreement with
Andrews Space, Inc. awarded
June 27, 2005 X 10-QSB/A Dec. 22, 2005 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.4. . . . Sublease between Gateway and
SpaceDev dated March 31, 2005 X 8-K April 15, 2005 10.1
-----------------------------------------------------------------------------------------------------------

PAGE II-4

-----------------------------------------------------------------------------------------------------------
Exhibit No. Description Filed Incorporated Form Date Filed with Exhibit
Herewith by Reference SEC No.
-----------------------------------------------------------------------------------------------------------
10.5. . . . Consent to Sublease between
Gateway and SpaceDev dated
April 1, 2005 X 8-K April 15, 2005 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.6. . . . AFRL Contract with SpaceDev
dated as of August 23, 2004 X 8-K Sept. 1, 2004 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.7. . . . AFRL Statement of Work dated
August 23, 2004* X 8-K Sept. 1, 2004 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.8. . . . AFRL SBIR "mini-mo" Contract
extension with SpaceDev dated
August 20, 2004* X 10-QSB Nov. 15, 2004 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.9. . . . AFRL SBIR Small Satellite Bus
Contract with SpaceDev dated
September 28, 2004 X 10-QSB Nov. 15, 2004 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.10 . . . AFRL SBIR Phase II Small
Launch Vehicle Contract with
SpaceDev dated September 29,
2004 X 10-QSB Nov. 15, 2004 10.3
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.11 . . . MDA Second Task Order with
SpaceDev dated October 20,
2004* X 10-QSB Nov. 15, 2004 10.4
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.12 . . . Separation Agreement and
General Release between
SpaceDev and Jeffrey Janicik
dated July 22, 2004 X 10-QSB Aug 9, 2004 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.13 . . . Modification to Small Shuttle
Compatible Propulsion Module
contract with AFRL dated July 7,
2004 X 10-QSB Aug. 9, 2004 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.14 . . . Lunar Dish Observatory
Contract between SpaceDev and
Lunar Enterprises Corporation
dated July 20, 2004 X 10-QSB Aug. 9, 2004 10.3
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.15 . . . Employment Offer by SpaceDev
to Randall K. Simpson dated
January 16, 2004 X 10-KSB April 6, 2004 10.38
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.16 . . . Confidential Separation
Agreement and General Release
of Claims with Dario Emanuel
DaPra dated March 18, 2004 X 10-KSB April 6, 2004 10.39
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.17 . . . Missile Defense Agency Contract
with SpaceDev dated March 31,
2004 X 10-KSB April 6, 2004 10.40
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.18 . . . Amendment No. 1 to Note issued
to Laurus Master Fund, dated
March 31, 2004 X 10-KSB April 6, 2004 10.41
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.19 . . . Waiver Letter from Laurus
Master Fund dated March 31,
2004 X 10-KSB April 6, 2004 10.42
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.20 . . . First Task Order Under Missile
Defense Agency Contract with
SpaceDev dated April 1, 2004 X 10-KSB April 6, 2004 10.43
-----------------------------------------------------------------------------------------------------------

PAGE II-5

-----------------------------------------------------------------------------------------------------------
Exhibit No. Description Filed Incorporated Form Date Filed with Exhibit
Herewith by Reference SEC No.
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.21 . . . Security Agreement between
SpaceDev and Laurus Master
Fund, Ltd. dated June 3, 2003 X 8-K June 18, 2003 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.22 . . . Secured Convertible Note issued
June 3, 2003 by SpaceDev to
Laurus Master Fund, Ltd. X 8-K June 18, 2003 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.23 . . . Common Stock Purchase
Warrant issued June 3, 2003 by
SpaceDev to Laurus Master
Fund, Ltd. X 8-K June 18, 2003 10.3
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.24 . . . Registration Rights Agreement
between SpaceDev and Laurus
Master Fund, Ltd. dated as of
June 3, 2003 X 8-K June 18, 2003 10.4
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.25 . . . Securities Purchase Agreement
with Laurus Master Fund, Ltd.
dated August 25, 2004 X 8-K Aug. 30, 2004 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.26 . . . Registration Rights Agreement
with Laurus Master Fund, Ltd.
dated August 25, 2004 X 8-K Aug. 30, 2004 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.27 . . . Letter Agreement with Laurus
Master Fund Ltd. dated August
25, 2004 X 8-K Aug. 30, 2004 10.3
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.28 . . . Employment Agreement between
SpaceDev and Stuart Schaffer
dated May 17, 2002 X 10-KSB Mar. 28, 2003 10.11
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.29 . . . First Amendment to Employment
Agreement between SpaceDev
and Stuart Schaffer dated June
11, 2002 X 10-KSB Mar. 28, 2003 10.12
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.30 . . . Employment Agreement between
SpaceDev and Emery Skarupa
dated May 24, 2002 X 10-KSB Mar. 28, 2003 10.13
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.31 . . . First Amendment to Employment
Agreement between ISS and
Thomas W. Brown dated March
15, 2000 X 10-SB/A Mar. 27, 2000 6.14
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.32 . . . Employment Agreement between
SpaceDev and Stan Dubyn dated
January 16, 2000 X 10-SB/A Mar. 27, 2000 6.15
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.33 . . . First Amendment to Employment
Agreement between SpaceDev
and Jan A. King , effective
January 20, 2000 X 10-SB/A Mar. 27, 2000 6.17
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.34 . . . Agreement of License and
Purchase of Technology between
SpaceDev and AMROC dated
August 1998 X 10-SB Jan. 18, 2000 6.4
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.35 . . . 1999 Stock Option Plan X SB-2 July 25, 2003 4.8
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.36 . . . First Amendment to 1999 Stock
Option Plan X SB-2 July 25, 2003 4.14
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.37 . . . 1999 Employee Stock Purchase
Plan X 10-SB Jan. 18, 2000 6.7
-----------------------------------------------------------------------------------------------------------

PAGE II-6

-----------------------------------------------------------------------------------------------------------
Exhibit No. Description Filed Incorporated Form Date Filed with Exhibit
Herewith by Reference SEC No.
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.38 . . . 2004 Equity Incentive Plan X S-8 Mar. 29, 2005 99.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.39 . . . First Amendment to 1999 Employee
Stock Purchase Plan X 10-KSB Mar. 28, 2006 10.39
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.40 . . . Executive Employment
Agreement between SpaceDev,
Inc., and James W. Benson dated
December 20, 2005 X 8-K Dec. 23, 2005 10.3
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.41 . . . Executive Employment
Agreement between SpaceDev,
Inc., and Mark Sirangelo dated
December 20, 2005 X 8-K Dec. 23, 2005 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.42 . . . Amended and Restated Executive
Employment Agreement between
SpaceDev, Inc., and Richard B.
Slansky dated December 20,
2005 X 8-K Dec. 23, 2005 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.43 . . . Non-Plan Stock Option
Agreement with James W.
Benson (evidencing an option to
purchase up to 950,000 shares)
dated December 20, 2005 X 8-K Dec. 23, 2005 10.6
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.44 . . . Non-Plan Stock Option
Agreement with Mark N.
Sirangelo dated December 20,
2005 X 8-K Dec. 23, 2005 10.4
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.45 . . . Non-Plan Stock Option
Agreement with Richard B.
Slansky dated December 20,
2005 X 8-K Dec. 23, 2005 10.5
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.46 . . . Falcon Launch Services
Agreement with Space
Exploration Technologies
Corporation dated November 15,
2005 * X 8-K/A Dec. 22, 2005 10.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.47 . . . Amendment No. 1 to the Secured
Promissory Note with Starsys
Research Corporation, dated
December 20, 2005 X 8-K Dec. 23, 2005 10.11
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.48 . . . Non-Plan Stock Option
Agreement with James W.
Benson (evidencing an option to
purchase up to 150,000 shares)
dated December 20, 2005 X 8-K Dec. 23, 2005 10.7
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.49 . . . Statement of Work with Andrews
Space, Inc. awarded June 27,
2005 X 10-QSB/A Dec. 23, 2005 10.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.50 . . . Securities Purchase Agreement
dated January 11, 2001 (Laurus) X 8-K Jan. 17, 2006 99.1
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.51 . . . Registration Rights Agreement
dated January 17, 2001 (Laurus) X 8-K Jan. 17, 2006 99.2
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.52 . . . Form of Preferred Stock Warrant
(Laurus) X 8-K Jan. 17, 2006 99.3
----------- ---------------------------------- -------- ------------ -------- --------------- -------
10.53 . . . Form of Common Stock Warrant
(Laurus) X 8-K Jan. 17, 2006 99.4
-----------------------------------------------------------------------------------------------------------

PAGE II-7

* Registrant requested confidential treatment pursuant to Rule 406 for a
portion of the referenced exhibit and has separately filed such exhibit with the
Commission.

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. 3 to Form SB-2 to be signed on its behalf by the undersigned, in the
City of San Diego, California, on the 28th day of April 2006.

SpaceDev, Inc.

By: /s/ Mark N. Sirangelo
-------------------------------------------------
Mark N. Sirangelo, Chief Executive Officer

By: /s/ Richard B. Slansky
-------------------------------------------------
Richard B. Slansky, President and
Chief Financial Officer

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 April 28, 2006
---------------------- Technology Officer and Director
James W. Benson

/s/ Mark N. Sirangelo Vice Chairman of the Board, Chief April 28, 2006
----------------------- Executive Officer and Director
Mark N. Sirangelo (principal executive officer)

/s/ Richard B. Slansky President, Chief Financial Officer, April 28, 2006
----------------------- Director and Corporate Secretary
Richard B. Slansky (principal financial and accounting
Officer)

/s/ Susan C. Benson Director April 28, 2006
-----------------------
Susan C. Benson

/s/ Curt Dean Blake Director April 28, 2006
-----------------------
Curt Dean Blake

/s/ Howell M. Estes, III Director April 28, 2006
-----------------------
Howell M. Estes, III

/s/ Wesley T. Huntress Director April 28, 2006
-----------------------
Wesley T. Huntress

/s/ Scott McClendon Director April 28, 2006
-----------------------
Scott McClendon

/s/ Stuart Schaffer Director April 28, 2006
-----------------------
Stuart Schaffer

/s/ Scott Tibbitts Director April 28, 2006
-----------------------
Scott Tibbitts

/s/ Robert S. Walker Director April 28, 2006
-----------------------
Robert S. Walker

II-10