**FORM
      10-QSB**


**U.S.
      SECURITIES AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**








(Mark
      One)




x  QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
        EXCHANGE ACT OF 1934


For
      the
      quarterly period ended September 30, 2007





o           TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      transition period from ___________________________ to
      ______________________________


Commission
      File Number
000-28947.





**SpaceDev,
      Inc.**


(Exact
      name of small business issuer as specified in its charter)





Delaware
            84-1374613(State
                or other jurisdiction of
              incorporation
                or organization)
            (IRS
                Employer
              Identification
                No.)13855
                Stowe Drive, Poway, California 92064(Address
                of principal executive offices)





(Issuer's
      telephone number)  (858) 375-2000.





____________________________________________________________________________________


(Former
      name, former address and former fiscal year, if changed since last
      report)





Check
      whether the issuer (1) has filed all reports required to be filed by Sections
      13
      or 15(d) of the Exchange Act during the past 12 months (or for such shorter
      period that the registrant was required to file such reports), and (2) has
      been
      subject to such filing requirements for the past 90 days.   Yes
x  No
o





Indicate
      by checkmark whether the registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act). Yes o  No x





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: 37,382,460****shares of
      Issuer's voting common stock were outstanding on November 6, 2007.





Transitional
      Small Business Disclosure Format (check one): Yes o  No x








**SPACEDEV,
      INC.**


**FORM
      10-QSB**


**FOR
      THE QUARTER ENDED SEPTEMBER 30, 2007**





**Index**
              PagePART
                  I -- FINANCIAL INFORMATION
              1ITEM
                  1. FINANCIAL STATEMENTS
              1Consolidated
                  Balance Sheets
              1Consolidated
                  Statements of Operations
              2Consolidated
                  Statements of Cash Flows
              3NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              5Overview
              16Financing
              17Results
                  of Operations
              21Liquidity
                  and Capital Resources
              29Critical
                  Accounting Standards
              30Recent
                  Accounting Pronouncements
              31Risk
                  Factors
              31Risks
                  Related to our Company
              31ITEM
                  3A.  CONTROLS AND PROCEDURES
              44PART
                  II -- OTHER INFORMATION
              45ITEM
                  1. LEGAL PROCEEDINGS
              45ITEM
                  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS
              45ITEM
                  3. DEFAULTS UPON SENIOR SECURITIES
              45ITEM
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
              45ITEM
                  5. OTHER INFORMATION
              45ITEM
                  6. EXHIBITS
              46SIGNATURES
              47












**PART
      I -- FINANCIAL INFORMATION**




**ITEM
      1.                      FINANCIAL
      STATEMENTS**


**SpaceDev,
      Inc. and Subsidiaries**


**Consolidated
      Balance Sheets**


**(Unaudited)****September
                  30, 2007**
              
              
              December
                  31, 2006**Assets****Current
                  Assets**Cash
              
              **$**
              **5,092,312**
              
              
              $
              1,438,146Accounts
                  receivable (Note 2(d))
              
              ****
              **7,065,771**
              
              
              
              7,289,720Inventory
                  (Note 2(b))
              
              ****
              **1,067,530**
              
              
              
              309,205Other
                  current assets (Note 6(a))
              
              ****
              **1,045,619**
              
              
              
              599,565Total
                  Current Assets
              
              ****
              **14,271,232**
              
              
              
              9,636,636**Fixed
                  Asset**s - Net
              
              ****
              **4,447,478**
              
              
              
              3,793,365**Intangible
                  Assets**
              
              ****
              **745,934**
              
              
              
              841,133**Goodwill
                  (Note 5)**
              
              ****
              **11,233,665**
              
              
              
              11,233,665**Other
                  Assets (Note 6(b))**
              
              ****
              **1,051,309**
              
              
              
              626,086**Total
                  Assets**
              
              **$**
              **31,749,618**
              
              
              $
              26,130,885**Liabilities
                  and Stockholders' Equity****Current
                  Liabilities**Accounts
                  payable and accrued expenses
              
              **$**
              **1,636,777**
              
              
              $
              1,755,985Current
                  portion of notes payable
              
              ****
              **61,033**
              
              
              
              -Current
                  portion of capitalized lease obligations
              
              ****
              **75,690**
              
              
              
              35,441Accrued
                  payroll, vacation and related taxes
              
              ****
              **1,290,631**
              
              
              
              1,184,457Billings
                  in excess of costs and deferred revenue (Note 2(a))
              
              ****
              **2,046,245**
              
              
              
              2,816,072Revolving
                  line of credit (Note 3(b))
              
              ****
              **2,789,574**
              
              
              
              805,172Other
                  accrued liabilities (Note 2(f))
              
              ****
              **1,375,270**
              
              
              
              1,602,561**Total
                  Current Liabilities**
              
              ****
              **9,275,220**
              
              
              
              8,199,688**Notes
                  Payable, Less Current Maturities**
              
              ****
              **161,373**
              
              
              
              50,193**Capitalized
                  Lease Obligations, Less Current Maturities**
              
              ****
              **260,634**
              
              
              
              136,709**Deferred
                  Gain - Assets held for sale (Notes 3(a))**
              
              ****
              **625,451**
              
              
              
              713,405**Other
                  Long Term Liabilities (Note 2(f))**
              
              ****
              **459,126**
              
              
              
              15,266**Total
                  Liabilities**
              
              ****
              **10,781,804**
              
              
              
              9,115,261**Commitments
                  and Contingencies****Stockholders’
                  Equity**Convertible
                  preferred stock, $0.001 par value, 10,000,000shares
                  authorized, and 252,104 and 252,963 shares issuedand
                  outstanding, respectively (Note 4)Series
                  C Convertible preferred stock (Note 4(a))
              
              ****
              **248**
              
              
              
              248Series
                  D-1 Convertible preferred stock (Note 4(b))
              
              ****
              **4**
              
              
              
              5Common
                  stock, $0.0001 par value; 100,000,000 sharesauthorized,
                  and 37,360,085 and 29,550,342 shares issuedand
                  outstanding, respectively (Note 4)
              
              ****
              **3,736**
              
              
              
              2,953Additional
                  paid-in capital
              
              ****
              **37,303,850**
              
              
              
              33,150,566Accumulated
                  deficit
              
              ****
              **(16,340,024**
              **)**
              
              
              (16,138,148
              )**Total
                  Stockholders’ Equity**
              
              ****
              **20,967,814**
              
              
              
              17,015,624**Total
                  Liabilities and Stockholders' Equity**
              
              **$**
              **31,749,618**
              
              
              $
              26,130,885


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




1


**SpaceDev,
      Inc. and Subsidiaries**


**Consolidated
      Statements of Operations**


**(Unaudited)**





*Three
                  Months Ended*
              
              *Nine
                  Months Ended**September
                  30,*
              **2007**
              
              
              **%**
              
              
              2006
              
              %
              
              
              **2007**
              
              **%**
              
              
              2006
              
              %**Net
                  Sales**
              **$**
              **7,606,322**
              
              
              ****
              **100.0**
              **%**
              
              $
              7,006,347
              
              
              100.0
              %
              
              **$**
              **25,310,938**
              
              ****
              **100.0**
              **%**
              
              $
              22,812,290
              
              
              100.0
              %**Total
                  Cost of Sales***
              ****
              **5,402,113**
              
              
              ****
              **71.0**
              **%**
              
              
              5,123,878
              
              
              73.1
              %
              
              ****
              **18,519,652**
              
              ****
              **73.2**
              **%**
              
              
              16,718,917
              
              
              73.3
              %**Gross
                  Margin**
              ****
              **2,204,209**
              
              
              ****
              **29.0**
              **%**
              
              
              1,882,469
              
              
              26.9
              %
              
              ****
              **6,791,286**
              
              ****
              **26.8**
              **%**
              
              
              6,093,373
              
              
              26.7
              %**Operating
                  Expenses**Marketing
                  and sales
              ****
              **796,695**
              
              
              ****
              **10.5**
              **%**
              
              
              524,701
              
              
              7.5
              %
              
              ****
              **2,189,571**
              
              ****
              **8.7**
              **%**
              
              
              1,859,396
              
              
              8.2
              %Research
                  and development
              ****
              **101,890**
              
              
              ****
              **1.3**
              **%**
              
              
              70,754
              
              
              1.0
              %
              
              ****
              **265,045**
              
              ****
              **1.0**
              **%**
              
              
              275,592
              
              
              1.2
              %General
                  and administrative
              ****
              **1,141,599**
              
              
              ****
              **15.0**
              **%**
              
              
              1,282,775
              
              
              18.3
              %
              
              ****
              **3,798,169**
              
              ****
              **15.0**
              **%**
              
              
              3,990,450
              
              
              17.5
              %**Total
                  Operating Expenses***
              ****
              **2,040,184**
              
              
              ****
              **26.8**
              **%**
              
              
              1,878,230
              
              
              26.8
              %
              
              ****
              **6,252,785**
              
              ****
              **24.7**
              **%**
              
              
              6,125,438
              
              
              26.9
              %**Income/(Loss)
                  from Operations**
              ****
              **164,025**
              
              
              ****
              **2.2**
              **%**
              
              
              4,239
              
              
              0.1
              %
              
              ****
              **538,501**
              
              ****
              **2.1**
              **%**
              
              
              (32,065
              )
              
              -0.1
              %**Non-Operating
                  Income/(Expense)**Interest
                  income
              ****
              **13,868**
              
              
              ****
              **0.2**
              **%**
              
              
              2,714
              
              
              0.0
              %
              
              ****
              **44,847**
              
              ****
              **0.2**
              **%**
              
              
              43,466
              
              
              0.2
              %Interest
                  and other expense
              ****
              **(63,104**
              **)**
              
              ****
              **-0.8**
              **%**
              
              
              (7,842
              )
              
              -0.1
              %
              
              ****
              **(196,417**
              **)**
              ****
              **-0.8**
              **%**
              
              
              (18,471
              )
              
              -0.1
              %Non-Cash
                  loan fee - (Note 3(b))
              ****
              **(86,302**
              **)**
              
              ****
              **-1.1**
              **%**
              
              
              (1,918
              )
              
              0.0
              %
              
              ****
              **(259,865**
              **)**
              ****
              **-1.0**
              **%**
              
              
              (1,918
              )
              
              0.0
              %Gain
                  on building sale (Note 3(a))
              ****
              **29,319**
              
              
              ****
              **0.4**
              **%**
              
              
              29,319
              
              
              0.4
              %
              
              ****
              **87,955**
              
              ****
              **0.3**
              **%**
              
              
              87,956
              
              
              0.4
              %**Total
                  Non-Operating Income/(Expense)**
              ****
              **(106,219**
              **)**
              
              ****
              **-1.4**
              **%**
              
              
              22,273
              
              
              0.3
              %
              
              ****
              **(323,480**
              **)**
              ****
              **-1.3**
              **%**
              
              
              111,033
              
              
              0.5
              %**Income
                  Before Taxes**
              ****
              **57,806**
              
              
              ****
              **0.8**
              **%**
              
              
              26,512
              
              
              0.4
              %
              
              ****
              **215,021**
              
              ****
              **0.8**
              **%**
              
              
              78,968
              
              
              0.3
              %**Income
                  Tax Provision**
              ****
              **-**
              
              
              ****
              **0.0**
              **%**
              
              
              5,055
              
              
              0.1
              %
              
              ****
              **800**
              
              ****
              **0.0**
              **%**
              
              
              14,290
              
              
              0.1
              %**Net
                  Income**
              **$**
              **57,806**
              
              
              ****
              **0.8**
              **%**
              
              $
              21,457
              
              
              0.3
              %
              
              **$**
              **214,221**
              
              ****
              **0.8**
              **%**
              
              $
              64,678
              
              
              0.3
              %**Net
                  Income**
              ****
              **57,806**
              
              
              
              
              
              
              
              21,457
              
              
              
              
              
              ****
              **214,221**
              
              
              
              
              
              
              64,678Less
                  Dividends Declared (Note 4(a) and (b))
              ****
              **(133,462**
              **)**
              
              
              
              
              
              
              (150,842
              )
              
              
              
              
              ****
              **(416,096**
              **)**
              
              
              
              
              
              (446,791
              )**Adjusted
                  Net Income (Loss) for EPS Calculation**
              ****
              **(75,656**
              **)**
              
              
              
              
              
              
              (129,385
              )
              
              
              
              
              ****
              **(201,875**
              **)**
              
              
              
              
              
              (382,113
              )**Net
                  Income Per Share:**
              **$**
              **(0.00**
              **)**
              
              
              
              
              
              $
              (0.00
              )
              
              
              
              
              **$**
              **(0.01**
              **)**
              
              
              
              
              $
              (0.01
              )Weighted-Average
                  Shares Outstanding
              ****
              **30,914,735**
              
              
              
              
              
              
              
              29,027,350
              
              
              
              
              
              ****
              **30,044,852**
              
              
              
              
              
              
              28,419,751**Fully
                  Diluted Net Income Per Share:**
              **$**
              **(0.00**
              **)**
              
              
              
              
              
              $
              (0.00
              )
              
              
              
              
              **$**
              **(0.01**
              **)**
              
              
              
              
              $
              (0.01
              )Fully
                  Diluted Weighted-Average Shares Outstanding
              ****
              **30,914,735**
              
              
              
              
              
              
              
              29,027,350
              
              
              
              
              
              ****
              **30,044,852**
              
              
              
              
              
              
              28,419,751*
                  The following table shows how the Company's stock option expenses
                  are
                  allocated to all expenses. These non-cash stock option expenses are
                  included in the unaudited operating results stated above.Cost
                  of sales
              **$**
              **84,701**
              
              
              
              
              
              
              $
              10,287
              
              
              
              
              
              **$**
              **162,074**
              
              
              
              
              
              $
              10,287Marketing
                  and sales
              ****
              **25,536**
              
              
              
              
              
              
              
              717
              
              
              
              
              
              ****
              **58,864**
              
              
              
              
              
              
              717Research
                  and development
              ****
              **-**
              
              
              
              
              
              
              
              -
              
              
              
              
              
              ****
              **-**
              
              
              
              
              
              
              -General
                  and administrative
              ****
              **(20,197**
              **)**
              
              
              
              
              
              
              (25,555
              )
              
              
              
              
              ****
              **81,206**
              
              
              
              
              
              
              90,138**Total
                  Non-Cash Stock Option Expense**
              **$**
              **90,040**
              
              
              
              
              
              
              $
              (14,551
              )
              
              
              
              
              **$**
              **302,144**
              
              
              
              
              
              $
              101,142


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




2


**SpaceDev,
      Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**


*Nine
                    Months Ended September 30,*
                **2007**
                2006**Cash
                    Flows From Operating Activities**Net
                    income
                **$                214,221**
                $                  64,678Adjustments
                    to reconcile net income to net cash provided by(used
                    in) operating activities:Depreciation
                    and amortization
                **887,031**
                613,166Gain
                    on disposal of building sale
                **(87,954)**
                (87,956)Stock
                    option expense
                **302,144**
                103,317Non-cash
                    loan fee
                **259,865**
                1,918Change
                    in operating assets and liabilities
                **(2,355,154)**
                (2,014,912)**Net
                    Cash Used In Operating Activities**
                **(779,847)**
                (1,319,788)**Cash
                    Flows From Investing Activities**Other
                    assets, capitalized acquisition costs
                **-**
                (1,066,564)Purchases
                    of fixed assets
                **(881,517)**
                (1,163,743)**Net
                    Cash Used In Investing Activities**
                **(881,517)**
                (2,230,307)**Cash
                    Flows From Financing Activities**Principal
                    payments on notes payable
                **(15,991)**
                (4,675,832)Principal
                    payments on capitalized lease obligations
                **(25,424)**
                (20,789)Dividend
                    payments on Series C and Series D-1 preferred
                **(436,604)**
                (352,894)Proceeds
                    from revolving credit facility
                **1,984,402**
                1,926,853Employee
                    stock purchase plan
                **49,802**
                122,086Other
                    assets, capitalized revolving credit facility costs
                **-**
                (175,000)(Repurchase)
                    Issuance of preferred stock
                **(859,329)**
                4,316,850Proceeds
                    from issuance of common stock
                **4,618,674**
                352,395**Net
                    Cash Provided by Financing Activities**
                **5,315,530**
                1,493,669**Net
                    Increase (Decrease) in Cash**
                **3,654,166**
                (2,056,426)**Cash
                    at Beginning of Period**
                **1,438,146**
                5,750,038**Cash
                    at End of Period**
                **$             5,092,312**
                $             3,693,612


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





3





**SpaceDev,
      Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows, Cont'd.**


**(Unaudited)**


*Nine
                  Months Ended September 30,*
              **2007**
              2006**Supplemental
                  Disclosures of Cash Flow Information:**Cash
                  paid during the period for:Interest
              **$                    196,417**
              $              18,471Taxes
              **800**
              21,000**Noncash
                  Investing and Financing Activities:**During
                  the nine months ended September 30, 2007 and 2006, the Company
                  entered
                  into capital leases
                  in the amount of approximately $190,000 and $184,000,
                  respectively.During
                  the nine months ended September 30, 2007 and 2006, the Company
                  declared
                  dividends in the
                  amount of $416,096 and $446,791 respectively, for our Series C
                  and Series
                  D-1 Preferred Stock.During
                  the nine months ended September 30, 2007 and 2006, the Company
                  converted $92,577
                  and $122,086 of employee stock purchase plan contributions into
                  126,351
                  and 104,845 shares
                  of common stock, respectively.During
                  the nine months ended September 30, 2006, the Company issued 310,009
                  shares of common stockand
                  expensed $350,000, which was spread over the previous twelve months,
                  in
                  non-cash loan feesfor
                  the additional expenses incurred under our revolving credit facility
                  with
                  Laurus Master Fund.During
                  the nine months ended September 30, 2007, the Company accrued $200,000
                  which represented 279,600 shares
                  for the additional expenses incurred under our revolving credit
                  facility
                  with the Laurus Master Fund. The
                  $200,000 in expense will be expensed over the next twelve months,
                  as
                  non-cash loan feesDuring
                  the nine months ended September 30, 2007, the Company entered into
                  notes
                  payablefor
                  licensed software, services and hardware in the amount of approximately
                  $188,000.During
                  the nine months ended September 30, 2007, the Company experienced
                  an
                  increase in fixed assets related
                  to tenant improvements paid by the landlord of the Company's new
                  Colorado
                  facility of approximately $375,000,
                  which is offset by an equivalent reduction of rent expense for
                  the life of
                  the lease.


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




4





**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**





**1.       Basis
      of Presentation**





The
      accompanying consolidated financial statements of SpaceDev, Inc., a Delaware
      corporation (“the Company”) includes the accounts of the Company and its
      subsidiary, Starsys, Inc., a Colorado corporation, and its inactive subsidiary
      Dream Chaser, Inc., a Delaware corporation.  [On August 20, 2007,
      SpaceDev, Inc., a Colorado corporation, reincorporated in the State of
      Delaware.  The reincorporation was accomplished by the merger of
      SpaceDev Colorado with and into the Company, which was a wholly owned subsidiary
      of SpaceDev Colorado.  The Company is the surviving corporation and
      SpaceDev Colorado no longer exists. Where applicable, references in the we
      notes
      to “the Company” should be understood to include SpaceDev
      Colorado.]  In the opinion of management, the consolidated financial
      statements reflect all normal and recurring adjustments, which are necessary
      for
      a fair presentation of the Company's financial position, results of operations
      and cash flows as of the dates and for the periods
      presented.   The consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information.  Consequently, these statements do not include
      all disclosures normally required by generally accepted accounting principles
      of
      the United States of America for annual financial statements nor those normally
      made in an Annual Report on Form 10-KSB.  Accordingly, reference
      should be made to the Company's Form 10-KSB filed on April 2, 2007 and other
      reports the Company filed with the U.S. Securities and Exchange Commission
      for
      additional disclosures, including a summary of the Company's accounting
      policies, which have not materially changed.  The consolidated results
      of operations for the nine months ended September 30, 2007 are not necessarily
      indicative of results that may be expected for the fiscal year ended December
      31, 2007 or any future period, and the Company makes no representations related
      thereto.





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      certain estimates and assumptions that affect the reported amounts of assets
      and
      liabilities, disclosures of contingent assets and liabilities and the results
      of
      operations during the reporting period.  Actual results could differ
      materially from those estimates.





On
      January 31, 2006, the Company acquired Starsys Research Corporation, a Colorado
      corporation.  After the merger, the Company maintained its
      headquarters in California and operating centers in California, Colorado and
      North Carolina.  As a result of the merger, the Company grew from just
      over 50 employees to over 200 employees.  The acquisition of Starsys
      on January 31, 2006 fundamentally changed the Company’s profile. The merger took
      place on January 31, 2006 and not January 1, 2006; therefore, the presentation
      of financial results for the nine month period ended September 30, 2007
      represents nine months of combined results whereas the comparable period in
      2006
      includes only eight months of combined results.





**2.       Accounting
      Policies**





*(a)  Revenue
      Recognition*





The
      Company's revenues for the nine months ended September 30, 2007 were derived
      primarily from fixed price contracts and commercial sales of component and
      subsystem products along with some United States government cost plus fixed
      fee
      (CPFF) contracts, which is compared to primarily the same type contracts for
      February through September 2006 and mainly CPFF contracts during the month
      of
      January 2006.  Revenues for the nine month period ended September 30,
      2007 represents a full nine months of combined results whereas the comparable
      period in 2006 includes only eight months of Starsys
      operations.  Estimated contract profits are taken into earnings in
      proportion to revenues recorded.  Time and material revenues are
      recognized as services are performed and costs incurred.  Certain
      fixed price contracts were accounted for according to the
      "percentage-of-completion" method of accounting for long-term
      contracts.  The amount of revenues recognized is that portion of the
      total contract amount that the actual cost expended bears to the anticipated
      final total cost based on current estimates of cost to complete the project
      (cost-to-cost method).  Recognition of profit commences on an
      individual project only when cost to complete the project can reasonably be
      estimated and after there has been some meaningful performance achieved on
      the
      project.  Recognition of losses on projects are taken as soon as the
      loss is reasonably determinable and accrued on the balance sheet in other
      accrued liabilities.  The current accrual for potential losses on
      projects, which existed at January 31, 2006, is approximately
      $80,000.  The accrual is adjusted as projects move toward completion
      and more accurate estimates are established.  Changes in job
      performance, job conditions, and estimated profitability, including those
      arising from contract penalty provisions (when applicable), and final contract
      settlements may result in revisions to costs and income and are recognized
      in
      the period in which the revisions are determined.  Contract costs
      include all direct material, direct labor and subcontractor costs, and other
      costs such as supplies, tools and travel which are specifically related to
      a
      particular contract.  All other selling, general and administrative
      costs are expensed as incurred.  Professional fees are billed to
      customers on a time and materials basis.  Time and material revenues
      are recognized as services are performed and costs incurred.





5


*(b)
      Inventory*





Inventory
      is valued based on the lower-of-cost-or-market method and is disbursed on a
      First-In, First-Out (FIFO) basis, unless required by customer contract to be
      distributed by specific identification for lot control
      purposes.  Inventory includes raw material inventory, finished goods
      inventory, and work-in-process inventory.





*(c)
      Earnings Per Share*





For
      the
      three and nine months ended September 30, 2007, options to purchase
      approximately 11.0 million shares of common stock and warrants to issue
      approximately 1.9 million shares of common stock was excluded from the
      computation of fully diluted earnings per share.  The Company also excluded
      the effect of the convertible preferred shares in fully diluted earning per
      common share calculation using the "if converted" method. Under that method,
      the
      convertible Series D-1 preferred shares are assumed to be converted into common
      shares at conversion rates of $1.48 per share, which totals approximately 2.5
      million common shares.  Also, approximately 4.0 million common shares
      underlying the Series C preferred stock (which is currently convertible at
      $0.62
      per share) was also excluded as the Company does not currently have fully
      diluted earnings per share due to the Company experiencing an adjusted net
      loss
      for EPS calculation for the three and nine month periods ended September 30,
      2007.  The Company recorded an adjusted net loss in both periods after
      dividends of approximately $76,000 and $202,000 for the three and nine months,
      respectively, making a fully diluted calculation unnecessary for all options,
      warrants and convertible preferred stock outstanding regardless of the strike
      price in comparison to the stock price at September 30, 2007.








*(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 and includes costs and estimated earnings
      in excess of billings on uncompleted contracts which represents approximately
      $1.5 million and $1.7 million at September 30, 2007 and December 31, 2006,
      respectively.  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.  As of both September 30, 2007 and
      December 31, 2006, the allowance for uncollectible accounts was approximately
      $75,000.





6


*(e)*
            *Estimates*





Actual
      results of contracts may differ from management's estimates and such differences
      could be material to the consolidated financial statements.  The
      Company bases its estimates on historical experience and on various other
      assumptions that it believes to be reasonable under the
      circumstances.





*(f)*
            *Other
                accrued liabilities*





Other
      accrued liabilities consist of short term expenses, which the Company has
      incurred or is expected to incur, at a date not beyond twelve months into the
      future. This includes estimates and assumptions including but not limited to
      warranty obligations.  Actual results may differ from these estimates under
      different conditions, and such differences may be material.  The following
      is a listing of items that constitute the Company’s other accrued liabilities at
      September 30, 2007.





Other
                  Accrued Liabilities -  September 30,
              2007Warranty
                  reserve
              $     483,797Annual
                  revolving credit facility fee
              200,000Rate
                  accrual
              191,306Preferred
                  dividend accrual
              133,496Provision
                  for anticipated loss
              80,287Deferred
                  rent
              37,483Accrued
                  taxes
              35,750All
                  other accrued liabilities
              213,151Total
                  Other Accrued Liabilities
              $  1,375,270





Other
      long term liabilities consist of long term expenses, which the Company has
      incurred or is expected to incur, at a date beyond twelve months into the
      future. Other long term liabilities consists of approximately $459,000 of
      deferred rent expense in connection with SFAS 13 as it pertains to the Company’s
      new Louisville, Colorado and Durham, North Carolina facilities.





*(g)*
            *Taxes*





In
      June
      2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income
      Taxes ("FIN 48").  FIN 48 creates a single model to address accounting
      for uncertainty in income tax positions.  FIN 48 prescribes a minimum
      threshold that an income tax position is required to meet before being
      recognized in the financial statements. The interpretation also provides
      guidance on derecognition and measurement criteria in addition to
      classification, interest and penalties and interim period accounting, and it
      significantly expands disclosure provisions for uncertain tax positions that
      have been or are expected to be taken in a company's tax return. FIN 48 is
      effective for fiscal years beginning after December 15, 2006 and the Company,
      accordingly, has adopted this statement as of January 1, 2007.  The
      cumulative effect of adopting FIN 48 will be recorded in retained earnings
      and
      other accounts as applicable.





7


As
      of the
      issuance date of these financial statements, the Company had not completed
      its
      assessment of potential unrecognized tax benefits.  The Company will
      continue its assessment; however, at this point, it has not recorded, nor does
      it expect to record, any change to retained earnings as a result of the adoption
      of FIN 48.  The Company believes that at January 1, 2007 and September
      30, 2007 it had no unrecognized tax benefits that, if recognized, would
      favorably affect the Company's effective income tax rate in future
      periods.  The Company's continuing practice is to recognize interest
      and/or penalties related to income tax matters in income tax
      expense.  The Company had no accrued interest or penalties at January
      1, 2007 and no accrued interest or penalties at September 30, 2007.





The
      tax
      years 2002 through 2006 remain open to examination by some or all of the major
      taxing jurisdictions to which it is subject.





**3.     Long
      Term Liabilities**





*a)     Building
      and Deferred Gain.*





In
      January 2003, the Company sold its interest in its Poway, California
      headquarters facility.  The transaction included the sale of the land
      and building and a deferred gain was recorded.  In conjunction with
      the sale, the Company entered into a lease agreement with the buyer to leaseback
      its facilities.  The Company's then chief executive officer provided a
      guaranty for the leaseback, which guaranty is still in place.  The
      gain on the sale of the facility was deferred and amortized in proportion to
      the
      gross rental charged to expense over the lease term.  The deferred
      gain of $1,172,720 is being amortized at the rate of $117,272 per year for
      ten
      years ending in January 2013.  As of September 30, 2007, the deferred
      gain was $625,451.  This amortization is included in the Company's
      non-operating income/(expenses) and totaled $87,954 and $87,956 for the nine
      months ended September 30, 2007 and 2006, respectively.  On September
      14, 2006, the building was sold again; however, the terms and conditions of
      the
      lease to the Company remained unchanged.





*b)     Revolving
      Credit Facility.*





New
      Revolving Credit Facility.  On September 29, 2006, the Company
      entered into a $5.0 million financing arrangement with Laurus Master Fund,
      Ltd.
      (“Laurus”).  The financing is effected through a revolving note for up
      to $5.0 million, although the exact principal balance at any given time will
      depend on draws made by the Company on the facility.  The Company
      borrows against the facility under an investment formula based on accounts
      receivable at an advance rate equal to 90% of eligible receivables and the
      lesser of: (a) 50% of eligible inventory (calculated on the basis of the
      lower-of-cost-or-market, on a first-in-first-out basis); or (b) $1.0 million,
      provided, however, that no more than $500,000 of such eligible inventory may
      be
      in the form of work-in-process inventory.  The balance on this
      revolving credit facility at September 30, 2007 and December 31, 2006 was
      $2,789,574 and $805,172, respectively.





The
      facility bears interest at a rate equal to prime plus 2%. This rate increases
      or
      decreases on the date the Prime Rate adjusts.  Interest is payable
      monthly.  Interest is due on the first business day of each month from
      October 2006 through maturity.  The term of the facility is scheduled
      to end on September 29, 2009.  Laurus received 310,009 unregistered
      shares of the Company’s common stock valued at $350,000 at closing. The value of
      these shares was determined based on the $1.13 average trading price for the
      stock during the preceding ten business days and was expensed over the first
      year of the note.  Laurus received an additional 279,600 unregistered
      shares of the Company’s common stock valued at $200,000 at the first anniversary
      of the facility.  The value of these shares was determined based on
      the average trading price for the stock during the preceding ten business days,
      which was $0.72 per share, and the expense will be amortized over the second
      year of the note.  The Company will issue additional restricted shares
      of its common stock worth, in the aggregate, $200,000 to Laurus on the second
      anniversary date of the facility, if the facility remains in
      place.  The pricing of these additional shares will be based on the
      applicable preceding ten business day average trading price.





Laurus
      agreed that when it can resell the unregistered shares under Rule 144, its
      resale on any one day cannot exceed 10% of the daily trading
      volume.  Laurus has piggyback registration rights subject to certain
      underwriters’ restrictions, but will not be entitled to demand registration of
      any of the shares received under the facility.  The facility is not
      convertible into any class of the Company’s securities at any time during its
      term.  In addition, Laurus is strictly prohibited from engaging in any
      short sales of the Company’s common stock during the term of the
      facility.





8


The
      facility is a secured debt, collateralized by substantially all of the Company's
      and its subsidiaries' assets. The facility contains certain default
      provisions.  In the event of a default by the Company, the Company
      will be required to pay an additional fee per month until the default is
      cured.  Laurus has the option of accelerating the entire principal
      balance and requiring the Company to pay a premium in the event of an uncured
      default.





The
      facility requires the Company to deposit all funds (other than certain
      refundable deposits and proceeds from financings) into a lockbox that will
      be
      swept on a daily basis to reduce any outstanding facility balance. Any funds
      in
      excess of any outstanding facility balance will be transferred to the Company
      on
      a daily basis.





The
      Company paid to certain persons designated by Laurus the amount of $9,500 for
      legal fees and expenses in structuring the facility, conducting due diligence
      and escrow fees.  In addition, the Company paid a finder’s fee in the
      amount of $35,000 and paid Laurus a facility fee of 3.5%, or approximately
      $140,000, of the facility amount, which facility fee is being expensed over
      the
      life of the note.





**4.     Stockholder's
      Equity - Preferred Stock, Common Stock, Warrants, and
      Options**





**Preferred
      Stock**





*a)     Series
      C Preferred Stock.*





On
      August
      25, 2004, the Company issued 250,000 shares of its Series C Non-Redeemable
      Convertible Preferred Stock, par value $0.001 per share (the "Series C Preferred
      Stock"), to Laurus for an aggregate purchase price of $2.5 million or $10.00
      per
      share (the "Stated Value").  The Series C Preferred Stock was
      originally convertible into shares of the Company's common stock at a rate
      of
      $1.54 per share.  On September 21, 2007, the Company adjusted the
      fixed conversion price from $1.54 to $0.62 per share due to a common stock
      financing with OHB Technology AG and MT Aerospace AG (See: *c) Common
      Stock* below).  The Company had not previously re-priced the
      Series C Preferred Stock when the Series D-1 Preferred Stock was issued and
      the
      June 2007 warrant offer to preferred stockholders was made due to Laurus’
participation in those transactions.  The Company has received verbal
      and written waivers from Laurus on these previous transactions.





The
      Company accrues quarterly, cumulative dividends on the Series C Preferred Stock
      at a rate of 6.85% per annum.  As of September 30, 2007 and 2006, the
      Company declared dividends payable of approximately $127,000 for each of the
      nine month periods to the holders of its Series C Preferred Stock. These
      dividends are payable in cash or shares of common stock at the holder's option
      with the exception that dividends may be paid in shares of common stock for
      up
      to 25% of the aggregate dollar trading volume if the fair market value of the
      Company's common stock for the 20-days preceding the conversion date exceeds
      120% of the conversion rate.  Accrued dividends were paid in cash
      during 2006 and for the first nine months of 2007.  On September 30,
      2007, accrued but unpaid dividends were approximately $43,000; these accrued
      dividends were paid in cash in October 2007.





The
      Series C Preferred Stock is redeemable by the Company in whole or in part at
      any
      time after issuance for (a) 115% of the Stated Value if the average closing
      price of the common stock for the 22 days immediately preceding the date of
      conversion does not exceed $1.48 per share 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 $1.48 per share. The Series C Preferred Shares
      have a liquidation right equal to the Stated Value upon the Company's
      dissolution, liquidation or winding-up.  The Series C Preferred Shares
      have no voting rights, except as required by law.





In
      conjunction with the Series C Preferred Shares, the Company issued a five-year
      common stock 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.





9


*b)     Series
      D-1 Preferred Stock.*





On
      January 12, 2006, the Company entered into a Securities Purchase Agreement
      with
      a limited number of institutional accredited investors, including Tailwind
      Capital, Bristol Capital Management, Nite Capital, Laurus and Omicron Capital,
      (which has since transferred their preferred shares to Portside Growth &
Opportunity Fund and Rockmore Investment Master Fund).  On January 13,
      2006, the Company issued and sold to these investors 5,150 shares of Series
      D-1
      Amortizing Convertible Perpetual Preferred Stock, par value $0.001 per share,
      for an aggregate purchase price of $5.15 million, or $1,000 per
      share.  As of September 30, 2007, approximately 3,644 Series D-1
      Preferred shares remain outstanding and approximately 1,506 Series D-1 Preferred
      shares had been repurchased through voluntary amortization or converted to
      the
      Company’s common stock. In total, 75 Series D-1 Preferred shares were converted
      into 50,676 shares of the Company's common stock and approximately 1,431 Series
      D-1 Preferred shares have been repaid through voluntary amortization, as
      provided for in the Agreement.  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.  The preferred shares are
      convertible into shares of the Company's common stock at a rate of $1.48 per
      share and accrue quarterly, cumulative dividends at a rate of LIBOR plus 4%
      on
      the first day of the applicable quarter.  As of September 30, 2007,
      the Company had accrued Series D-1 dividends of approximately $91,000, which
      were paid in October 2007.





Certain
      warrants the Company issued to the Series D-1 investors at the closing entitled
      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.    On May 31, 2007, the Company offered to the
      holders of these warrants the opportunity to exercise the warrants at a
      specially reduced price to be calculated as 80% times the volume weighted
      average price (VWAP) of its common stock for the 20 trading days preceding
      the
      warrant holder’s acceptance of the offer. Although this written offer expired by
      its terms on June 15, 2007, the Company orally extended the offer to June 29,
      2007 and Laurus accepted, exercising 500,000 of their 639,203 warrants of this
      series for $290,000 cash.  The VWAP for the 20 trading days preceding
      June 29, 2007 was $0.725 per share making the strike price of the common stock
      warrant $0.58 which is 80% of the $0.725.  Due to a ratchet
      anti-dilution provision in the warrants of this series, the exercise price
      of
      the remaining 635,138 warrants in the series (which includes 139,203 warrants
      still owned by Laurus) was reduced to $0.58 per share as a result of this
      transaction, and otherwise the remaining warrants remain in full force and
      effect in accordance with their original terms. The warrants are exercisable
      for
      five years following the date of grant. The warrants feature a net exercise
      provision, which enables the holder to choose to exercise the warrant without
      paying cash. However, this right is available only if a registration statement
      or prospectus covering the shares subject to the warrant is not
      available.  The warrants will continue to have the 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
      refers to these warrants as the common stock warrants.





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





·
            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 or rate per share which floats (i.e., which
                may
                change over time), without the consent of a majority of the Series
                D-1
                preferred stockholders, so long as any shares of Series D-1 Preferred
                Stock are outstanding, subject to certain
                conditions.





In
      connection with the Series D-1 Preferred Stock financing, Laurus consented
      to
      and waived certain contractual rights.  The Company paid Laurus
      Capital Management, L.L.C., and the manager of Laurus Master Fund, an amount
      of
      $87,000 in connection with Laurus' delivery of the consent and waiver, and
      paid
      $1,000 to Laurus' counsel for their related fees.





10


*c)     Common
      Stock*





In
      September 2007, the Company entered into two agreements with OHB Technology
      AG,
      a leading German space technology company, and MT Aerospace AG, a subsidiary
      of
      OHB Technology AG and an established supplier in the aeronautic, aerospace
      and
      defense sectors.  The parties entered into a Stock Purchase Agreement
      covering the issuance and sale of SpaceDev’s common stock, which formalized a
      sale of 7,095,566 shares in a private transaction to the investors at a purchase
      price of $0.62 per share.  The price was determined as a premium of 11% to
      the closing price of the common stock on September 12, 2007, which was $0.56
      per
      share.  The Company received gross proceeds from the sale of approximately
      $4.4 million.  The purchase price of the common stock was paid by the
      investors in cash.





The
      common stock is restricted and cannot be sold without an effective registration
      statement or an exemption from registration under the Securities Act, including
      Rule 144 of the Securities Act. The Company also entered into a Stockholder
      Agreement with the investors, which provides the investors with the right,
      after
      one year, to demand that the Company file a registration statement with the
      Securities and Exchange Commission to cover resales of the common stock from
      time to time by the investors.  In addition, subject to existing rights of
      other stockholders, the Company provided the investors with rights to
      participate in its future financings.





The
      investors have agreed not to solicit the Company’s customers and clients in the
      United States for the same products and services provided by the Company. The
      investors have agreed not to purchase additional shares of common stock or
      cause
      others to do so, except as expressly provided in the Stockholder
      Agreement.  The Stockholder Agreement expires on the earlier of:  (1)
      ten years, (2) a change of control of SpaceDev or (3) when the investors own
      less than 4.99% of the Company.





*d)
      Common Stock Options*





The
      Company adopted SFAS 123(R) to account for its stock-based compensation
      beginning January 1, 2006.  Previously, the Company elected to account
      for its stock-based compensation plans under APB 25.  For the nine
      months ended September 30, 2007 and 2006, the Company expensed approximately
      $302,000 and $101,000 of stock option expenses due to SFAS
      123(R).  The Company expensed stock options based on a calculation
      using the minimum value method as prescribed by SFAS 123(R), otherwise known
      as
      the Black-Scholes method.   Under this method, the Company used a
      risk-free interest rate at the date of grant, an expected volatility, an
      expected dividend yield and an expected life of the options to determine the
      fair value of options granted. The risk-free interest rate ranged from 4.08%
      to
      4.75%, expected volatility ranged from 92% to 104%, at the time all options
      were
      granted the dividend yield was assumed to be zero, and the expected life of
      the
      options was assumed to be four years based on the average vesting period of
      options granted.





**5.  Goodwill**





On
      January 31, 2006, the Company completed the acquisition of Starsys Research
      Corporation by reverse triangular merger.





The
      following is a schedule of the goodwill incurred in the Starsys
      acquisition.




Starsys
                  Research Total Assets
              $         (7,851,494)Starsys
                  Research Total Liabilities
              13,054,140Cash
                  to Starsys Stockholders
              410,791Equity
                  to Starsys Stockholders
              5,576,846Fees
                  Associated with Acquisition
              1,056,079Total
                  Goodwill
              $         12,246,362
  11





In
      2006,
      the Company reduced its Goodwill from approximately $12.2 million to
      approximately $11.2 million by identifying approximately $1.0 million in fixed
      assets and intangible assets, which are being amortized over their estimated
      useful lives. The weighted average amortization period for these intangible
      assets is approximately 10 years.





Starsys
      shareholders received approximately $411,000 in cash and approximately 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.  In addition, the
      Company recognized approximately $350,000 of deferred tax liability associated
      with the acquisition of intangible assets.





On
      September 8, 2005, the Company made a secured loan in the principal amount
      of
      $1.2 million to Starsys Research Corporation. The loan accrued interest at
      8%
      per annum and matured on January 31, 2006 upon the closing of the acquisition.
      No principal or interest payments were made before maturity.  The loan
      was secured by a security interest in all of the assets of
      Starsys.  In addition, Starsys had agreed to pay the Company a
      placement agent fee and to reimburse the Company expenses in the aggregate
      amount of $120,000. The principal amount as well as the other amounts listed
      above, were forgiven at the closing of the merger.





Following
      the merger, the pre-merger Starsys shareholders were potentially 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 have originally
      consisted 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
                Company's common stock for the 20 trading days preceding the date
                of the
                audit opinion for the fiscal year ended December 31, 2005, but not
                less
                than $2.00 per share. This portion of the additional performance
                consideration was not earned;





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 the fiscal year ended December 31, 2006, but not
                less
                than $2.50 per share.  This portion of the additional
                performance consideration was not earned;
                and,





For
                the fiscal year ending 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 the fiscal year ending December 31, 2007, but not
                less
                than $3.00 per share.  Whether the required performance criteria
                were achieved will be evaluated in early 2008 based on 2007
                results.  If this amount is earned, goodwill may be
                adjusted.





Starsys
      shareholders may be entitled to receive additional 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 the applicable cure
      period set forth in the merger agreement.





Approximately
      one-half of the shares issued to Starsys shareholders at the closing had been
      placed in escrow to satisfy any indemnification obligations of the Starsys
      shareholders under the merger agreement and to pay reasonable expenses of the
      shareholder agent. In June 2007, shares in the amount of 1,729,666 (out of
      a
      total of the 1,797,746 shares in escrow) were released to the former Starsys
      shareholders and the remaining 68,080 shares of SpaceDev common stock will
      be
      held in escrow to pay reasonable expenses of Mr. Scott Tibbitts, the shareholder
      representative.





12


**6.     Other
      Assets**





*a)     Other
      Current Assets*




Other
      current assets consist of a variety of prepaid and other cash advances for
      items
      which are expected to occur within the next year. The following is a listing
      of
      items that constitute the Company’s other current assets at September 30,
      2007.




**Other
                  Current Assets -  September 30,**
              **2007**Prepaid:Financing
                  Fees
              $      658,493Computer
                  & Software
              119,092Director
                  & Officers Prepaid Insurance
              9,023General
                  Liability & Workers Comp - Prepaid Insurance
              52,087Rent
              112,281Other
                  Prepaid Expenses
              94,643**Total
                  Other Current Assets**
              **$   1,045,619**





*b)*
            *Other
                Assets*




Other
      assets consist of deposits which are expected to occur at a date beyond twelve
      months into the future. The following is a listing of items that constitute
      the
      Company’s other assets at September 30, 2007.





Other
                  Assets -  September 30,
              2007Deposits
              $        108,600Facility
                  Letter of Credit
              527,003Building
                  Deposits
              228,469Deferred
                  Expenses
              184,623Capital
                  Lease Deposits
              2,614Total
                  Other Assets
              $     1,051,309




**7.     New
      Accounting Pronouncements**





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities - including an amendment of FASB
      Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to elect
      to
      measure many financial instruments and certain other items at fair value. Upon
      adoption of SFAS No. 159, an entity may elect the fair value option for eligible
      items that exist at the adoption date. Subsequent to the initial adoption,
      the
      election of the fair value option should only be made at initial recognition
      of
      the asset or liability or upon a re-measurement event that gives rise to
      new-basis accounting. SFAS No. 159 does not affect any existing accounting
      literature that requires certain assets and liabilities to be carried at fair
      value nor does it eliminate disclosure requirements included in other accounting
      standards. SFAS No. 159 is effective for fiscal years beginning after November
      15, 2007. The Company is currently assessing the impact of SFAS No. 159 on
      its
      consolidated financial statements.




13


**8.     Unaudited
      Pro Forma Combined Consolidated Statements of Operations**





The
      following unaudited pro forma combining and combined statements of operations
      give effect to the merger of SpaceDev and Starsys using the purchase method
      of
      accounting, as required by Statement of Financial Accounting Standard No. 141,
      "Business Combinations."  The Company acquired Starsys Research
      Corporation on January 31, 2006 and is the "accounting acquirer" for accounting
      purposes.  Under this method of accounting, the combined company will
      allocate the purchase price to the fair value of assets of Starsys deemed to
      be
      acquired, including identifiable intangible assets and goodwill.  The
      purchase price allocation is subject to revision when the combined company
      obtains additional information regarding asset valuation.  The
      unaudited pro forma combined statements of operations are based on respective
      historical consolidated financial statements and the accompanying notes of
      the
      Company.




The
      unaudited pro forma combined statement of operations for the nine months ended
      September 30, 2006 combines SpaceDev's historical statement of operations for
      nine months ended September 30, 2006 with the Starsys historical statement
      of
      operations for the nine months ended September 30, 2006 assuming the merger
      took
      place on January 1, 2006.  The unaudited pro forma combined statements
      of operations should be read in conjunction with the related notes included
      in
      this Form 10-QSB and the consolidated audited financial statements of
      SpaceDev.  The unaudited pro forma combined statements of operations
      are not necessarily indicative of what the actual results of operations and
      financial position would have been had the merger taken place on January 1,
      2006
      and do not indicate future results of operations.





In
      the
      unaudited pro forma combined statement of operations for the nine months ended
      September 30, 2006 included certain adjustments that were made to eliminate
      the
      intercompany transactions between the two entities.  The intercompany
      transactions totaled approximately $265,000 in net sales, offset by
      approximately $87,000 in cost of sales and approximately $178,000 in marketing
      and sales for the nine months ended September 30, 2006.




14


**SpaceDev,
      Inc. and Subsidiaries**


Pro
      Forma
      Combined Consolidating and Consolidated Statement of Operations


(Unaudited)





***For
                  the Nine Months Ended******September
                  30, 2006*****Consolidated**
              
              
              **Pro
                  Forma Adjustments**
              
              
              **Consolidated
                  Pro Forma****Net
                  Sales**
              
              $
              24,649,426
              
              
              $
              (265,224
              )
              
              $
              24,384,202**Cost
                  of Sales ***
              
              $
              18,081,469
              
              
              
              (86,972
              )
              
              $
              17,994,497**Gross
                  Margin**
              
              
              6,567,957
              
              
              
              (178,253
              )
              
              $
              6,389,704**Operating
                  Expenses**Marketing
                  and sales expense
              
              
              2,093,230
              
              
              
              (178,253
              )
              
              
              1,914,978Research
                  and development
              
              
              270,310
              
              
              
              -
              
              
              
              270,310General
                  and administrative
              
              
              4,300,929
              
              
              
              -
              
              
              
              4,300,929**Total
                  Operating Expenses ***
              
              
              6,664,469
              
              
              
              (178,253
              )
              
              
              6,486,216**Loss
                  from Operations**
              
              
              (96,512
              )
              
              
              -
              
              
              
              (96,512
              )**Non-Operating
                  Income**Interest
                  income
              
              
              71,772
              
              
              
              -
              
              
              
              71,772Interest
                  expense
              
              
              (40,954
              )
              
              
              -
              
              
              
              (40,954
              )Non-cash
                  interest expense
              
              
              (1,918
              )
              
              
              -
              
              
              
              (1,918
              )Gain
                  on Building Sale
              
              
              87,956
              
              
              
              -
              
              
              
              87,956**Total
                  Non-Operating Income/(Expense)**
              
              
              116,856
              
              
              
              -
              
              
              
              116,856**Income
                  Before Income Taxes**
              
              
              20,344
              
              
              
              -
              
              
              
              20,344Income
                  tax provision
              
              
              14,290
              
              
              
              -
              
              
              
              14,290**Net
                  Income**
              
              $
              6,054
              
              
              $
              -
              
              
              
              6,054*
                  The following table shows how the Company's stock option expense
                  would be
                  allocated to all expenses.Cost
                  of Sales
              
              $
              10,287
              
              
              $
              -
              
              
              
              10,287Marketing
                  and sales
              
              
              717
              
              
              
              -
              
              
              
              717Research
                  and development
              
              
              -
              
              
              
              -
              
              
              
              -General
                  and administrative
              
              
              90,138
              
              
              
              -
              
              
              
              90,138$
              101,142
              
              
              $
              -
              
              
              
              101,142
  15


ITEM
      2.                      MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The
      following discussion should be read
      in conjunction with the Company's consolidated financial statements and the
      notes thereto and the other financial information appearing elsewhere in this
      document.  Readers are also urged to carefully review and consider the
      various disclosures made by us which attempt to advise interested parties of
      the
      factors which affect our business, including without limitation the Risk
      Factors set forth herein.





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 assume responsibility for the accuracy and
      completeness of the forward-looking statements.  Except as may be
      required by law, we undertake no obligation to publicly update any of the
      forward-looking statements after the date of this report to conform such
      statements to actual results or to changes in our expectations.





Actual
      results could differ materially from those anticipated by such forward-looking
      statements.  Factors that could cause or contribute to such
      differences include, but are not limited to, those identified in the "Risk
      Factors" section herein.





**Overview**




On
      August
      20, 2007, SpaceDev, Inc., a Colorado corporation, reincorporated in the State
      of
      Delaware.  The reincorporation was accomplished by the merger of
      SpaceDev Colorado with and into SpaceDev, Inc., a Delaware corporation, which
      was a wholly owned subsidiary of SpaceDev Colorado.  SpaceDev Delaware
      is the surviving corporation and SpaceDev Colorado no longer
      exists.  SpaceDev, Inc., a Delaware corporation, including our
      wholly-owned subsidiary, Starsys, Inc., a Colorado corporation, which was
      acquired by us on January 31, 2006,  is engaged in the conception,
      design, development, manufacture, integration, sale, and operation of space
      technology systems, subsystems, products and services, as well as the design,
      manufacture, and sale of mechanical and electromechanical subsystems and
      components for spacecraft. As used herein, references to the "Company,"
      "SpaceDev," "we," "us" or "our," mean SpaceDev, Inc. a Delaware corporation,
      and
      where the context so indicates also include SpaceDev Colorado and Starsys.
      We
      are currently focused on the commercial and military development of (a) low-cost
      small satellites and related subsystems, (b) hybrid rocket propulsion for space
      and launch vehicles, and (c) subsystems that enable critical spacecraft
      functions such as pointing solar arrays and communication antennas and
      restraining, deploying and actuating moving spacecraft components.





During
      the first nine months of 2007, approximately 75% of our net sales were generated
      from direct government contracts and from government-related work through
      subcontracts with others, while the remaining 25% was generated from commercial
      contracts.  During the same period in 2006, approximately 87% of our
      net sales were generated from direct government contracts and from
      government-related work through subcontracts with others, while the remaining
      13% was generated from commercial contracts.  We will continue to seek
      both government and commercial business and anticipate that net sales from
      government sources will continue to represent a majority of our business' net
      sales for the next several years.  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; however, with our recent strategic alliance and investment by OHB
      Technology AG and MT Aerospace AG, we are interested in exploring international
      revenue and contract opportunities.  We expect to explore and
      investigate ways to overcome restrictions related to export control regulations,
      including International Traffic in Arms Regulations, which may limit our ability
      to develop market opportunities outside the United States and OHB Technology
      AG’s ability to develop market opportunities in the United States.





16


During
      the first nine months of 2007, we submitted approximately 175 bids for new
      and
      existing government or commercial programs and continued our work with members
      of the United States Congress to identify directed funding for our
      programs.  We continue to execute on our core government contracts as
      well as look for new opportunities inside and outside of our core customer
      base.  Our government customers include but are not limited to the
      Missile Defense Agency, the Air Force, NASA, and the U.S. Army.  Our
      government related work customers include but are not limited to General
      Dynamics, Northrop Grumman and Raytheon.  Commercial customers include
      but are not limited to Lockheed Martin, Loral and Sumitomo.





**Financing**




Sale
      of Common Stock to OHB
      Technology AG and MT Aerospace AG.





In
      September 2007, we raised $4.4 million by selling 7,095,566 shares of common
      stock to OHB Technology AG, a leading German space technology company, and
      MT
      Aerospace AG, a subsidiary of OHB Technology AG and an established supplier
      in
      the aeronautic, aerospace and defense sectors, in a private transaction at
      a
      purchase price of $0.62 per share.  The price was determined as a
      premium of 11% to the closing price of our common stock on September 12, 2007,
      which was $0.56 per share.  We received gross proceeds from the sale
      of approximately $4.4 million.  The purchase price of our common stock
      was paid by the investors in cash.  We intend to use the net proceeds
      from the sale of the common stock for general working capital purposes,
      including but not limited to expanding our research, retiring certain interest
      bearing preferred stock and for growth capital.  We also believe that
      the relationship may evolve into a strategic one of mutual high level benefit
      by
      actively exploring manufacturing opportunities using our production facilities,
      systems development by both organizations, and new business program
      opportunities in Europe as well as in the United States.





The
      common stock issued is restricted and cannot be sold without an effective
      registration statement or an exemption from registration under the Securities
      Act, including Rule 144 of the Securities Act. We also entered into a
      Stockholder Agreement with the investors, which provides the investors with
      the
      right, after one year, to demand that we file a registration statement with
      the
      Securities and Exchange Commission to cover re-sales of the common stock from
      time to time by the investors.  In addition, subject to existing
      rights of other stockholders, we provided the investors with rights to
      participate in our future financings.





The
      investors have agreed not to solicit our customers and clients in the United
      States for the same products and services provided by us. The investors have
      agreed not to purchase additional shares of common stock or cause others to
      do
      so, except as expressly provided in the Stockholder Agreement.  The
      Stockholder Agreement expires on the earlier of:  (1) ten years, (2) a
      change of control of SpaceDev or (3) when the investors own less than 4.99%
      of
      the company.





Revolving
      Credit
      Facility.





On
      September 29, 2006, we entered into a $5.0 million financing arrangement with
      Laurus Master Fund, Ltd. (“Laurus”).  The financing is effected
      through a revolving note for up to $5.0 million, although the exact principal
      balance at any given time depends on draws made by us or payments made by our
      customers directly to the revolving credit facility.    The
      term of the facility is scheduled to end on September 29, 2009, and is renewable
      annually.  We have decided to extend the facility through September
      29, 2008. (For more information on the revolving credit facility, please refer
      the Note 3(b) in the notes to
      consolidated financial statements).





17


Laurus
      received 310,009 unregistered shares of the Company’s common stock valued at
      $350,000 at closing. The value of these shares was determined based on the
      $1.13
      average trading price for the stock during the preceding ten business days
      and
      was expensed over the first year of the note.  Laurus received an
      additional 279,600 unregistered shares of the Company’s common stock valued at
      $200,000 at the first anniversary of the facility.  The value of these
      shares was determined based on the average trading price for the stock during
      the preceding ten business days, which was $0.72 per share, and the expense
      will
      be amortized over the second year of the note.  The Company will issue
      additional restricted shares of its common stock worth, in the aggregate,
      $200,000 to Laurus on the second anniversary date of the facility, if the
      facility remains in place.  The pricing of these additional shares
      will be based on the applicable preceding ten business day average trading
      price.





Series
      D-1 Preferred
      Stock.





In
      January 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.  We used the proceeds
      from this transaction to finance the Starsys acquisition in early
      2006.





On
      May
      31, 2007, we offered to the holders of these warrants the opportunity to
      exercise the warrants at a specially reduced price to be calculated as 80%
      times
      the volume weighted average price of our common stock for the 20 trading days
      preceding the warrant holder’s acceptance of the offer. Although this written
      offer expired by its terms on June 15, 2007, we orally renewed the offer to
      June
      29, 2007 and Laurus accepted, exercising 500,000 of their 639,203 warrants
      of
      this series for $290,000 cash.  The VWAP for the 20 trading days
      preceding June 29, 2007 was $0.725 per share making the strike price of the
      warrant $0.58 which is 80% of the $0.725.  Due to a ratchet
      anti-dilution provision in the warrants of this series, the exercise price
      of
      the remaining 635,138 warrants in the series (which includes 139,203 warrants
      still owned by Laurus) was reduced to $0.58 per share as a result of this
      transaction, and otherwise the remaining warrants remain in full force and
      effect in accordance with their original terms. The warrants are exercisable
      for
      five years following the date of grant. The warrants feature a net exercise
      provision, which enables the holder to choose to exercise the warrant without
      paying cash.  However, this right is available only if a registration
      statement or prospectus covering the shares subject to the warrant is not
      available. The warrants will continue to have the anti-dilution provisions
      reducing the warrant exercise price, if we issue equity securities (other than
      in specified exempt transactions) at an effective price below the warrant
      exercise price, to such lower exercise price.





**Selection
      of Significant Contracts**





In
      June
      2002, Starsys was awarded a contract from Northrop Grumman Space Technology
      for
      the design, development, assembly, and test of two configurations of flat plate
      gimbal drive assemblies.  These gimbals are used to position six dish
      antennas and two nulling antenna systems for each of two
      spacecraft.  Subsequent to this award, Northrop Grumman Space
      Technology modified this contract to include a third shipset bringing the total
      contract value to approximately $7.1 million.  Before our merger with
      Starsys, the contract was modified to add an additional $1.7
      million.  In addition to eight flight unit deliveries per spacecraft,
      the program includes development and qualification hardware.  This
      contract was awarded as a firm fixed price contract with the final delivery
      scheduled for March 2007 and certain follow-on work, including life test, to
      be
      completed by the end of 2007.  We acquired Starsys on January 31,
      2006. Revenues generated from this contract from February 1, 2006 through
      September 30, 2007 totaled approximately $4.1 million. We experienced
      significant cost overruns on this contract.  In late 2006 and early
      2007, after our merger with Starsys, we negotiated contract modifications in
      both the timing of payments and in the establishment of additional contract
      consideration of up to $1.0 million based on the achievement of specific
      milestones. We achieved milestones entitling us to all the incentive payments,
      which partially mitigated the impact of significant cost, scope and requirements
      changes and overruns.  Most of the $1.0 million incentive has been
      recognized as revenue since we believe the program is approximately 99% complete
      as of September 30, 2007.





18


In
      March
      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 (intended to design and build
      up
      to six responsive, affordable, high performance microsatellites to support
      national missile defense), 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 overall
      contract initially 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 microsatellites to be networked
      on-orbit with high speed laser communications technology.  This
      overall contract is proceeding under a phased approach.  The first
      phase, executed under Task Order I for approximately $1.1 million, was awarded
      in April 2004, was completed in September 2004, and resulted in a general
      mission and microsatellite design. The second phase, executed under Task Order
      II for approximately $8.3 million, was awarded in October 2004 and was
      originally expected to be completed by January 2006 but was extended at the
      request of the Missile Defense Agency with an increased funding of $1.5 million,
      and subsequently completed in March 2006.  Task Order II resulted in a
      detailed mission and microsatellite design, which underwent a successful
      Critical Design Review in March 2006.  Task Order III, the first of
      several task orders expected during the third phase, was awarded to us in April
      2006 for a total of approximately $1.5 million, which was later amended to
      approximately $2.5 million and ran through June 2006. Task Order IV was awarded
      by the Missile Defense Agency in July 2006, with initial funding of
      approximately $4.0 million through November 2006.  Task Order IV was
      subsequently amended to approximately $4.5 million and extended through June
      15,
      2007.  On April 12, 2007, we finalized a contract modification to Task
      Order IV with the Missile Defense Agency.  The main content of the
      change was to: 1) extend the period of performance from June 15, 2007 to
      September 30, 2007 and subsequently to December 31, 2007; 2) increase the
      funding ceiling from approximately $4.5 million to approximately $9.0 million;
      3) provide approximately $1.6 million in funding toward the increased ceiling;
      and 4) change the statement of work to reflect the delivery of one
      microsatellite by September 30, 2007 and subsequently extended to December
      31,
      2007.  On May 11, 2007 the remaining $2.9 million in funding was
      provided to fully fund the $9.0 million task order, and later on September
      20,
      2007, we finalized a contract modification which extended the period of
      performance from September 30, 2007 to December 31, 2007 at no additional cost
      to the government.  We have been informed that there will not be any
      Government Fiscal Year 2008 funds from the Missile Defense Agency to support
      our
      microsatellite distributed sensing experiment in Government Fiscal Year
      2008.  We are currently working with the Missile Defense Agency and
      other government agencies for additional funding support.  Government
      contract funds from the Missile Defense Agency from Government Fiscal Year
      2007
      were not exhausted by September 30, 2007 and will be used to cover anticipated
      phase completion costs through December 31, 2007, and possibly
      longer.  It is possible that MDA or another government agency may fund
      the program or co-fund the program going forward; however, there can be no
      assurance that funding will be available.  (See Risk Factors:
*“Some of our government contracts, including our large Missile Defense
      Agency contract, are staged and we cannot guarantee that all stages of the
      contracts will be awarded to us or fully funded”* and *“A substantial
      portion of our net sales are generated from government contracts, which makes
      us
      susceptible to the uncertainties inherent in the government budgeting
      process.  In addition, many of our contracts can be terminated by the
      customer”*).  We recognized approximately $21.0 million in revenue
      under this contract from inception through September 30, 2007.





In
      January 2005, Starsys was awarded a firm fixed price contract from Raytheon
      for
      the design, development, manufacture, assembly and test of the Aerosol
      Polarimetry Sensor (APS), Scan Mirror Motor/Encoder Assembly
      (SMMA).  The APS instrument is slated to fly on the NASA Glory climate
      monitoring satellite mission.  The APS is also a prime candidate for a
      secondary payload on National Polar-Orbiting Operational Environmental Satellite
      System.  The SMMA consists of a Starsys designed low ripple, precision
      brushless DC motor and optical encoder assembly.  The program consists
      of a development unit, engineering unit, qualification / life test unit, and
      flight units. This contract was awarded as a cost plus fixed fee contract at
      a
      value of $2.5 million.  In July 2006, the contract was modified to add
      approximately $2.5 million bringing the contract total to $5.0
      million.  The modification also added incremental funding and extended
      the contract to March 2009.  Revenues from February 1, 2006, the day
      after our acquisition date of Starsys, through September 30, 2007 totaled
      approximately $3.1 million.





19


In
      October 2005, Starsys was awarded a contract from General Dynamics C4 Systems
      to
      design and deliver an antenna pointing gimbal and control electronics for the
      GeoEye-1 program.  The contract was originally valued at $2.0 million
      but later modified to $2.4 million. The GeoEye-1 program is a next-generation,
      high-resolution commercial remote-sensing satellite.  The Starsys
      antenna control system is uniquely designed to operate by greatly reducing
      motion, of the GeoEye-1 spacecraft while pictures are being taken and data
      is
      simultaneously transmitted to earth ground stations, through incorporation
      of a
      low disturbance designed micro-stepping actuator and actuator drive electronics
      (Quiet Array Drive).   Revenues from February 1, 2006, through
      September 30, 2007 totaled approximately $2.0 million.  This program
      was completed during the third quarter of 2007.





In
      June
      2006, we were awarded a firm fixed price contract from Lockheed Martin
      Commercial Space Systems for the design and fabrication of the antenna pointing
      gimbals onboard the US Navy’s Mobile User Objective System.  The
      initial award is for two flight shipsets and includes two standard A2100 5-meter
      antenna gimbal assemblies, four Ka-Band antenna gimbal assemblies and two
      14-meter gimbal assemblies.  Options are included for additional
      gimbals supporting three additional spacecraft.  The contract will
      include the development and qualification of the Ka-Band and 14-meter gimbal
      designs in addition to delivery of standard gimbals and solar array deployment
      hinges Starsys previously provided for the A-2100 bus.  The contract
      value for the initial award was $1.8 million; however, if all options are
      exercised, the total contract value would exceed $6.0 million, with the current
      contract value at approximately $4.3 million.  We recognized
      approximately $3.2 million in revenue under this contract from inception through
      September 30, 2007.





In
      August
      2006, we were awarded a government firm fixed price contract to provide the
      solar array drive, antenna pointing actuators, and gimbal control electronic
      assemblies for the Lunar Reconnaissance Orbiter (LRO) program from NASA Goddard
      Space Flight Center and Swales Aerospace. The total contract value is in excess
      of $6.5 million.  The LRO mission is scheduled to launch in the fall
      of 2008 as part of NASA's Lunar Precursor and Robotic Program.  The
      spacecraft requires two drive actuators to align the solar panels with the
      sun,
      and a two axis pointing mechanism to align the downlink antenna for
      communication with earth.  We are to provide these actuators for the
      spacecraft along with the electronics to control them. A total of seven
      actuators and five control electronics assemblies will be delivered under the
      contract.  We recognized approximately $5.2 million in revenue under
      this contract from inception through September 30, 2007.





In
      October 2006, we were awarded a $330,000 Phase I study contract from Benson
      Space Company to further the SpaceDev Dream ChaserTM spaceship
      program.  This was a related party contract, because the principal of
      Benson Space Company is our founder and director, James W.
      Benson.  The study was intended to contribute to the on-going
      development of the spaceship and to result in space vehicle and rocket motor
      designs ready for Phase II vehicle fabrication and testing. The SpaceDev Dream
      ChaserTM spaceship is based on NASA’s design of the ten passenger orbital HL-20
      Personnel Launch System, and will launch vertically and land
      horizontally.  We have recognized all $330,000 in revenue under this
      contract.





In
      February 2007, we were awarded a $1.4 million cost reimbursable design and
      development subcontract with NASA’s Jet Propulsion Laboratory in support of the
      Mars Science Laboratory mission, subsequently this subcontract had been modified
      to its current contract value of approximately $1.6 million.  We will
      develop and deliver electromechanical Descent Brake dampers.  The
      contract period of performance is approximately 14 months.  NASA’s
      Mars Science Laboratory mission will deliver an 1800 pound rover to the surface
      of Mars in 2010.  Rather than the airbag landing system used by the
      Mars Exploration Rover mission, a “Skycrane” landing system will use a
      rocket-decelerated Descent Stage that will hover and gently lower the rover
      on a
      25 feet long bridle cord.  A critical component of the “Skycrane”
landing system is the Descent Brake that will lower the rover in less than
      seven
      seconds with a controlled speed profile that will provide a gentle touch-down
      on
      the Martian surface.  We recognized approximately $1.2 million in
      revenue under this contract from inception through September 30,
      2007.





20


In
      March
      2007, we received a follow-on order from Ball Aerospace and Technology
      Corporation for solar array rotational drive assemblies and drive control
      electronics for the Digital Globe WorldView-2 satellite program. The value
      of
      the order is $1.25 million increasing the total contract value to $2.5
      million.  The Starsys Quiet Array Drive (QUAD) Micro-Stepping motion
      control technology will be utilized on the Ball Aerospace BCP 2000 platform,
      which will articulate each of the two solar arrays for alignment with the sun.
      The WorldView-2 satellite is scheduled to be ready for launch in late 2008
      and
      is expected to expand the capabilities of DigitalGlobe’s world imaging
      portfolio.   Revenue recognized on this program through September 30,
      2007 was approximately $1.5 million.





**Results
      of Operations**




Please
      refer to the consolidated financial statements, which are a part of this report,
      for further information regarding the results of operations.  Also,
      please note that the presentation of financial results for the nine month period
      ended September 30, 2007 represents a full nine months of combined (historical
      SpaceDev plus Starsys) results whereas the comparable nine months in 2006
      illustrates only eight months of combined results (i.e., February 2006 through
      September 2006) plus one month (January 2006) with only historical SpaceDev
      results.





***Nine-Months
      Ended September 30, 2007 -vs.- Nine-Months Ended September 30,
      2006***





During
      the nine months ended September 30, 2007, we had net sales of approximately
      $25.3 million as compared to net sales of approximately $22.8 million for the
      same nine month period in 2006.  Sales increased primarily due to our
      acquisition of Starsys on January 31, 2006.  On a pro forma basis, as
      if SpaceDev and Starsys had been together since January 1, 2006, revenues would
      have been approximately $24.4 million for the nine months ended September 30,
      2006.  Therefore, the increase in revenues was mainly due to the
      timing of the merger combined with successful execution on programs, including
      certain loss programs where negotiated increases in contract value added revenue
      potential.    We had a higher mix of revenue from commercial
      customers in the 2007 period.  Revenue for the nine months ended
      September 30, 2007 from government and government related work was approximately
      $19.0 million and revenue from commercial customers was approximately $6.3
      million.  In comparison, in the nine months ended September 30, 2006,
      revenue from government and government related work was approximately $20.0
      million and revenue from commercial customers was approximately $2.8
      million.  We expect our percentage of revenue from government and
      government related work to maintain or exceed the current 75%
      level.





For
      the
      nine months ended September 30, 2007, we had costs of sales (direct and
      allocated costs associated with individual contracts) of approximately $18.5
      million, or 73.2% of net sales, as compared to approximately $16.7 million,
      or
      73.3% of net sales, during the same period in 2006.  Although we anticipate
      margin improvements, the cost of sales percentage remained essentially flat
      primarily due to an increase in our facility and overhead costs as a result
      of
      our new Louisville, Colorado and Durham, North Carolina facilities, offset
      by
      the release of reserves previously accrued and expensed for under loss
      generating fixed price development contracts, which are in their final stages
      of
      completion and accordingly our estimated losses on theses particular contracts
      are reduced.  We continue to focus
      efforts on managing our growth including but not limited to recruiting new
      engineering, business management and other technical talent, developing and
      acquiring project management skills and creating or expanding systems to assist
      in the efficient and effective management of our projects.





21


We
      experienced an increase of approximately $127,000 in operating expenses for
      the
      nine month period ended September 30, 2007, compared to the same period in
      2006;
      even though the nine month period in 2006 only included eight months of the
      Starsys operating expenses.  Total operating expenses as a percentage
      of net sales decreased from 26.9% for the nine months ended September 30, 2006
      to 24.7% for the nine months ended September 30, 2007.  The change was
      mainly due to a slight decrease in our research and development expenses for
      the
      nine months, and a decrease in general and administrative expenses, which is
      partially offset by an increase in marketing and sales as well as an increase
      in
      our stock option expenses required under SFAS 123(R).




·
            General
                and administrative expenses decreased approximately $200,000 from
                approximately $4.0 million, or 17.5% of net sales, for the nine months
                ended September 30, 2006 to approximately $3.8 million, or 15.0%
                of net
                sales, for the same nine month period in 2007.  The decrease can
                be attributed mainly to the utilization of certain general and
                administrative resources to support new business development efforts
                and
                our bid and proposal process, thereby classifying those charges directly
                to marketing and sales.  On a pro-forma basis, general and
                administrative expenses would have decreased approximately $503,000,
                from
                approximately $4.3 million for the nine months ended September 30,
                2006 to
                $3.8 million for the same period in
                2007.  .





·
            Research
                and development expenses decreased slightly to approximately $265,000,
                or
                1.0% of net sales, for the nine months ended September 30, 2007,
                from
                approximately $276,000, or 1.2% of net sales, during the same period
                in
                2006.  The decrease was primarily due to lower personnel costs
                and our focus on operations rather than research and
                development.





·
            Marketing
                and sales expenses increased to approximately $2.2 million, or 8.7%
                of net
                sales, for the nine months ended September 30, 2007, from approximately
                $1.9 million, or 8.2% of net sales, during the same period in
                2006.  The total dollar increase of approximately $330,000 was
                mainly due to an investment in additional proposal activity and a
                focus on
                new business development and
                marketing.





·
            Our
                stock option expense is based on a calculation using the minimum
                value
                method as prescribed by SFAS 123(R), otherwise known as the Black-Scholes
                method.   Under this method, we used a risk-free interest
                rate at the date of grant, an expected volatility, an expected dividend
                yield and an expected life of the options to determine the fair value
                of
                options granted.  For stock options granted during the nine
                months ending September 30, 2007, the risk-free interest rate ranged
                from
                4.08% to 4.75%, expected volatility ranged from 92% to 104%, the
                dividend
                yield was assumed to be zero, and the expected life of the options
                was
                assumed to be four years based on the average vesting period of options
                granted.  The total expense for the nine months ended September
                30, 2007 and 2006 was approximately $302,000 and $101,000,
                respectively.





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





·
            Interest
                expense and loan fees for the nine months ended September 30, 2007
                and
                2006 was approximately $196,000 and $18,000, respectively.  The
                increase was mainly attributable to utilization of our revolving
                credit
                facility in 2007; whereas, we did not borrow any significant amount
                until
                the very end of the same period in 2006.  We generated interest
                and other income in the nine months ended September 30, 2007 and
                2006 of
                approximately $45,000 and $43,000, respectively, the slight increase
                was
                primarily due to lower cash balances in
                2007.





·
            We
                recognized approximately $88,000 of the deferred gain on the 2003
                sale of
                our Poway headquarters building during each of the nine month periods
                ended September 30, 2007 and 2006, and we will continue to amortize
                the
                remaining deferred gain of approximately $625,000 into non-operating
                income over the remainder of the leaseback, which expires in January
                2013.





·
            We
                recorded non-cash loan fees related to our revolving credit facility
                of
                approximately $260,000 for the nine month period ended September
                30,
                2007.  The expense was due to the issuance of 310,009 shares of
                our common stock, valued at $350,000, to Laurus in September 2006
                under
                the terms of the new revolving credit facility, which we amortized
                over
                the initial term of the credit facility which started on September
                29,
                2006 and ended on September 29, 2007.  In September 2007, the
                revolving credit facility was automatically extended for another
                year, and
                we were required to issue an additional 279,600 shares of our common
                stock
                to Laurus, which was valued at $200,000.  We plan to amortize
                this cost over the twelve month period starting September 29, 2007
                and
                ending on September 29, 2008.





22


During
      the nine months ended September 30, 2007, we generated net income of
      approximately $214,000, or 0.8% of net sales, after absorbing a charge of
      approximately $302,000 in non-cash charges related to expensing stock options
      under SFAS 123(R), compared to net income of approximately $65,000, or 0.3%
      of
      net sales, for the same nine month period in 2006 (after absorbing a charge
      of
      approximately $101,000 in stock option expense).  Although net income
      was positive in both periods, our earnings per share were slightly negative
      in
      both periods because our preferred stock dividend payments are deducted from
      net
      income when calculating earnings per share.





During
      the nine months ended September 30, 2007, we had a positive EBITDA of
      approximately $1.7 million, or 6.8% of net sales, compared to EBITDA of
      approximately $682,000, or 3.0% of net sales, for the nine months ended
      September 30, 2006.





EBITDA
      is
      a non-GAAP measure.  Because not every company defines EBITDA in the
      same way, our EBITDA figures may not be fully comparable to those reported
      by
      other companies.  We define EBITDA as net income before interest,
      taxes, depreciation, amortization, non-cash loan fees, stock option expense,
      and
      gain on our 2003 building sale.





The
      following table reconciles EBITDA to net income for the nine months ended
      September 30, 2007 and 2006, respectively:





**For
                  the nine months ending**
              
              **September
                  30, 2007**
              
              
              September
                  30, 2006**(Unaudited)**
              
              
              (Unaudited)**Net
                  Income**
              
              **$**
              **214,221**
              
              
              $
              64,678Interest
                  Income
              
              ****
              **(44,847**
              **)**
              
              
              (43,466
              )Interest
                  Expense
              
              ****
              **196,416**
              
              
              
              18,471Provision
                  for Income Taxes
              
              ****
              **800**
              
              
              
              14,290Non-Cash
                  Loan Fee
              
              ****
              **259,865**
              
              
              
              1,918Depreciation
                  and Amortization
              
              ****
              **887,031**
              
              
              
              613,166Stock
                  Option Expense
              
              ****
              **302,144**
              
              
              
              101,142Gain
                  on Building Sale
              
              ****
              **(87,955**
              **)**
              
              
              (87,956
              )**EBITDA
                  ***
              
              **$**
              **1,727,675**
              
              
              $
              682,243





EBITDA
      should not be considered as an alternative to net income (as an indicator of
      operating performance) or as an alternative to cash flow (as a measure of
      liquidity or ability to service debt obligations).  We believe that
      EBITDA provides an important additional perspective on our operating results,
      our ability to service our long-term obligations, our ability to fund continuing
      growth, and our ability to continue as a going concern. Our Board of Directors
      uses EBITDA as one method to evaluate our performance as a management
      team.





On
      January 1, 2006, we adopted SFAS 123(R), which requires companies to measure
      an
      equity instrument based on the grant-date fair value of the award and expense
      the value.  We use the Black-Scholes pricing model to determine the
      fair value of our options on the measurement date.  The cost is
      recognized over the requisite period (usually the vesting
      period).  During the first nine months of 2007 and 2006 we had stock
      option expense of approximately $302,000 and $101,000 related to stock option
      awards, respectively.  Without the adoption of SFAS 123(R), our
      operating income, net income and net income per share would have been increased
      to the pro forma non-GAAP amounts indicated below:




23


**SpaceDev,
                  Inc.****and
                  Subsidiaries****Consolidated
                  Statements of Operations - Supplemental Schedule***Nine
                  Months Ended**September
                  30,*
              
              **2007**
              
              
              **%**
              
              
              2006
              
              
              %**GAAP
                  Operating Income**
              
              **$**
              **538,501**
              
              
              ****
              **2.1**
              **%**
              
              $
              (32,065
              )
              
              
              -0.1
              %SFAS
                  123(R) stock -based compensation
              
              ****
              **302,144**
              
              
              ****
              **1.2**
              **%**
              
              
              101,142
              
              
              
              0.4
              %**Non-GAAP
                  Operating Income**
              
              ****
              **840,645**
              
              
              ****
              **3.3**
              **%**
              
              
              69,077
              
              
              
              0.3
              %**Non-Operating
                  Income/(Expense)**Interest
                  income
              
              ****
              **44,847**
              
              
              ****
              **0.2**
              **%**
              
              
              43,466
              
              
              
              0.2
              %Interest
                  and other expense
              
              ****
              **(196,417**
              **)**
              
              ****
              **-0.8**
              **%**
              
              
              (18,471
              )
              
              
              -0.1
              %Gain
                  on building sale (Note 3(a))
              
              ****
              **(259,865**
              **)**
              
              ****
              **-1.0**
              **%**
              
              
              (1,918
              )
              
              
              0.0
              %Non-Cash
                  loan fee - (Note 3(b))
              
              ****
              **87,955**
              
              
              ****
              **0.3**
              **%**
              
              
              87,956
              
              
              
              0.4
              %**Total
                  Non-Operating Income**
              
              ****
              **(323,480**
              **)**
              
              ****
              **-1.3**
              **%**
              
              
              111,033
              
              
              
              0.5
              %**Non-GAAP
                  Net Income Before Taxes**
              
              **$**
              **517,165**
              
              
              ****
              **2.0**
              **%**
              
              $
              180,110
              
              
              
              0.8
              %**Income
                  Tax Provision**
              
              ****
              **(800**
              **)**
              
              ****
              **0.0**
              **%**
              
              
              14,290
              
              
              
              0.1
              %**Non-GAAP
                  Net Income**
              
              **$**
              **517,965**
              
              
              ****
              **2.0**
              **%**
              
              $
              165,820
              
              
              
              0.7
              %**Non-GAAP
                  Net Income**
              
              ****
              **517,965**
              
              
              
              
              
              
              
              165,820Less
                  Preferred Dividend Payments
              
              ****
              **(416,096**
              **)**
              
              
              
              
              
              
              (446,791
              )**Adjusted
                  Net Income/(Loss) for EPS Calculation**
              
              ****
              **101,869**
              
              
              
              
              
              
              
              (280,971
              )**Non-GAAP
                  Net Income Per Share**
              
              **$**
              **0.00**
              
              
              
              
              
              
              $
              (0.01
              )Weighted-Average
                  Shares Outstanding
              
              ****
              **30,044,852**
              
              
              
              
              
              
              
              28,419,751





We
      believe that evaluating our ongoing operating results with these non-GAAP
      measurements may be useful as a supplement to our standard GAAP financial
      measurement presentation.  Accordingly, we have chosen certain
      non-GAAP financial information to evaluate our ongoing operations and for
      internal planning and forecasting purposes.  We believe that non-GAAP
      financial measures should be considered in addition to, and not a substitute
      for, financial information prepared in accordance with GAAP. We present such
      non-GAAP financial measures in reporting our financial results to provide
      additional and supplemental disclosure to evaluate operating results. Whenever
      we use a non-GAAP financial measurement, we provide a reconciliation of the
      non-GAAP financial measure to the most closely applicable GAAP financial
      measurement.





***Three-Months
      Ended September 30, 2007 -vs.- Three-Months Ended September 30,
      2006***





During
      the three months ended September 30, 2007, we had net sales of approximately
      $7.6 million as compared to net sales of approximately $7.0 million for the
      same
      three month period in 2006.  We had a higher mix of revenue from
      commercial customers in the 2007 period.  Revenue for the three months
      ended September 30, 2007 from government and government related work was
      approximately $4.9 million and revenue from commercial customers was
      approximately $2.7 million.  In comparison, in the three months ended
      September 30, 2006, revenue from government and government related work was
      approximately $5.9 million and revenue from commercial customers was
      approximately $1.1 million.





For
      the
      three months ended September 30, 2007, we had costs of sales (direct and
      allocated costs associated with individual contracts) of approximately $5.4
      million, or 71.0% of net sales, as compared to approximately $5.1 million,
      or
      73.1% of net sales, during the same period in 2006.  Although the
      actual total cost of sales increased in dollars, the cost of sales percentages
      for the three months ended September 30, 2007 compared to the same three months
      in 2006 actually decreased; thereby increasing our gross margin from 26.9%
      for
      the three months ended September 30, 2006 to 29.0% for the three months ended
      September 30, 2007.  The cost of sales percentage decreased primarily
      because the increase in our facility and overhead costs as a result of our
      new
      Louisville, Colorado and Durham, North Carolina facilities was offset by an
      increase in efficiencies and the release of reserves previously accrued for
      loss
      generating fixed price development contracts.  We continue to focus
      efforts on managing our growth including but not limited to recruiting new
      engineering, business management and other technical talent, developing and
      acquiring project management skills and creating or expanding systems to assist
      in the efficient and effective management of our projects.





24


We
      experienced an increase of approximately $162,000 in operating expenses for
      the
      three month period ended September 30, 2007, compared to the same period in
      2006.  However, the total operating expenses as a percentage of net
      sales remained flat at 26.8% for the three months ended September 30, 2007
      and
      2006.  The dollar increase was mainly due to increases in marketing
      and sales expenses related to proposal efforts and a small increase in research
      and development expenses for the three months, as well as an increase in our
      stock option expenses required under SFAS 123(R), which were offset by a
      reduction in general and administrative expenses.





·
            General
                and administrative expenses decreased approximately $141,000 from
                approximately $1.3 million, or 18.3% of net sales, for the three
                months
                ended September 30, 2006 to approximately $1.1 million, or 15.0%
                of net
                sales, for the same three month period in 2007.  The decrease
                can be attributed mainly to improving our cost allocation processes;
                thereby refining our ability to charge expenses directly to programs,
                departments and cost pools, which were partially offset with
                Sarbanes-Oxley compliance requirement
                costs.





·
            Research
                and development expenses increased approximately $31,000 from
                approximately $71,000, or 1.0% of net sales, for the three months
                ended
                September 30, 2006 to approximately $102,000, or 1.3% of net sales,
                for
                the same three month period in 2007.  The slight increase was
                attributed to our internal development efforts to explore vertical
                integration of certain key satellite materials as well as supplement
                certain internal development efforts on our lunar investigatory
                study.





·
            Marketing
                and sales expenses increased to approximately $797,000, or 10.5%
                of net
                sales, for the three months ended September 30, 2007, from approximately
                $525,000, or 7.5% of net sales, during the same period in
                2006.  The increase of approximately $272,000 was mainly due to
                additional proposal activity and a focus on new business development
                and
                marketing as well as refining our cost allocation
                processes.





·
            Our
                stock option expense is based on a calculation using the minimum
                value
                method as prescribed by SFAS 123(R), otherwise known as the Black-Scholes
                method.   Under this method, we used a risk-free interest
                rate at the date of grant, an expected volatility, an expected dividend
                yield and an expected life of the options to determine the fair value
                of
                options granted.  For stock options granted during the three
                months ending September 30, 2007, the risk-free interest rate ranged
                from
                4.08% to 4.72%, expected volatility ranged from 100% to 104%, the
                dividend
                yield was assumed to be zero, and the expected life of the options
                was
                assumed to be four years based on the average vesting period of options
                granted.  The total expense for the three months ended September
                30, 2007 and 2006 was approximately $90,000 and ($15,000),
                respectively.





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





·
            Interest
                expense and loan fees for the three months ended September 30, 2007
                and
                2006 were approximately $63,000 and $7,800, respectively.  The
                increase was mainly attributable to utilization of our revolving
                credit
                facility in 2007; whereas, we did not borrow any significant amount
                until
                the very end of the same period in 2006.  We generated interest
                and other income in the three months ended September 30, 2007 and
                2006 of
                approximately $14,000 and $2,700,
                respectively.





25


·
            We
                recognized approximately $29,000 of the deferred gain on the 2003
                sale of
                our Poway headquarters building during each of the three month periods
                ended September 30, 2007 and 2006, and we will continue to amortize
                the
                remaining deferred gain of approximately $625,000 into non-operating
                income over the remainder of the leaseback, which expires in January
                2013.


·
              We
                    recorded non-cash loan fees related to our revolving credit facility
                    of
                    approximately $86,000 and $2,000 for the three month periods
                    ended
                    September 30, 2007 and 2006, respectively.  The expense was due
                    to the issuance of 310,009 shares of our common stock, valued
                    at $350,000,
                    to Laurus in September 2006 under the terms of the new revolving
                    credit
                    facility, which we amortized over the initial term of the credit
                    facility
                    which started on September 29, 2006 and ended on September 29,
                    2007.   In September 2007, the revolving credit facility
                    was automatically extended for another year, and we were required
                    to issue
                    an additional 279,600 shares of our common stock to Laurus, which
                    was
                    valued at $200,000.  We plan to amortize this cost over the
                    twelve month period starting on September 29, 2007 and ended
                    September 29,
                    2008.


During
      the three months ended September 30, 2007, we generated net income of
      approximately $58,000, or 0.8% of net sales, after absorbing a charge of
      approximately $90,000 in non-cash charges related to expensing stock options
      under SFAS 123(R), compared to net income of approximately $21,000, or 0.3%
      of
      net sales, for the same three month period in 2006, which included a credit
      of
      approximately $15,000 in stock option expense.  Although net income
      was positive in both periods, our earnings per share were slightly negative
      in
      both periods because under GAAP, our preferred stock dividend payments are
      subtracted from net income when calculating earnings per share.





During
      the three months ended September 30, 2007, we had a positive EBITDA of
      approximately $548,000, or 7.2% of net sales, compared to EBITDA of
      approximately $230,000, or 3.3% of net sales, for the three months ended
      September 30, 2006.





EBITDA
      is
      a non-GAAP measure.  Because not every company defines EBITDA in the
      same way, our EBITDA figures may not be fully comparable to those reported
      by
      other companies.  We define EBITDA as net income before interest,
      taxes, depreciation, amortization, non-cash loan fees, stock option expense,
      non-cash loan fees and gain on our 2003 building sale.





26


The
      following table reconciles EBITDA to net income for the three months ended
      September 30, 2007 and 2006, respectively:





**For
                  the three months ended**
              
              **September
                  30, 2007**
              
              
              September
                  30, 2006**(Unaudited)**
              
              
              (Unaudited)**Net
                  Income**
              
              **$**
              **57,806**
              
              
              $
              21,457Interest
                  Income
              
              ****
              **(13,868**
              **)**
              
              
              (2,714
              )Interest
                  Expense
              
              ****
              **63,104**
              
              
              
              7,842Provision
                  for Income Taxes
              
              ****
              **-**
              
              
              
              5,055Non-Cash
                  Loan Fee
              
              ****
              **86,302**
              
              
              
              1,918Depreciation
                  and Amortization
              
              ****
              **294,110**
              
              
              
              240,665Stock
                  Option Expense
              
              ****
              **90,040**
              
              
              
              (14,551
              )Gain
                  on Building Sale
              
              ****
              **(29,319**
              **)**
              
              
              (29,319
              )**EBITDA**
              
              **$**
              **548,175**
              
              
              $
              230,353





EBITDA
      should not be considered as an alternative to net income (as an indicator of
      operating performance) or as an alternative to cash flow (as a measure of
      liquidity or ability to service debt obligations).  We believe that
      EBITDA provides an important additional perspective on our operating results,
      our ability to service our long-term obligations, our ability to fund continuing
      growth, and our ability to continue as a going concern. Our Board of Directors
      uses EBITDA as one method to evaluate our performance as a management
      team.





On
      January 1, 2006, we adopted SFAS 123(R), which requires companies to measure
      an
      equity instrument based on the grant-date fair value of the award and expense
      the value.  We use the Black-Scholes pricing model to determine the
      fair value of our options on the measurement date.  The cost is
      recognized over the requisite period (usually the vesting
      period).  During the three months ended September 30, 2007 and 2006,
      we had stock option expense of approximately $90,000 and a negative $15,000
      related to stock option awards, respectively.  Without the adoption of
      SFAS 123(R), our operating income and net income would have been increased
      and
      our net loss per share would have been reduced to the pro forma non-GAAP amounts
      indicated below:





27


**SpaceDev,
                  Inc.****and
                  Subsidiaries****Consolidated
                  Statements of Operations - Supplemental Schedule***Three
                  Months Ended**September
                  30,*
              
              **2007**
              
              
              **%**
              
              
              2006
              
              
              %**GAAP
                  Operating Income**
              
              **$**
              **164,025**
              
              
              ****
              **2.2**
              **%**
              
              $
              4,239
              
              
              
              0.0
              %SFAS
                  123(R) stock -based compensation
              
              ****
              **90,040**
              
              
              ****
              **1.2**
              **%**
              
              
              (14,551
              )
              
              
              -0.1
              %**Non-GAAP
                  Operating Income**
              
              ****
              **254,065**
              
              
              ****
              **1.0**
              **%**
              
              
              (10,312
              )
              
              
              0.0
              %**Non-Operating
                  Income/(Expense)**Interest
                  income
              
              ****
              **13,868**
              
              
              ****
              **0.1**
              **%**
              
              
              2,714
              
              
              
              0.0
              %Interest
                  and other expense
              
              ****
              **(63,104**
              **)**
              
              ****
              **-0.2**
              **%**
              
              
              (7,842
              )
              
              
              0.0
              %Gain
                  on building sale (Note 3(a))
              
              ****
              **(86,302**
              **)**
              
              ****
              **-0.3**
              **%**
              
              
              (1,918
              )
              
              
              0.0
              %Non-Cash
                  loan fee - (Note 3(b))
              
              ****
              **29,319**
              
              
              ****
              **0.1**
              **%**
              
              
              29,319.00
              
              
              
              0.1
              %**Total
                  Non-Operating Income**
              
              ****
              **(106,219**
              **)**
              
              ****
              **-0.4**
              **%**
              
              
              22,273
              
              
              
              0.1
              %**Non-GAAP
                  Net Income Before Taxes**
              
              **$**
              **147,846**
              
              
              ****
              **0.6**
              **%**
              
              $
              11,961
              
              
              
              0.1
              %**Income
                  Tax Provision**
              
              ****
              **-**
              
              
              ****
              **0.0**
              **%**
              
              
              5,055
              
              
              
              0.0
              %**Non-GAAP
                  Net Income**
              
              **$**
              **147,846**
              
              
              ****
              **0.6**
              **%**
              
              $
              6,906
              
              
              
              0.0
              %**Non-GAAP
                  Net Income**
              
              ****
              **147,846**
              
              
              
              
              
              
              
              6,906Less
                  Preferred Dividend Payments
              
              ****
              **(133,462**
              **)**
              
              
              
              
              
              
              (150,842
              )**Adjusted
                  Net Income/(Loss) for EPS Calculation**
              
              ****
              **14,384**
              
              
              
              
              
              
              
              (143,936
              )**Non-GAAP
                  Net Income Per Share**
              
              **$**
              **0.00**
              
              
              
              
              
              
              $
              (0.00
              )Weighted-Average
                  Shares Outstanding
              
              ****
              **30,914,735**
              
              
              
              
              
              
              
              29,027,350


We
      believe that evaluating our ongoing operating results with these non-GAAP
      measurements may be useful as a supplement to our standard GAAP financial
      measurement presentation.  Accordingly, we have chosen certain
      non-GAAP financial information to evaluate our ongoing operations and for
      internal planning and forecasting purposes.  We believe that non-GAAP
      financial measures should be considered in addition to, and not a substitute
      for, financial information prepared in accordance with GAAP. We present such
      non-GAAP financial measures in reporting our financial results to provide
      additional and supplemental disclosure to evaluate operating results. Whenever
      we use a non-GAAP financial measurement, we provide a reconciliation of the
      non-GAAP financial measure to the most closely applicable GAAP financial
      measurement.





28


**Liquidity
      and Capital Resources**





Net
      increase in cash during the nine months ended September 30, 2007 was
      approximately $3.7 million, primarily due to the $4.3 million net proceeds
      from
      our sale of common stock to OHB Technology AG, a leading German space technology
      company, and MT Aerospace AG, a subsidiary of OHB.  The increase in
      cash from issuance of common stock was partially offset by uses of cash in
      operations and for purchases of fixed assets as well as the repurchase of our
      preferred stock.  We had a cash decrease of $2.0 million for the same
      nine month period in 2006, primarily due to the uses of cash related to the
      merger with Starsys.





Net
      cash
      used in operating activities totaled approximately $780,000 for the nine months
      ended September 30, 2007, a decrease of approximately $520,000 as compared
      to
      approximately $1.3 million used in operating activities during the same nine
      month period in 2006.  The decrease was primarily due to our one-time
      need to use our cash resources to pay accounts payable and fund accounts
      receivable related to the merger with Starsys in early 2006.





Net
      cash
      used in investing activities totaled approximately $882,000 for the nine months
      ended September 30, 2007, compared to approximately $2.2 million used in
      investing activities during the same nine month period in 2006. The decrease
      in
      cash used in investing activities is primarily due to no acquisition-specific
      expenses this year compared to funding capital acquisition costs associated
      with
      the Starsys merger last year, although we did invest in certain property, plant
      and equipment related to the move of our two non-California facilities in
      2007.





Net
      cash
      provided by financing activities totaled approximately $5.3 million for the
      nine
      months ended September 30, 2007, which is an increase of approximately $3.8
      million from approximately $1.5 million provided by financing activities during
      the same nine months in 2006.  This is primarily attributable to our
      recent sale of stock to OHB Technology AG and MT Aerospace AG as well as
      advances on our revolving credit facility, which together provided over $6.6
      million in cash during the first nine months of 2007.  In the 2006
      period, we raised approximately $4.3 million net in our Series D-1 preferred
      stock financing but invested most of the proceeds in the Starsys
      merger.





At
      September 30, 2007, our cash, which included cash reserves and cash available
      for investment, was approximately $5.0 million, as compared to approximately
      $3.7 million at September 30, 2006, an increase of approximately $1.3
      million.  At September 30, 2007, our working capital ratio was 1.5:1
      versus a working capital ratio of 1.2:1 for the same period in 2006. A working
      capital ratio of 1:1 means that current assets are equal in amount to all
      current liabilities.





As
      of
      September 30, 2007, our backlog of funded and non-funded business was
      approximately $19 million, compared to approximately $20 million as of December
      31, 2006 and compared to $50 million as of September 30, 2006.





As
      of
      September 30, 2007 there has been no material changes in our utilization of
      net
      operating loss carryforwards or effective tax rate from those reported in our
      Form 10-KSB annual report filed on April 2, 2007.  Pursuant to
      Internal Revenue Code Section 382 and 383, our use of net operating loss and
      credit carryforwards may be limited as a result of cumulative changes in the
      ownership of more than 50% over a three year period.





As
      of
      September 30, 2007, the balance on our revolving credit facility was
      approximately $2.8 million.  With the additional capital from our
      financing with OHB Technology AG and MT Aerospace AG, we do not anticipating
      the
      active use of the facility for immediate working capital
      purposes.  However, we have renewed the revolving credit facility to
      provide a reserve against future cash needs, particularly with respect to any
      delays in payments by our government customers.





29


Our
      ability to increase cash generation from operations depends upon our ability
      to
      ultimately implement our business plan, which includes (but is not limited
      to)
      our ability to continue to effectively integrate operations with Starsys, manage
      the uncertainties in the government budgeting process, implement cost controls
      and limit the possibility of further cost overruns on fixed-price contracts,
      and
      generate substantial new revenue from customers.  In any event, we
      might also find it desirable from time to time to seek to raise capital to
      finance growth opportunities and/or to refinance existing securities, as we
      did
      this quarter with the OHB Technology AG and MT Aerospace common stock
      investment.





**Critical
      Accounting Standards**


Due
      to
      the acquisition of Starsys, our revenues transitioned in 2006 from being
      primarily cost plus fixed fee contracts, where revenues are recognized as costs
      are incurred and services are performed, to a combination of cost plus fixed
      fee
      contracts and 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.  Losses on contracts
      are recognized when they become known and reasonably estimable (see the Notes
      to
      our Consolidated Financial Statements).  Actual results of contracts
      may differ from management's estimates and such differences could be material
      to
      the consolidated financial statements.  In addition, when the total
      value of a contract becomes uncertain (such as when a contract modification
      to
      reflect cost overruns is being negotiated), we may be unable to report further
      revenues on the contract under the percentage-of-completion method until the
      uncertainty is resolved.





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
      December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based
      Payment* (SFAS 123(R)), which replaces SFAS No. 123 and supersedes APB
      Opinion No. 25. SFAS 123(R) requires all share-based payments to employees,
      including grants and vesting of employee stock options beginning January 1,
      2006, to be recognized in the financial statements based on their fair values.
      In addition, the adoption of SFAS 123(R) requires additional accounting related
      to the income tax effects and additional disclosure regarding the cash flow
      effects resulting from share-based payment arrangements. SFAS 123(R) became
      effective January 1, 2006 for calendar year companies. Accordingly, we
      implemented the revised standard in the first quarter of 2006. (See Note 4
      to
      our Consolidated Financial Statements.)





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in
      Income Taxes*, an interpretation of FASB Statement No. 109, Accounting for
      Income Taxes ("FIN 48").  FIN 48 creates a single model to address
      accounting for uncertainty in income tax positions.  FIN 48 prescribes
      a minimum threshold that an income tax position is required to meet before
      being
      recognized in the financial statements. The interpretation also provides
      guidance on derecognition and measurement criteria in addition to
      classification, interest and penalties and interim period accounting, and it
      significantly expands disclosure provisions for uncertain tax positions that
      have been or are expected to be taken in a company's tax return. FIN 48 is
      effective for fiscal years beginning after December 15, 2006 and we have also
      adopted this statement as of January 1, 2007.  The cumulative effect
      of adopting FIN 48 will be recorded in retained earnings and other accounts
      as
      applicable.





As
      of the
      issuance date of these financial statements, we have not completed our
      assessment of potential unrecognized tax benefits.  Therefore, we have
      not recorded, nor do we expect to record, any change to retained earnings as
      a
      result of the adoption of FIN 48.  We believe that at January 1, 2007
      and September 30, 2007, we have no unrecognized tax benefits that, if
      recognized, would favorably affect our effective income tax rate in future
      periods.  Our continuing practice will be to recognize interest and/or
      penalties related to income tax matters in income tax expense.  We
      have had no accrued interest or penalties at January 1, 2007 and no accrued
      interest or penalties at September 30, 2007.





The
      tax
      years 2002 through 2006 remain open to examination by some or all of the major
      taxing jurisdictions to which we are subject.





30


**Recent
      Accounting Pronouncements**


In
      February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities - including an amendment of FASB
      Statement No. 11*" ("SFAS No. 159"). SFAS No. 159 permits entities to elect
      to measure many financial instruments and certain other items at fair value.
      Upon adoption of SFAS No. 159, an entity may elect the fair value option for
      eligible items that exist at the adoption date. Subsequent to the initial
      adoption, the election of the fair value option should only be made at initial
      recognition of the asset or liability or upon a re-measurement event that gives
      rise to new-basis accounting. SFAS No. 159 does not affect any existing
      accounting literature that requires certain assets and liabilities to be carried
      at fair value nor does it eliminate disclosure requirements included in other
      accounting standards. SFAS No. 159 is effective for fiscal years beginning
      after
      November 15, 2007. We are currently assessing the impact of SFAS No. 159 on
      our
      consolidated financial statements.





**Risk
      Factors**


The
      following factors, among others, could cause actual results to differ materially
      from those contained in forward-looking statements made herein and presented
      elsewhere by management from time to time.





**Risks
      Related to our Company**





***We
      have experienced losses from operations in prior periods and have been required
      to seek additional financing to support our
      businesses.***





In
      prior
      years, both SpaceDev and Starsys have experienced operating losses and, in
      recent periods, revenues from operations have not been sufficient to fund our
      respective operations.  On a pro forma basis, our combined company
      would have had revenue of approximately $34.1 million, $27 million and $23
      million, and a net loss from operations of approximately $1.0 million, $2.9
      million and $5.0 million for the years ended December 31, 2006, 2005 and
      2004, respectively, assuming the merger had occurred on January 1,
      2004.  We had revenue of approximately $25.3 million and $24.3 million
      (on a pro-forma basis), respectively, and net income from operations of
      approximately $539,000 and a net loss from operations of approximately $97,000
      (on a pro-forma basis), respectively, for the nine months ended September 30,
      2007 and 2006. In addition, our operating activities have been using cash rather
      than providing cash.  The success of our combined companies depends
      upon our ability to generate revenue from existing contracts, to execute
      programs cost-effectively, to price fixed-price contracts accurately, to attract
      and successfully complete additional government and commercial contracts, and
      possibly to obtain additional financing.  The likelihood of our
      success must be considered in light of the expenses, difficulties and delays
      frequently encountered in connection with developing businesses, those
      historically encountered by us, and the competitive environment in which we
      operate.





***If
      we are unable to raise capital, we may be unable to fund operating cash
      shortfalls and future growth opportunities.***





In
      the
      past, both SpaceDev and Starsys have relied upon cash from financing activities
      to fund part of the cash requirements of our respective
      businesses.  We may need additional financing to fund our projected
      operations, capital expenditures or expansion plans (including
      acquisitions).  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 common shareholders.





31


***Our
      size tends to limit our business opportunities.***





Unless
      we
      attain a meaningful larger size of revenue and capabilities, our ability to
      compete successfully for a large amount of desirable business may be limited
      because customers perceive that larger supplies are more dependable, have the
      resources to successfully execute larger programs and, therefore, are more
      stable.  Yet, if we cannot win such business, it may be difficult for
      us to rapidly grow our business through organic growth.  Prime
      contracts in our industry may be large in dollar amount and critical to national
      interests. As a practical matter, smaller companies are at a disadvantage when
      competing to be awarded such large contracts as the prime contractor, due to
      customer perception that larger companies might be more stable. For this
      purpose, we would currently be considered a "smaller company."





***Some
      of our government contracts, including our large Missile Defense Agency
      contract, are staged and we cannot guarantee that all stages of the contracts
      will be awarded to us or fully funded.***





Some
      of
      our government contracts are phased contracts in which the customer may
      determine to terminate the contract between phases for any
      reason.  Accordingly, the entire contract amount may not be realized
      by us.  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, or if they are awarded to us but not fully funded, it could
      have a material adverse effect on our financial position and results of
      operations.  Task Order IV of our Missile Defense Agency contract was
      modified to extend the period of performance to December 31, 2007 and increase
      the task order ceiling from approximately $4.5 million to approximately $9.0
      million.  If this funding is not realized or increased further, we
      will have garnered a total of only about $23 million of the $43 million
      potentially available under the contract.  We were recently informed
      that there will not be any GFY 2008 funds from the Missile Defense Agency to
      support our microsatellite distributed sensing experiment in GFY
      2008.  We are currently working with the Missile Defense Agency and
      other government agencies for additional funding support.  Government
      contract funds from the Missile Defense Agency from GFY 2007 were not exhausted
      by September 30, 2007 and will be used to cover anticipated phase completion
      costs through December 31, 2007, and possibly longer.  It is possible
      that the Missile Defense Agency or another government agency may fund the
      program or co-fund the program going forward; however, there can be no assurance
      that funding will be available.




***We
      provide our products and services
      primarily through fixed-price and cost plus fixed fee contracts. Starsys has
      experienced significant losses on fixed-price contracts, especially those
      requiring product development. Cost overruns may result in further losses and,
      if significant, could impair our liquidity position.***




Under
      fixed-price contracts, our
      customers pay us for work performed and products shipped without adjustment
      for
      the costs we incur in the process. Therefore, we generally bear all or a
      significant portion of the risk of losses as a result of increased costs on
      these contracts, unless we can obtain voluntary relief from our customer, which
      relief (or additional consideration) cannot be assured. Although we have taken
      significant steps to try to limit our risk on fixed price contracts going
      forward, Starsys has experienced significant cost overruns on development
      projects under fixed-price contracts, resulting in estimated losses on contracts
      before application of any reserves of approximately $2.9 million for Starsys’
fiscal 2005 and approximately $1.7 million for the twelve months ended December
      31, 2006. As of September 30, 2007 the current accrual for potential losses
      on
      projects, which existed at January 31, 2006, represents a remainder of
      approximately $80,000.




As
      a particular example, Starsys
      experienced significant cost overruns throughout 2006 on a sizable subcontract
      with Northrop Grumman Space Technology.  In early 2007, we were
      successful in negotiating with our customer for a contract modification based
      on
      performance incentives.  Since we were successful in achieving our
      performance targets, we defrayed some of our cost overruns. However, there
      are
      ongoing costs related to life tests, a failure review board and other program
      activities. There may still be further disputes as to whether we completed
      all
      of our contract requirements and any ongoing significant overruns could
      materially impair our liquidity and operations.




When
      contract provisions produce
      unfavorable results for us, or fixed price development contracts result in
      losses, we generally do not have the legal or economic leverage needed to easily
      obtain renegotiated terms. Our customers generally would not fear any threat
      we
      might make to withhold future business and our financial and business position
      make litigation an unfavorable option for us. On the other hand, the reverse
      might be true of our customers, who tend to be large aerospace companies with
      significant resources. In the particular case of two major Starsys fixed-price
      contracts on which we have experienced significant cost overruns, the customers
      were willing to work with us and negotiations resulted in contract amendments
      providing additional incentive payments based on performance; however, there
      can
      be no assurance that future attempts to renegotiate contracts will be
      successful.




32


To
      mitigate risks of this kind, we have
      made a business decision to limit new fixed-price development contracts and
      offer our customers alternative contract structures that better protect
      us.  This decision could limit our ability to obtain new
      business.




Under
      cost plus contracts, we are
      reimbursed for allowable incurred costs plus a fee, which may be fixed or
      variable. There is no guarantee as to the amount of fee we will be awarded
      under
      a cost plus contract with a variable fee. The price on a cost plus fixed fee
      reimbursable contract is based on allowable costs incurred, but generally is
      subject to contract funding limitations. Therefore, we could bear the amount
      of
      costs in excess of the funding limitation specified in the contract, and we
      may
      not be able to recover those cost overruns.




***If
      we fail to integrate our operations effectively, the combination of SpaceDev
      and
      Starsys will not realize all the potential benefits of the merger and may be
      counterproductive.***





The
      integration of SpaceDev and Starsys is ongoing and may be time consuming and
      expensive, and may disrupt our combined company's operations if it is not
      completed in a timely and efficient manner. If this integration effort is not
      successful, our combined company's results of operations could be
      harmed.  In addition, our combined company may not achieve anticipated
      synergies or other benefits of the merger.  Our combined company may
      encounter difficulties, costs, and delays involved in integrating our
      operations, including but not limited to the following:





·
            failure
                to successfully manage relationships with customers and other important
                relationships;


·
            failure
                of customers to accept new services or to continue using the products
                and
                services of the combined company;


·
            difficulties
                in successfully integrating the management teams and employees of
                the two
                companies;


·
            potential
                incompatibility of business
                cultures;


·
            challenges
                encountered in managing larger, more geographically dispersed
                operations;


·
            the
                loss of key employees;


·
            diversion
                of the attention of management from other ongoing business
                concerns;


·
            potential
                incompatibilities of processes, technologies and
                systems;


·
            potential
                difficulties integrating and harmonizing financial reporting systems;
                and,


·
            potential
                failure to implement systems to properly price and manage the execution
                of
                fixed-price contracts.





If
      our
      combined company's operations do not meet the expectations of existing customers
      of either company, these customers may reduce the amount of business or cease
      doing business with us altogether, which would harm our results of operations
      and financial condition.





We
      do not
      believe that the anticipated benefits of the merger were fully realized in
      the
      first year.   We believe the market price of our common stock may
      have declined, in part, due to this. We will not meet the expectations of
      investors and financial or industry analysts if:





·
            the
                integration of the two companies is
                unsuccessful;


·
            the
                costs of or operational difficulties arising from the merger are
                greater
                than anticipated;


·
            the
                combined financial results are not consistent with
                expectations;


·
            the
                anticipated operating and product synergies of the merger are not
                realized; or,


·
            the
                fixed price development contracts acquired in the merger, or new
                fixed
                price contracts entered into after the merger incur major cost overruns
                or
                remain unprofitable for other
                reasons.





33


***We
      need to invest in Starsys to support
      its business recovery.***





We
      have used our cash to fund our
      combined operations, including, but not limited to, integrating the Starsys
      and
      SpaceDev businesses, and funding the completion of fixed price development
      contracts inherited as part of the merger.  Although the number and
      value of Starsys’ historical fixed price development contracts is declining, and
      we believe is being replaced by more stable contract types, further cash may
      be
      required to complete the fixed price development contracts and fund the
      remaining integration of the companies.  As stated previously, Starsys
      and the historical SpaceDev business have both experienced losses from
      operations in prior periods, requiring that we seek additional financing to
      support our businesses and there can be no assurance that additional financing
      will be available, and if available, at terms and conditions favorable to
      us.





***We
      have relocated to a new Colorado facility and North Carolina facility in the
      first nine months of  2007.***





The
      move of our Boulder, Colorado and
      Durham, North Carolina operations to new and larger nearby facilities in the
      first half of 2007 was time consuming and expensive and partially disrupted
      operations.  In addition, we may not achieve anticipated efficiencies
      or other operational benefits of these moves.  Although both moves are
      complete, we may still encounter difficulties, costs, and delays involved in
      recertifying our equipment, reestablishing network and communication
      capabilities, or other required operating essentials.  Failure for us
      to successfully manage the facility moves could damage relationships with our
      customers, divert management attention from other ongoing business
      opportunities, cause additional and unexpected program delays, and create
      additional costs and inefficiencies in personnel
      productivity.  Moreover, if our business does not develop as expected
      the new facilities may be larger than what we require, resulting in rent
      payments for some unneeded space.  Our rental costs at the new
      facilities will be approximately 65% higher than we had paid at the prior
      facilities.





***A
      substantial portion of our net sales are generated from government contracts,
      which makes us susceptible to the uncertainties inherent in the government
      budgeting process.  In addition, many of our contracts can be
      terminated by the customer.***





Our
      concentration of government work makes us susceptible to government budget
      cuts
      and policy changes, which may impact the award of new contracts or future phases
      of existing contracts.  Government budgets (both in general and as to
      space and defense projects) are subject to the prevailing political climate,
      which is subject to change at any time.  Additionally, awarded
      contracts could be altered or terminated before we recognize our projected
      revenue. Many contracts are awarded in phases where future phases are not
      guaranteed to us.  For example, in our Missile Defense Agency
      contract, if Task Order IV of our Missile Defense Agency contract, which is
      currently funded for approximately $9.0million, is not increased and we are
      not
      awarded any further task orders, we will have garnered a total of only about
      $23
      million of the $43 million potentially available under the
      contract.  The Missile Defense Agency recently extended the end time
      of Task Order IV from March 1, 2007 with three later extensions, first to June
      15, 2007 then to September 30, 2007 and finally to December 31,
      2007.  The Missile Defense Agency has indicated that there will not be
      any GFY 2008 funds to support our microsatellite distributed sensing experiment
      in GFY 2008.  We are currently working with the Missile Defense Agency
      and other government agencies for additional funding
      support.  Government contract funds from the Missile Defense Agency
      from GFY 2007 were not exhausted by September 30, 2007 and will be used to
      cover
      anticipated phase completion costs through December 31, 2007, and possibly
      longer.  It is possible that the Missile Defense Agency or another
      government agency may fund the program or co-fund the program going forward;
      however, there can be no assurance that funding will be available.





34


In
      addition, obtaining contracts and subcontracts from government agencies is
      challenging, and contracts often include provisions that are not standard in
      private commercial transactions. For example, government contracts
      may:





·
            include
                provisions that allow the government agency to terminate the contract
                without penalty;


·
            be
                subject to purchasing decisions of agencies that are subject to political
                influence;


·
            contain
                onerous procurement procedures;
                and,


·
            be
                subject to cancellation if government funding becomes
                unavailable.





Securing
      government contracts can be a protracted process involving competitive
      bidding.  In many cases, unsuccessful bidders may challenge contract
      awards, which can lead to increased costs, delays, and possible loss of the
      contract for the winning bidder.





In
      addition, major contracts are often awarded to teams of companies. Therefore,
      our ability to win contracts may depend not only on our own merits, but also
      those of our bid team members. Also, if we do not lead the bid team as the
      prime
      contractor, we will have limited control over the contract bid and award
      processes.





***Our
      common shareholders will experience dilution if our preferred stock is converted
      or our outstanding warrants and options are
      exercised.***





As
      of
      September 30, 2007, we are obligated to issue 8,406,858 shares of our common
      stock, of which 1,922,138 are represented by outstanding warrants and 6,484,720
      could be converted from our outstanding preferred stock.  In addition,
      as of September 30, 2007, we had outstanding stock options to purchase an
      aggregate of 10,980,943 shares of our common stock, of which 8,753,275 are
      currently vested.  The total number of shares, issuable upon the
      exercise or conversion of currently vested warrants, options and preferred
      stock
      (17,160,133 shares) represents approximately 46% of our issued and outstanding
      shares of common stock as of September 30, 2007.





***Our
      level of business may be difficult to predict.***





We
      hope
      to sell an increasing percentage of our products and services on a recurring
      basis, but most of our revenue is derived from government contracts and
      government-related work, which may not be recurring.  Government
      contracts can be defunded or terminated by the Government for convenience.
      Also,
      some of our products and services may not achieve market acceptance, and our
      future prospects may therefore be difficult to evaluate.





***We
      may not develop products successfully or in a timely
      manner.***





Many
      of
      our products and technologies are currently in 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.  Most of our development work is in fact performed under
      contracts from our customers.  In the past, we have 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 our 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
      our
      customers under the contracts, our results of operations will be harmed. These
      contracts are inherently risky, and in the past have had material adverse
      affects to us.  We intend to reduce significantly our acceptance of
      this sort of contract. This may limit our opportunity to develop products at
      a
      customer's expense.





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 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.  Some of these costs may be covered by
      our customers or partnership arrangements; however, there can be no assurance
      that significant costs will not be incurred by us.





35


***The
      marketplace for our technology and products is highly uncertain, especially
      in
      the historic SpaceDev business.***





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 from our lines of business,
      including, but not limited to, small satellites and electromechanical systems
      for spacecraft.  A long-term commercial market may develop for private
      manned and unmanned space exploration.  Small satellites 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,
      and
      now services such as turnkey launch solutions.  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.





***Our
      operating results could fluctuate on a quarterly and annual basis, which could
      cause our stock price to fluctuate or decline.***





Our
      operating results may fluctuate from quarter-to-quarter and year-to-year for
      a
      variety of reasons, many of which are beyond our control. Factors that could
      affect our quarterly and annual operating results include those listed below
      as
      well as others listed in this "Risk Factors" section:





·
            we
                may not be awarded all stages of existing or future
                contracts;


·
            significant
                contracts may be awarded to our competitors rather than to
                us;


·
            the
                timing of new technological advances and product announcements or
                introductions by us and our
                competitors;


·
            changes
                in the terms of our arrangements with customers or
                suppliers;


·
            reliance
                on a few customers for a significant portion of our net
                sales;


·
            the
                failure of our key suppliers to perform as
                expected;


·
            general
                or particular political conditions that could affect spending for the
                products that we offer;


·
            changes
                in perception of the safety of space
                travel;


·
            cost
                overruns or other delays or failures to satisfy our obligations under
                our
                contracts on a timely basis;


·
            the
                failure of our products to successfully launch or
                operate;


·
            the
                uncertain market for our technology and
                products;


·
            the
                availability and cost of raw materials and components for our products;
                and,


·
            the
                potential loss of or inability to hire key
                personnel.





Our
      operating results may fall below the expectations of public market analysts
      or
      investors.  In this event, our stock price could decline
      significantly.





***We
      face significant competition and many of our competitors have greater resources
      and market status than we do.***





We
      face
      significant competition for our government and commercial
      contracts.  Many of our competitors have greater resources than we do
      and may be able to devote greater resources than us to research and development,
      marketing, and lobbying efforts.  Given the sophistication inherent in
      any space company's operations, larger competitors may have a significant
      advantage and may be able to more efficiently adapt and implement technological
      advances. In addition, larger and financially stronger corporations have
      advantages over us in obtaining space and defense contracts due to their
      superior marketing (lobbying) resources and the perception that they may be
      a
      better choice than smaller companies for mission-critical projects because
      of
      the higher likelihood that they will be able to continue in business for the
      necessary future period.





36


Furthermore,
      it is possible that other domestic or foreign companies or governments, some
      with greater experience in the space industry and many with greater financial
      resources than we possess, could seek to produce products or services that
      compete with our products or services, including new mechanisms and
      electromechanical subsystems using new technology which could render our
      products less viable.  Some of our foreign competitors currently
      benefit from, and others may benefit in the future from, subsidies from or
      other
      protective measures implemented by their home countries.





***Our
      products and services may not function well under certain
      conditions.***





Most
      of
      our products are technologically advanced and tested, but sometimes are not
      space qualified for performance under demanding operating conditions. Many
      of
      our customers conduct extensive testing during the extensive pre-launch period,
      while the hardware is on the ground.  As a result, depending on the
      contract terms, we could incur additional costs related to rework.  We
      have established a warranty policy and have currently accrued $484,000 as a
      reserve against product rework.  Although we have never had a failure
      of our products in space, it is possible that our products may not successfully
      launch or operate, or perform as intended in space. Like most organizations
      that
      have launched space qualified hardware, we may experience some product and
      service failures, cost overruns, schedule delays, and other problems in
      connection with our products.





***Launch
      failures or delays could have serious adverse effects on our
      business.***





Launch
      failures or delays of our small satellites could have serious adverse effects
      on
      our business. Small satellite launches are subject to significant risks, the
      realization of which can cause disabling damage to, or total loss of, a small
      satellite, as well as damage to our reputation among actual and potential
      customers. Delays in the launch could also adversely affect our net sales.
      Delays could be caused by a number of factors, including:





·
            designing,
                constructing, integrating, or testing the small satellite, components,
                or
                related ground systems;


·
            delays
                in receiving the license(s) necessary to operate the small satellite
                system(s);


·
            delays
                in obtaining our customer's
                payload;


·
            delays
                related to the launch vehicle;


·
            weather;
                and,


·
            other
                events beyond our control.





Delays
      and the perception of potential delays could negatively affect our marketing
      efforts and limit our ability to obtain new contracts and projects.





In
      addition to many other risks involving our lines of business, we intend to
      enter
      the launch services market by providing a microsat bus, integration services,
      and a launch vehicle as a package of commercial orbital transportation services.
      Until we develop our own launch vehicle, we may be dependent on the performance
      of third party companies like United Launch Alliance (ULA), a large company,
      or
      Space Exploration Technologies, a small company with limited operating history,
      which has not yet had a successful launch, for our launch vehicle.





37


***Our
      U.S. government contracts are subject to audits that could result in a material
      adverse effect on our financial condition and results of operations if a
      material adjustment is required.***





The
      accuracy and appropriateness of our direct and indirect costs and expenses
      under
      our contracts with the U.S. government are subject to extensive regulation
      and
      audit by the Defense Contract Audit Agency, by other agencies of the U.S.
      government, or by prime contractors.  These entities have the right to
      audit our cost estimates and/or allowable cost allocations with respect to
      certain contracts.  From time to time we may in the future be required
      to make adjustments and reimbursements as a result of these
      audits.  Responding to governmental audits, inquiries, or
      investigations may involve significant expense and divert management
      attention.  Also, an adverse finding in any such audit, inquiry, or
      investigation could involve contract termination, suspension, fines, injunctions
      or other sanctions.





***Our
      success depends on our ability to retain our key personnel. We accelerated
      vesting of all outstanding stock options in December 2005, in anticipation
      of
      SFAS 123(R), which reduced the effectiveness of the stock options as a retention
      device for our key personnel.***





Our
      success will be dependent upon the efforts of key members of our management
      and
      engineering team, including our chief executive officer, Mark N. Sirangelo,
      our
      president and chief financial officer, Richard B. Slansky, the managing director
      of SpaceDev, Scott Tibbitts, and certain other key personnel.  The
      loss of any of these persons, or other key employees, including personnel with
      security clearances required for classified work and highly skilled technicians
      and engineers, could have a material adverse effect on us.  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.  At this time, we do not
      maintain key man life insurance on any of our key personnel.





Historically,
      we have used vesting stock options to enhance our ability to retain key
      personnel.  Technology companies, in general, and our company in
      particular, depends upon and uses broad based employee stock option programs
      to
      hire, incentivize, and retain employees in a competitive marketplace. If the
      employee leaves us before the vesting period has been completed, the employee
      must forfeit any unvested portion of the stock options.  To the extent
      the vesting requirement was operating as a retention device, the elimination
      of
      the vesting requirements eliminated the retention benefit.  An
      accounting standard setting body adopted SFAS 123(R), an accounting standard
      that requires us to record equity-based compensation expense for stock options
      and employee stock purchase plan rights granted to employees based on the fair
      value of the equity instrument at the time of grant. We began recording these
      expenses in 2006. The change in accounting rules lead to a decrease in reported
      earnings, if we have earnings, or an increased loss, if we do not have earnings.
      We continue to use vesting stock options as an incentive; however, as a result
      of SFAS 123(R) and other issues, the number of options being granted has been
      reduced; by doing so, we could lose the advantage of a valuable incentivizing
      tool and could be placed at a competitive disadvantage by other potential
      employers who were more willing to grant stock options.




***Our
      founder, Jim Benson, is no longer a Company Officer.***





Our
      founder and former chief executive officer, James W. Benson, resigned as our
      Chairman and chief technology officer in September 2006 in order to found a
      new
      company, Benson Space Company.  Although Benson Space Company has been
      one of our customers and may become a future customer, the departure of a
      founder, who has helped to shape our culture and vision, is always a special
      challenge for an emerging company.





38


***If
      we grow but do not effectively manage the growth, our business could suffer
      as a
      result.***





Even
      if
      we are successful in obtaining new business, failure to manage the growth could
      adversely affect our operations.  We may experience extended periods
      of very rapid growth, which 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.  We
      must develop management information systems, including operating, financial,
      and
      accounting systems, improve project management systems and processes and expand,
      train, and manage our workforce 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.





***We
      may not successfully address the problems encountered in connection with
      potential future acquisitions.***





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.  Acquisitions may be necessary to enable us to quickly achieve
      the size needed for some potential customers to seriously consider entrusting
      us
      with mission-critical contracts or subcontracts. As a company, we have limited
      experience in acquiring other businesses and technologies: the Starsys
      acquisition was our first major acquisition.  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 core
                businesses;


·
            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;


·
            dilution
                of common stock and shareholder value as well as adverse changes
                in stock
                price;


·
            potential
                loss of key employees of acquired businesses;
                and,


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





***If
      our key suppliers fail to perform as expected, our reputation may be
      damaged.  We may experience delays, lose customers, and experience
      declines in revenues, profitability, and cash flow.***





We
      purchase a significant percentage of our product components and subassemblies
      from third parties. If our subcontractors fail to perform as expected or
      encounter financial difficulties, we may have difficulty replacing them or
      identifying qualified replacements in a timely or cost effective
      manner.  As a result, we may experience performance delays that could
      result in additional program costs, contract termination for default, or damage
      to our customer relationships which may cause our revenues, profitability,
      and
      cash flow to decline.  In addition, negative publicity from any
      failure of one of our products or sub-systems as a result of a supplier failure
      could damage our reputation and prevent us from winning new
      contracts.





***Our
      limited insurance may not cover all risks inherent in our
      operations.***





We
      may
      find it difficult to insure certain risks involved in our operations, including
      our launch vehicle and satellite operations, accidental damage to high value
      customer hardware during the manufacturing process, and damages to customer
      spacecraft caused by our products not working to specification. Insurance market
      conditions or factors outside of our control at the time 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 insure 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, proceeds from
      insurance may not be sufficient to cover losses.





39


***Our
      competitive position may 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 may be significantly
      harmed because it may 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.




***Claims
      by other companies that we infringe on their intellectual property or that
      patents on which we rely are invalid could adversely affect our
      business.***





From
      time
      to time, companies may assert patent, copyright and other intellectual property
      rights against our products, or products using our technologies, or other
      technologies used in our industry.  These claims may result in our
      involvement in litigation.  We may not prevail in such litigation
      given the complex technical issues and inherent uncertainties in intellectual
      property litigation.  If any of our products were found to infringe on
      another company's intellectual property rights, we could be required to redesign
      our products or license such rights and/or pay damages or other compensation
      to
      such other company.  If we were unable to redesign our products or
      license such intellectual property rights used in our products, we could be
      prohibited from making and selling such products.





Other
      companies or entities also may commence actions seeking to establish the
      invalidity of our patents.  In the event that one or more of our
      patents is challenged, a court may invalidate the patent or determine that
      the
      patent is not enforceable, which could harm our competitive
      position.  If any of our key patents are invalidated, or if the scope
      of the claims in any of these patents is limited by court decision, we could
      be
      prevented from licensing the invalidated or limited portion of such
      patents.  Even if such a patent challenge is not successful, it could
      be expensive and time consuming to address, divert management attention from
      our
      business and harm our reputation.





40


***We
      are subject to substantial regulation, some of which prohibits us from selling
      internationally.  Any failure to comply with existing regulations, or
      increased levels of regulation, could have a material adverse effect on
      us.***





Our
      business activities are subject to substantial regulation by various agencies
      and departments of the United States 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, or "ITAR."  Exports of our products, services, and
      technical information require 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. 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.  The practical
      effect of ITAR is to limit our opportunities or increase the costs of our
      proposals in the international marketplace.





In
      September 2007, we sold to OHB Technology AG, a leading German space technology
      company, and MT Aerospace AG, a subsidiary of OHB Technology AG and an
      established supplier in the aeronautic, aerospace and defense sectors, common
      stock amounting 19% of our total outstanding shares. Because they are foreign
      companies, we could possibly be at risk of losing new and ongoing business
      if we
      do not have the proper procedures in place to delineate and inform employees
      and
      visitors, and also shareholders like OHB, regarding our controls necessary
      to
      ensure that no transfer of classified defense information or controlled
      unclassified information occurs unless authorized.





In
      addition, the space industry has
      specific regulations with which we must comply.  Command and telemetry
      frequency assignments for space missions are regulated internationally
      by the International Telecommunications Union, which we refer to as the
      ITU.  In the United States, the Federal Communications Commission,
      which we refer to as the FCC, and the National Telecommunications Information
      Agency, which we refer to as NTIA, regulate command and telemetry frequency
      assignments.  All launch vehicles that are launched from a launch site
      in the United States must pass certain launch range safety regulations that
      are
      administered by the U.S. Air Force. In addition, all commercial space launches
      that we would perform require a license from the Department of Transportation.
      Satellites that are launched must obtain approvals for command and frequency
      assignments.  For international approvals, the FCC and NTIA obtain
      these approvals from the ITU.  These regulations have been in place
      for a number of years to cover the large number of non-government commercial
      space missions that have been launched and put into orbit in the last 15 to
      20
      years. Any commercial deep space mission that we would perform would be subject
      to these regulations.





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.





41


***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. Our market price may continue to exhibit significant fluctuations
      in
      response to a variety of factors, many of which are beyond our control,
      including:





·
            deviations
                in our results of operations from
                estimates;


·
            changes
                in estimates of our financial
                performance;


·
            changes
                in our markets, including decreased government spending or the entry
                of
                new competitors;


·
            awards
                of significant contracts to competitors rather than to
                us;


·
            our
                inability to obtain financing necessary to operate our
                business;


·
            changes
                in technology;


·
            potential
                loss of key personnel;


·
            short
                selling;


·
            regular
                stock selling programs established and executed by
                insiders;


·
            changes
                in market valuations of similar companies and of stocks
                generally;


·
            volume
                fluctuations generally including, but not limited to, resales by
                former
                Starsys stockholders or by Laurus Master Fund;
                and,


·
            other
                factors listed above in "*Our operating results could fluctuate on a
                quarterly and annual basis, which could cause our stock price to
                fluctuate
                or decline.*"





***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
      September 30, 2007, our executive officers and directors together beneficially
      owned approximately 28.1% of the issued and outstanding shares of our common
      stock.  OHB Technology AG and MT Aerospace AG collectively
      beneficially own approximately 15.8% of our common stock. (Note: The beneficial
      ownership calculations are different from a straight percentage of outstanding
      ownership.) James W. Benson and Susan C. Benson beneficially own approximately
      23.2% of our common stock.  (Mr. Benson separated from our employ in
      September 2006 and founded Benson Space Company but retains a seat on our Board
      of Directors.)  As a result, executive officers, directors and/or
      significant shareholders (i.e., OHB and/or the Bensons) could have the ability
      to exert significant influence over matters concerning us, including the
      election of directors, changes in the size and composition of the Board of
      Directors, and mergers and other business combinations involving us, although
      our foreign stockholders are limited in their ability to exert significant
      influence over us by contract.  In addition, through control of the
      Board of Directors and voting power, our officers and directors 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 shareholders.  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.





***We
      have not paid dividends on our common stock in the past and do not anticipate
      paying dividends on our common stock in the foreseeable
      future.***





We
      have
      not paid common stock dividends since our inception and do not anticipate paying
      dividends in the foreseeable future.  We are currently effectively
      obliged to pay quarterly dividends on our preferred stock in
      cash.  Our current business plan provides for the reinvestment of
      earnings in an effort to complete development of our technologies and products,
      with the goal of increasing sales and long-term profitability and
      value.  In addition, the terms of our preferred stock currently
      restrict, and any other credit or borrowing arrangements that we may enter
      into
      may in the future restrict or limit, our ability to pay common stock dividends
      to our shareholders.





42


***Our
      expansion into other new lines of business may divert management's attention
      from our pre-existing operations and prove to be too
      costly.***





Our
      current business plan contemplates the migration of technologies from projects
      into products for small satellites and hybrid rocket motors over the next
      several years.  Our Starsys-derived lines of business may migrate or
      expand from a component business into a structures and/or subsystem business
      over the next several years.  In the meantime, we are investigating
      other applications of our technology and other markets for our technologies
      and
      prospective 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 historic core
      business.  Consequently, this expansion may divert management's time
      and attention, and we may need to incur significant expenses in order to develop
      the expertise, and reputation we desire.  Any revenues generated by
      new lines of business may not be significant enough to offset the expenditures
      required to enter such business, or provide the anticipated return on
      investment.





***We
      are subject to new corporate governance and internal control reporting
      requirements, and our costs related to compliance with, or our failure to comply
      with existing and future requirements, could adversely affect our
      business.***





We
      face
      new corporate governance requirements under the Sarbanes-Oxley Act of 2002,
      as
      well as new rules and regulations subsequently adopted by the SEC, the Public
      Company Accounting Oversight Board and any stock exchange on which our stock
      may
      be listed in the future. These laws, rules and regulations, which are already
      known to be burdensome and costly, continue to evolve and may become
      increasingly stringent in the future. In particular, we will be required to
      include a management report on internal control over financial reporting as
      part
      of our annual report for the year ended December 31, 2007 (and future annual
      reports) pursuant to Section 404 of the Sarbanes-Oxley Act.  We are in
      the process of evaluating our control structure and processes to help ensure
      that we will be able to comply with Section 404 of the Sarbanes-Oxley
      Act.  We cannot assure you that we will be able to fully comply with
      these laws, rules and regulations that address corporate governance, internal
      control reporting, and similar matters.  Failure to comply with these
      laws, rules, and regulations could materially adversely affect our reputation,
      financial condition, and the value of our securities.





***The
      terms of our outstanding shares of preferred stock, and any shares of preferred
      stock issued in the future, may reduce the value of your common
      stock.***





We
      have
      up to 10,000,000 shares of authorized preferred stock in one or more series.
      We
      currently have outstanding 248,460 shares of our Series C Convertible Preferred
      Stock and approximately 3,644 shares of our Series D-1 Preferred Stock, as
      of
      September 30, 2007.  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.  Our Series C Preferred Stock and Series
      D-1 Preferred Stock rank senior to the common stock with respect to dividends
      and liquidation and have other important preferred rights.





43


***Our
      secured debt financing is expensive and onerous.***





On
      September 29, 2006, we entered into a secured revolving credit facility with
      Laurus Master Fund.  Although the maximum size of the facility is $5.0
      million, actual borrowings are limited by a formula based on our eligible
      accounts receivable and eligible inventory.  Our current cash advance
      is approximately $2.8 million, as of September 30, 2007. We paid a loan fee
      at
      closing in the form of 310,009 shares of common stock valued at $350,000 which
      was spread over the first year of the line of credit.  Subsequent to
      September 30, 2007, we issued an additional 279,600 restricted shares to Laurus,
      equivalent to a $200,000 fee upon the 2007 first anniversary of the
      facility.  In addition, we will be required to pay Laurus an
      additional loan fee in the form of common stock valued at $200,000 on September
      29, 2008, the second anniversary date of the facility, if the facility remains
      in place.   In addition, the outstanding balance on the facility
      bears interest at a floating rate of prime plus 2%, and the maximum life of
      the
      facility is three years.  The facility is collateralized by
      substantially all of our assets.  The facility contains certain
      default provisions.  In the event of a default by us, we will be
      required to pay an additional fee per month until the default is
      cured.  Laurus has the option of accelerating the entire principal
      balance and requiring us to pay a premium in the event of an uncured
      default.





Any
      further debt financing, if available at all when needed, might require further
      expensive and onerous financial terms, security provisions and restrictive
      covenants.  If we cannot repay or refinance our debt when it comes
      due, we would be materially adversely affected.





***Because
      our common 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 our common stock are currently subject to the "penny stock" rules promulgated
      under the Securities Exchange Act of 1934, as amended. Under these rules,
      broker-dealers who recommend our 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.







**ITEM
      3A.  CONTROLS AND PROCEDURES**




Mark
      N.
      Sirangelo, our chief executive officer, and Richard B. Slansky, our chief
      financial officer, after evaluating the effectiveness of our disclosure controls
      and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
      Act
      of 1934, as amended) have concluded that, as of September 30, 2007, our
      disclosure controls and procedures are effective.





We
      are
      not yet required to furnish the information called for by Item 308T of
      Regulation S-B.





44





**PART
      II -- OTHER INFORMATION**





**ITEM
      1.                      LEGAL
      PROCEEDINGS**


None.





**ITEM
      2.                      UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**





No
      further disclosure required.





**ITEM
      3.                      DEFAULTS
      UPON SENIOR SECURITIES**


None.





**ITEM
      4.                      SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**


The
      annual meeting of the shareholders of SpaceDev, Inc. was held on August 10,
      2007.  The following proposals were presented:





PROPOSAL
      1:  Election of nine directors:








**Nominee**
            **For**
            **Withheld**Sirangelo,
                Mark
            27,722,179
            150,390Slansky,
                Richard
            19,066,072
            8,806,497Benson,
                Jim
            24,598,458
            3,274,111Blake,
                Curt
            19,045,451
            8,827,118Estes,
                Howell
            19,061,562
            8,811,007Huntress,
                Wesley
            19,045,836
            8,826,733McClendon,
                Scott
            27,650,603
            221,966Tibbitts,
                Scott
            19,000,791
            8,871,778Walker,
                Robert
            19,144,131
            8,728,438





PROPOSAL
      2:  Ratification of selection of PKF, Certified Public
      Accountants,





**For**
            **Against**
            **Abstain**27,690,037
            83,085
            99,446





PROPOSAL
      3:  Reincorporation from Colorado to Delaware.





**For**
            **Against**
            **Abstain**
            **Broker
                Nonvotes**16,806,009
            552,863
            103,241
            10,410,456





**ITEM
      5.                      OTHER
      INFORMATION**




None
      of
      our property was damaged in the October 2007 wildfires in the San Diego/Poway
      area.




45





**ITEM
      6.                      EXHIBITS**





Exhibit
                No.
            Description
            Filed
                Herewith
            Incorporated
                by Reference
            Form
            Date
                Filed with SEC
            Exhibit
                No.3.1
            Certificate
                of Incorporation of SpaceDev, Inc., a Delaware corporation
            
            X
            8-K
            Aug.
                24, 2007
            3.13.2
            Bylaws
                of SpaceDev, Inc., a Delaware corporation
            
            X
            8-K
            Aug.
                24, 2007
            3.210.1
            Agreement
                and Plan of Merger, dated as of August 20, 2007, between SpaceDev
                Colorado
                and SpaceDev Delaware
            
            X
            8-K
            Aug.
                24, 2007
            10.110.2
            Stock
                Purchase Agreement, entered into as of September 14, 2007, by and
                between
                SpaceDev, Inc. and MT Aerospace AG and OHB Technology AG.
            
            X
            8-K
            Sep.
                19, 2007
            99.110.3
            Stockholder
                Agreement, entered into as of September 19, 2007, by and between
                SpaceDev,
                Inc. and MT Aerospace AG and OHB Technology AG.
            
            X
            8-K
            Sep.
                19, 2007
            99.231.1
            Rule
                13a-14(a) certification of Chief Executive Officer
            X31.2
            Rule
                13a-14(a) certification of Chief Financial Officer
            X32.1
            Section
                1350/Rule 13a-14(b) certifications
            X








46








**SIGNATURES**








In
      accordance with the requirements of the Exchange Act, the Registrant caused
      this
      report to be signed on its behalf by the undersigned thereunto duly
      authorized.





**SpaceDev,
      Inc.**


Registrant














Dated:  November
      9,
      2007                                                By: /s/ Mark N.
      Sirangelo


Mark
      N.
      Sirangelo


Chief
      Executive Officer

















Dated:  November
      9,
      2007                                                  By: /s/ Richard
      B. Slansky


Richard
      B. Slansky


President
      & Chief Financial Officer











47