**FORM
      10-QSB**


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





**Washington,
      D.C. 20429**








(Mark
      One)


x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      quarterly period ended June 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)





Colorado
            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: 30,187,138****shares of
      Issuer's voting common stock were outstanding on July 31, 2007.





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


Table
          of Contents


**SPACEDEV,
      INC.**


**FORM
      10-QSB**


**FOR
      THE QUARTER ENDED JUNE 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
            5ITEM
                2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR
                PLAN OF OPERATION
            14Overview
            14Financing
            15Results
                of Operations
            18Liquidity
                and Capital Resources
            24Critical
                Accounting Standards
            25Recent
                Accounting Pronouncements
            26Risk
                Factors
            27Risks
                Related to our Company
            27ITEM
                3A(T).  CONTROLS AND
                PROCEDURES
            40PART
                II -- OTHER INFORMATION
            41ITEM
                1.  LEGAL PROCEEDINGS
            41ITEM
                2.  UNREGISTERED SALES OF EQUTIY SECURITIES
                AND USE OF PROCEEDS
            41ITEM
                3.  DEFAULTS UPON SENIOR
                SECURITIES
            41ITEM
                4.  SUBMISSION OF MATTERS TO A VOTE OF
                SECURITY HOLDERS
            41ITEM
                5.  OTHER INFORMATION
            41ITEM
                6.  EXHIBITS
            42SIGNATURES
            42





Table
          of Contents




**PARTI
      -- FINANCIAL INFORMATION**




**ITEM1.                      FINANCIAL
      STATEMENTS**


**SpaceDev,
      Inc. and Subsidiaries**


**ConsolidatedBalance Sheets**


**(Unaudited)****June
                  30, 2007**
              
              
              December
                  31, 2006**Assets****Current
                  Assets**Cash
              
              **$**
              **2,914,756**
              
              
              $
              1,438,146Accounts receivable (Note 2(d))
              
              ****
              **6,771,922**
              
              
              
              7,289,720Inventory (Note 2(b))
              
              ****
              **519,788**
              
              
              
              309,205Other
                  current assets (Note 6(a))
              
              ****
              **539,010**
              
              
              
              599,565Total
                  Current Assets
              
              ****
              **10,745,476**
              
              
              
              9,636,636**Fixed
                  Asset**s - Net
              
              ****
              **4,004,879**
              
              
              
              3,793,365**Intangible
                  Assets**
              
              ****
              **769,620**
              
              
              
              841,133**Goodwill
                  (Note 5)**
              
              ****
              **11,233,665**
              
              
              
              11,233,665**Other
                  Assets (Note 6(b))**
              
              ****
              **745,916**
              
              
              
              626,086**Total
                  Assets**
              
              **$**
              **27,499,556**
              
              
              $
              26,130,885**Liabilities
                  and Stockholders' Equity****Current
                  Liabilities**Accounts
                  payable and accrued expenses
              
              **$**
              **1,235,425**
              
              
              $
              1,755,985Current
                  portion of capitalized lease obligations
              
              ****
              **74,897**
              
              
              
              35,441Accrued
                  payroll, vacation and related taxes
              
              ****
              **905,776**
              
              
              
              1,184,457Billings
                  in excess of costs and deferred revenue (Note 2(a))
              
              ****
              **1,791,046**
              
              
              
              2,816,072Revolving
                  line of credit (Note 3(b))
              
              ****
              **3,037,950**
              
              
              
              805,172Other
                  accrued liabilities (Note 2(a))
              
              ****
              **2,594,130**
              
              
              
              1,602,561**Total
                  Current Liabilities**
              
              ****
              **9,639,224**
              
              
              
              8,199,688**Notes
                  Payable, Less Current Maturities**
              
              ****
              **55,997**
              
              
              
              50,193**Capitalized
                  Lease Obligations, Less Current Maturities**
              
              ****
              **269,508**
              
              
              
              136,709**Deferred
                  Gain - Assets held for sale (Notes 3(a))**
              
              ****
              **654,769**
              
              
              
              713,405**Other
                  Long Term Liabilities**
              
              ****
              **-**
              
              
              
              15,266**Total
                  Liabilities**
              
              ****
              **10,619,498**
              
              
              
              9,115,261**Commitments
                  and Contingencies****Stockholders’
                  Equity**Convertible
                  preferred stock, $.001 par value, 10,000,000shares
                  authorized, and 252,295 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, $.0001 par value; 100,000,000 sharesauthorized, and 30,141,034 and 29,550,342 shares issuedand outstanding, respectively (Note 4)
              
              ****
              **3,014**
              
              
              
              2,953Additional
                  paid-in capital
              
              ****
              **33,141,157**
              
              
              
              33,150,566Accumulated
                  deficit
              
              ****
              **(16,264,365**
              **)**
              
              
              (16,138,148
              )**Total
                  Stockholders’ Equity**
              
              ****
              **16,880,058**
              
              
              
              17,015,624**Total
                  Liabilities and Stockholders' Equity**
              
              **$**
              **27,499,556**
              
              
              $
              26,130,885


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




Table
          of Contents
 1




**SpaceDev,
        Inc. and Subsidiaries**
 **ConsolidatedStatements
        of Operations**
 **(Unaudited)**




*Three
                  Months Ended*
              
              
              *Six
                  Months Ended**June
                  30,*
              
              **2007**
              
              
              **%**
              
              
              2006
              
              
              %
              
              
              **2007**
              
              
              **%**
              
              
              2006
              
              
              %**Net
                  Sales**
              
              **$**
              **8,647,568**
              
              
              ****
              **100.0**
              **%**
              
              $
              8,631,165
              
              
              
              100.0
              %
              
              **$**
              **17,704,616**
              
              
              ****
              **100.0**
              **%**
              
              $
              15,805,943
              
              
              
              100.0
              %**Total
                  Cost of Sales***
              
              ****
              **6,151,468**
              
              
              ****
              **71.1**
              **%**
              
              
              6,329,932
              
              
              
              73.3
              %
              
              ****
              **13,117,539**
              
              
              ****
              **74.1**
              **%**
              
              
              11,595,039
              
              
              
              73.4
              %**Gross
                  Margin**
              
              ****
              **2,496,100**
              
              
              ****
              **28.9**
              **%**
              
              
              2,301,233
              
              
              
              26.7
              %
              
              ****
              **4,587,077**
              
              
              ****
              **25.9**
              **%**
              
              
              4,210,904
              
              
              
              26.6
              %**Operating
                  Expenses**Marketing
                  and sales
              
              ****
              **806,262**
              
              
              ****
              **9.3**
              **%**
              
              
              691,136
              
              
              
              8.0
              %
              
              ****
              **1,392,876**
              
              
              ****
              **7.9**
              **%**
              
              
              1,334,695
              
              
              
              8.4
              %Research
                  and development
              
              ****
              **123,795**
              
              
              ****
              **1.4**
              **%**
              
              
              123,062
              
              
              
              1.4
              %
              
              ****
              **163,155**
              
              
              ****
              **0.9**
              **%**
              
              
              204,839
              
              
              
              1.3
              %General
                  and administrative
              
              ****
              **1,413,015**
              
              
              ****
              **16.3**
              **%**
              
              
              1,476,941
              
              
              
              17.1
              %
              
              ****
              **2,656,570**
              
              
              ****
              **15.0**
              **%**
              
              
              2,707,674
              
              
              
              17.1
              %**Total
                  Operating Expenses***
              
              ****
              **2,343,072**
              
              
              ****
              **27.1**
              **%**
              
              
              2,291,139
              
              
              
              26.5
              %
              
              ****
              **4,212,601**
              
              
              ****
              **23.8**
              **%**
              
              
              4,247,208
              
              
              
              26.9
              %**Income/(Loss)
                  from Operations**
              
              ****
              **153,028**
              
              
              ****
              **1.8**
              **%**
              
              
              10,094
              
              
              
              0.1
              %
              
              ****
              **374,476**
              
              
              ****
              **2.1**
              **%**
              
              
              (36,304
              )
              
              
              -0.2
              %**Non-Operating
                  Income/(Expense)**Interest
                  income
              
              ****
              **10,023**
              
              
              ****
              **0.1**
              **%**
              
              
              7,137
              
              
              
              0.1
              %
              
              ****
              **30,979**
              
              
              ****
              **0.2**
              **%**
              
              
              40,752
              
              
              
              0.3
              %Interest
                  and other expense
              
              ****
              **(57,955**
              **)**
              
              ****
              **-0.7**
              **%**
              
              
              (5,346
              )
              
              
              -0.1
              %
              
              ****
              **(133,313**
              **)**
              
              ****
              **-0.8**
              **%**
              
              
              (10,629
              )
              
              
              -0.1
              %Non-Cash
                  loan fee - (Note 3(b))
              
              ****
              **(87,261**
              **)**
              
              ****
              **-1.0**
              **%**
              
              
              -
              
              
              
              0.0
              %
              
              ****
              **(173,562**
              **)**
              
              ****
              **-1.0**
              **%**
              
              
              -
              
              
              
              0.0
              %Gain
                  on building sale (Note 3(a))
              
              ****
              **29,318**
              
              
              ****
              **0.3**
              **%**
              
              
              29,319
              
              
              
              0.3
              %
              
              ****
              **58,636**
              
              
              ****
              **0.3**
              **%**
              
              
              58,637
              
              
              
              0.4
              %**Total
                  Non-Operating Income/(Expense)**
              
              ****
              **(105,876**
              **)**
              
              ****
              **-1.2**
              **%**
              
              
              31,110
              
              
              
              0.4
              %
              
              ****
              **(217,261**
              **)**
              
              ****
              **-1.2**
              **%**
              
              
              88,760
              
              
              
              0.6
              %**Income
                  Before Taxes**
              
              ****
              **47,152**
              
              
              ****
              **0.5**
              **%**
              
              
              41,204
              
              
              
              0.5
              %
              
              ****
              **157,216**
              
              
              ****
              **0.9**
              **%**
              
              
              52,456
              
              
              
              0.3
              %**Income
                  Tax Provision**
              
              ****
              **-**
              
              
              ****
              **0.0**
              **%**
              
              
              5,000
              
              
              
              0.1
              %
              
              ****
              **(800**
              **)**
              
              ****
              **0.0**
              **%**
              
              
              9,235
              
              
              
              0.1
              %**Net
                  Income**
              
              **$**
              **47,152**
              
              
              ****
              **0.5**
              **%**
              
              $
              36,204
              
              
              
              0.4
              %
              
              **$**
              **156,416**
              
              
              ****
              **0.9**
              **%**
              
              $
              43,221
              
              
              
              0.3
              %**Net
                  Income**
              
              ****
              **47,152**
              
              
              
              
              
              
              
              36,204
              
              
              
              
              
              
              ****
              **156,416**
              
              
              
              
              
              
              
              43,221Less
                  Preferred Dividend Payments (Note 4(a) and (b))
              
              ****
              **(138,866**
              **)**
              
              
              
              
              
              
              (98,774
              )
              
              
              
              
              
              ****
              **(282,633**
              **)**
              
              
              
              
              
              
              (197,684
              )**Adjusted
                  Net Income (Loss) for EPS Calculation**
              
              ****
              **(91,714**
              **)**
              
              
              
              
              
              
              (62,570
              )
              
              
              
              
              
              ****
              **(126,218**
              **)**
              
              
              
              
              
              
              (154,463
              )**Net
                  Income Per Share:**
              
              **$**
              **(0.00**
              **)**
              
              
              
              
              
              $
              (0.00
              )
              
              
              
              
              
              **$**
              **(0.00**
              **)**
              
              
              
              
              
              $
              (0.01
              )Weighted-Average
                  Shares Outstanding
              
              ****
              **29,643,246**
              
              
              
              
              
              
              
              28,818,403
              
              
              
              
              
              
              ****
              **29,606,975**
              
              
              
              
              
              
              
              28,818,403**Fully
                  Diluted Net Income Per Share:**
              
              **$**
              **(0.00**
              **)**
              
              
              
              
              
              $
              (0.00
              )
              
              
              
              
              
              **$**
              **(0.00**
              **)**
              
              
              
              
              
              $
              (0.01
              )Fully
                  Diluted Weighted-Average Shares Outstanding
              
              ****
              **29,643,246**
              
              
              
              
              
              
              
              28,818,403
              
              
              
              
              
              
              ****
              **29,606,975**
              
              
              
              
              
              
              
              28,818,403*
                  The following table shows how the Company's stock option expense
                  are
                  allocated to all expenses. These non-cash stock option expenses are
                  included in the unaudited operating results stated above.Cost
                  of sales
              
              **$**
              **35,999**
              
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              **$**
              **77,372**
              
              
              
              
              
              
              $
              -Marketing
                  and sales
              
              ****
              **19,676**
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              ****
              **33,328**
              
              
              
              
              
              
              
              -Research
                  and development
              
              ****
              **-**
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              ****
              **-**
              
              
              
              
              
              
              
              -General
                  and administrative
              
              ****
              **51,810**
              
              
              
              
              
              
              
              24,992
              
              
              
              
              
              
              ****
              **101,403**
              
              
              
              
              
              
              
              115,693**Total
                  Non-Cash Stock Option Expense**
              
              **$**
              **107,484**
              
              
              
              
              
              
              $
              24,992
              
              
              
              
              
              
              **$**
              **212,103**
              
              
              
              
              
              
              $
              115,693


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






Table
          of Contents
 2


**SpaceDev,
        Inc. and Subsidiaries**
 **ConsolidatedStatements
        of Cash Flows**
 **(Unaudited)**


*Six
                  Months Ended June 30,*
              **2007**
              2006**Cash
                  Flows From Operating Activities**Net
                  income
              **$           156,416**
              $                43,221Adjustments
                  to reconcile net income to net cash provided by(used
                  in) operating activities:Depreciation
                  and amortization
              **592,916**
              372,500Gain
                  on disposal of building sale
              **(58,636)**
              (58,637)Stock
                  option expense
              **212,103**
              117,868Non-cash
                  loan fee
              **173,562**
              -Change
                  in operating assets and liabilities
              **(728,640)**
              (2,770,637)**Net
                  Cash Provided By (Used In) Operating Activities**
              **347,721**
              (2,295,685)**Cash
                  Flows From Investing Activities**Other
                  assets, capitalized acquisition costs
              **-**
              (1,066,564)Purchases
                  of fixed assets
              **(543,319)**
              (1,075,688)**Net
                  Cash Used In Investing Activities**
              **(543,319)**
              (2,142,252)**Cash
                  Flows From Financing Activities**Principal
                  payments on notes payable
              **-**
              (4,675,832)Principal
                  payments on capitalized lease obligations
              **(17,343)**
              (10,537)Dividend
                  payments on Series C and Series D-1 preferred
              **(297,799)**
              (197,684)Proceeds
                  from revolving credit facility
              **2,232,778**
              -Employee
                  stock purchase plan
              **28,895**
              89,510(Repurchase)
                  Issuance of preferred stock
              **(572,230)**
              4,602,956Proceeds
                  from issuance of common stock
              **297,907**
              132,857**Net
                  Cash Provided by (Used In) Financing Activities**
              **1,672,208**
              (58,730)**Net
                  Increase (Decrease) in Cash**
              **1,476,610**
              (4,496,667)**Cash
                  at Beginning of Period**
              **1,438,146**
              5,750,038**Cash
                  at End of Period**
              **$         2,914,756**
              $           1,253,371


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


Table
          of Contents
 3




**SpaceDev,
        Inc. and Subsidiaries**
 **ConsolidatedStatements
        of Cash Flows,
        Cont'd.**
 **(Unaudited)**
 *Six
                    Months Ended June 30,*
                **2007**
                2006**Supplemental
                    Disclosures of Cash Flow Information:**Cash
                    paid during the period for:Interest
                **$                      133,313**
                $             10,629Taxes
                **-**
                -**Noncash
                    Investing and Financing Activities:**During
                    the six months ended June 30, 2007, the Company entered into
                    a capital
                    lease in the amountof
                    approximately $190,000.During
                    the six months ended June 30, 2007 and 2006 the Company declared
                    dividends
                    in the amountof
                    $282,632 and $295,949 respectively, for our Series C and Series
                    D-1
                    Preferred Stock.During
                    the six months ended June 30, 2007 and 2006, the Company converted
                    $52,871
                    and $34,516of
                    employee stock purchase plan contributions into 63,970 and 24,885
                    shares
                    of common stock,respectively.


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






Table
          of Contents
 4


**NOTESTO
        CONSOLIDATED FINANCIAL STATEMENTS**
 
 **1.       Basis
        of Presentation**
 
 The  accompanying  consolidated  financial  statements  of  SpaceDev,
        Inc., a Colorado corporation ("the
        Company")  include  the  accounts  of  the  Company
        and its subsidiary, Starsys, Inc., a Colorado corporation, and its inactive
        subsidiaries SpaceDev Oklahoma,  an Oklahoma  corporation,
        Dream Chaser, Inc., a Delaware corporation, and SpaceDev, Inc., a Delaware
        corporation.  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 six months ended June 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 six month period ended June 30, 2007 represents
        six
        months of combined results whereas the comparable quarter in 2006 includes
        only
        five months of combined results.
 
 **2.       Accounting
        Policies**
 
 *(a)  Revenue
        Recognition*
 
 The
        Company's revenues for the six months ended June 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 June 2006 and mainly CPFF contracts during the month of January
        2006.  Revenues for the six month period ended June 30, 2007
        represents a full six months of combined results whereas the comparable period
        in 2006 includes only five 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
        prepared 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
        existing projects represents approximately $203,000.  As projects
        progress, 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.






Table
          of Contents
 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
        six months ended June 30, 2007, options to purchase approximately 10.9 million
        shares of common stock and warrants to issue approximately 1.9 million shares
        of
        common stock were excluded from the computation of fully diluted earnings
        per
        share as the exercise prices of these options and warrants was greater than
        the
        market price of the common shares at June 30, 2007. 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 C and D-1 Preferred shares are assumed to be converted
        into
        common shares at conversion rates of $1.54 per share and $1.48 per share,
        respectively. They were excluded from the computation of fully diluted earnings
        per share as the conversion price of the Series C and D-1 Preferred shares
        was
        greater than the market price of the common shares at June 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
        $2.2 million and $1.7 million at June 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 June 30, 2007 and December 31, 2006, the allowance
        for uncollectible accounts was approximately $75,000 for both
        periods.
  (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.






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  (e)  *Warranty*


The
        Company continually evaluates its estimates and assumptions including those
        related to warranty obligations.  Actual results may differ from these
        estimates under different conditions, and such differences may be
        material.  The Company has estimated its warranty reserve at June 30,
        2007 at approximately $535,000.
  (f)  *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.
 
 As
        of the
        issuance date of these financial statements, the Company had not completed
        its
        assessment of potential unrecognized tax benefits.  Therefore, the
        Company 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 June 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 June 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 June 30, 2007, the deferred gain
        was $654,769.  This amortization is included in the Company's
        non-operating income/(expenses) and totaled $58,636 and $58,637 for the six
        months ended June 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 June 30, 2007 was $3,037,950.






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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 the expense is being amortized
        over the first year of the note.  The Company will issue additional
        restricted shares of its common stock worth, in the aggregate, $200,000 to
        Laurus on each 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 our 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.
 
 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) 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
        Shares"), to Laurus for an aggregate purchase price of $2.5 million or $10.00
        per share (the "Stated Value").  The Series C Preferred Shares are
        convertible into shares of the Company's common stock at a rate of $1.54
        per
        share, and accrue quarterly, cumulative dividends at a rate of
        6.85%.  As of June 30, 2007 and 2006, the Company declared dividends
        payable of approximately $84,000 and $85,000, respectively for each of the
        six
        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 must be paid in shares of common stock for up to
        25% of
        the aggregate dollar trading volume if the fair market value of the 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 six months of 2007.  On June 30, 2007, accrued but
        unpaid dividends were approximately $42,000; these accrued dividends were
        paid
        in cash in July 2007.  The Series C Preferred Shares are redeemable by
        the Company in whole or in part at any time after issuance for (a) 115% of
        the
        Stated Value if the average closing price of the common stock for the 22
        days
        immediately preceding the date of conversion does not exceed $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.




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          of Contents
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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.
 
 *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 June 30, 2007, approximately 3,835 Series D-1 Preferred
        shares remain outstanding and approximately 1,315 Series D-1 Preferred shares
        were 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 1,240 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 June 30, 2007, the
        Company had accrued Series D-1 dividends of approximately $96,000, which
        were
        paid in July 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, 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 (VWAP)
        of
        our common stock for the 20 trading days preceding the warrantholder’s
        acceptance of the offer. Although this written offer expired by its terms
        on
        June 15, 2007, we 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 antidilution
        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. We refer to these warrants
        as the common stock warrants.






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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.
 
 *c)     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 six
        months ended June 30, 2007 and 2006, the Company expensed approximately $212,000
        and $116,000 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 was estimated at 5.0%, expected volatility
        ranged from 86% to 172% 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 merger agreement was
        dated October 24, 2005 and amended on December 7, 2005 and January 31,
        2006.
 
 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
 
 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.




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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.  This portion of the additional
                  performance consideration 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.
 
 **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 June 30,
        2007.




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Other
                  Current Assets -  June 30,
              **2007**Prepaid:Computer
                  & Software
              $       63,389Directory
                  & Officers Prepaid Insurance
              18,047Financing
                  Fees
              144,794General
                  Liability & Workers Comp - Prepaid Insurance
              56,132Medical
                  Premiums - Prepaid
              107,118Rent
              121,630Other
                  Accruals
              27,900Total
                  Other Current Assets
              **$      539,010**




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 June 30, 2007.




Other
                  Assets -  June 30,
              2007Prepaid
                  Rent
              $          72,556Other
                  Deposits
              552,479Building
                  Deposits
              118,267Capital
                  Lease Deposits
              2,614**Total
                  Other Assets**
              **$     745,916**




**7.     New
        Accounting Pronouncements**
 
 There
        were no recent Accounting Pronouncements that affected the Company during
        the
        six months ended June 30, 2007.  For past pronouncements, please refer
        the Company's Form 10-KSB filed on April 2, 2007.
 
 **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 year ended December
        31, 2006 combines SpaceDev's historical statement of operations for the year
        ended December 31, 2006 with the Starsys historical statement of operations
        for
        the year ended December 31, 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 and
        do not indicate future results of operations.




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 12


**SpaceDev,
        Inc. and Subsidiaries**
 Pro
        Forma
        Combined Consolidating and Consolidated Statement of Operations
 (Unaudited)
   *For
        the Six Months
        Ended*
 *June
        30,
        2006*


**Combined
                  Consolidated Pro Forma**
              
              
              
              **Pro
                  Forma Adjustments**
              
              
              **Consolidated
                  Pro Forma**
              
              
              **%****Net
                  Sales**
              
              $
              17,606,505
              
              
              
              100.00
              %
              
              $
              (216,223
              )
              
              $
              17,390,282
              
              
              
              100.00
              %**Cost
                  of Sales ***
              
              
              12,951,377
              
              
              
              73.56
              %
              
              $
              (80,758
              )
              
              
              12,870,619
              
              
              
              74.01
              %**Gross
                  Margin**
              
              $
              4,655,128
              
              
              
              26.44
              %
              
              $
              (135,465
              )
              
              
              4,519,663
              
              
              
              25.99
              %**Operating
                  Expenses**Marketing
                  and sales expense
              
              
              1,538,169
              
              
              
              8.74
              %
              
              $
              (135,465
              )
              
              
              1,402,705
              
              
              
              8.07
              %Research
                  and development
              
              
              199,556
              
              
              
              1.13
              %
              
              
              -
              
              
              
              199,556
              
              
              
              1.15
              %General
                  and administrative
              
              
              3,018,151
              
              
              
              17.14
              %
              
              
              -
              
              
              
              3,018,151
              
              
              
              17.36
              %**Total
                  Operating Expenses ***
              
              
              4,755,877
              
              
              
              27.01
              %
              
              
              (135,465
              )
              
              
              4,620,412
              
              
              
              26.57
              %**Income/(Loss)
                  from Operations**
              
              
              (100,749
              )
              
              
              -0.57
              %
              
              
              -
              
              
              
              (100,749
              )
              
              
              -0.58
              %**Non-Operating
                  Income/(Expense)**Interest
                  income
              
              
              69,058
              
              
              
              0.39
              %
              
              
              -
              
              
              
              69,058
              
              
              
              0.40
              %Interest
                  expense
              
              
              (33,112
              )
              
              
              -0.19
              %
              
              
              -
              
              
              
              (33,112
              )
              
              
              -0.19
              %Gain
                  on Building Sale
              
              
              58,637
              
              
              
              0.33
              %
              
              
              -
              
              
              
              58,637
              
              
              
              0.34
              %**Total
                  Non-Operating Income/(Expense)**
              
              
              94,583
              
              
              
              0.54
              %
              
              
              -
              
              
              
              94,583
              
              
              
              0.54
              %**Income
                  (Loss) Before Income Taxes**
              
              
              (6,166
              )
              
              
              -0.04
              %
              
              
              -
              
              
              
              (6,166
              )
              
              
              -0.04
              %Income
                  tax provision
              
              
              9,235
              
              
              
              0.05
              %
              
              
              -
              
              
              
              9,235
              
              
              
              0.05
              %**Net
                  Income (Loss)**
              
              $
              (15,401
              )
              
              
              -0.09
              %
              
              $
              -
              
              
              
              (15,401
              )
              
              
              -0.09
              %*
                  The following table shows how the Company's amortization expense
                  of stock
                  options would be allocated to all expenses.Cost
                  of Sales
              
              $
              -
              
              
              
              0.00
              %
              
              $
              -
              
              
              
              -
              
              
              
              0.00
              %Marketing
                  and sales
              
              
              -
              
              
              
              0.00
              %
              
              
              -
              
              
              
              -
              
              
              
              0.00
              %Research
                  and development
              
              
              -
              
              
              
              0.00
              %
              
              
              -
              
              
              
              -
              
              
              
              0.00
              %General
                  and administrative
              
              
              115,693
              
              
              
              0.66
              %
              
              
              -
              
              
              
              115,693
              
              
              
              0.67
              %$
              115,693
              
              
              
              0.66
              %
              
              $
              -
              
              
              
              115,693
              
              
              
              0.67
              %






Table
          of Contents
 13




**ITEM2.                      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**
  SpaceDev,
        Inc., (the "Company," "SpaceDev," "we," "us" or "our") including our
        wholly-owned subsidiary, Starsys, Inc., 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.  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 six months of 2007, approximately 80% of our net sales were generated
        from direct government contracts, and from government-related work through
        subcontracts with others, while the remaining 20% was generated from commercial
        contracts.  During the same period in 2006, approximately 94% of our
        net sales were generated from direct government contracts and from
        government-related work through subcontracts with others, while the remaining
        6%
        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 80% or more 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.  Although we are interested in exploring international
        revenue and contract opportunities, we are restricted by export control
        regulations, including International Traffic in Arms Regulations, which may
        limit our ability to develop market opportunities outside the United
        States.
 
 During
        the first six months of 2007, we submitted approximately 100 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 and Sumitomo.





Table
          of Contents
 14


**Financing**





New
      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 will depend on draws made by us on the
      facility.  We are allowed to borrow 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 June 30,
      2007 was approximately $3.0 million.





The
      facility bears interest at a rate equal to prime plus 2% and is payable monthly.
      The rate will be increased or decreased on the date the Prime Rate is
      adjusted.  Interest is due on the first business day of each month
      through maturity.  The term of the facility is scheduled to end on
      September 29, 2009.  Laurus received 310,009 unregistered shares of
      our 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 the expense is being amortized over the first
      year of the note.  We will issue additional restricted shares of our
      common stock worth, in the aggregate, $200,000 to Laurus on each 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.  The facility is not convertible
      into any class of our securities.





Laurus
      agreed that if and 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.  In addition, Laurus is
      strictly prohibited from engaging in any short sales of our common stock during
      the term of the facility.





The
      facility is a secured debt, 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.  The facility requires us to deposit all funds (other than
      certain refundable deposits) 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 us on a daily
      basis.





Series
      D-1 Amortizing Convertible
      Perpetual 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.




Table
          of Contents
 15


On
        May
        31, 2007, we offered to the holders of the Series D-1 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 warrantholder’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 common stock warrant $0.58 which is 80% of the
        $0.725.  Due to a ratchet antidilution 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 October 2007.  We acquired Starsys on January 31, 2006.
        Revenues generated from this contract from February 1, 2006 through June
        30,
        2007 totaled approximately $3.4 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 amount of additional contract consideration of up to
        $1.0
        million based on the achievement of specific milestones. Of the additional
        possible $1.0 million, we achieved milestones entitling us to 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
        98%
        complete as of June 30, 2007.
 
 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, 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; 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.  We are
        currently working with the Missile Defense Agency and other government agencies
        for additional funding support of our microsatellite distributed sensing
        experiment.  Government contract funds from the Missile Defense Agency
        will expire at the end of the current government fiscal year.  It is
        possible that MDA or another government agency may fund the program or co-fund
        the program; 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 $19.8 million in revenue under this contract from inception
        through June 30, 2007.




Table
          of Contents
 16


In
        January 2005, Starsys was awarded a firm fixed price contract from Raytheon
        in
        Goleta, California 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 with incremental funding and extend to March
        2009.  Revenues from February 1, 2006, the first month after our
        acquisition date of Starsys, through June 30, 2007 totaled approximately
        $2.7
        million.
 
 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 scheduled for launch
        in
        2007.  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, our acquisition date of Starsys, through June 30, 2007
        totaled
        approximately $2.0 million.
 
 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. We recognized
        approximately $1.4 million in revenue under this contract from inception
        through
        June 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 $6.3 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 $2.9 million in revenue under this contract from inception
        through
        June 30, 2007.




Table
          of Contents
 17


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 from inception through June 30, 2007.
 
 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.  We will develop and deliver
        electromechanical Descent Brake dampers.  The contract period of
        performance is approximately 18 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 $448,000 in revenue
        under this contract from inception through June 30, 2007.
 
 **Resultsof
        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 six month
        periods
        ended June 30, 2007 represents a full six months of combined (historical
        SpaceDev + Starsys) results whereas the comparable six months in 2006
        illustrates only five months of combined results (i.e., February 2006 through
        June 2006) plus one month (January 2006) with only historical SpaceDev
        results.
 
 ***Six-Months
        Ended June 30, 2007 -vs.- Six-Months Ended June 30,
        2006***
 
 During
        the six months ended June 30, 2007, we had net sales of approximately $17.7
        million as compared to net sales of approximately $15.8 million for the same
        six
        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 $17.4 million for the six months ended June 30,
        2006.  Therefore, the increase in revenues was mainly due to the
        timing of the merger combined with execution on certain additional SpaceDev
        and
        Starsys programs.  We had a higher mix of revenue from commercial
        customers in the 2007 period.  Revenue for the six months ended June
        30, 2007 from government and government related work was approximately $14.0
        million and revenue from commercial customers was approximately $3.7
        million.  In comparison, in the six months ended June 30, 2006,
        revenue from government and government related work was approximately $14.1
        million and revenue from commercial customers was approximately $1.7
        million.  We do not expect our percentage of revenue from government
        and government related work to fall below this indicated 80% level.
 
 For
        the
        six months ended June 30, 2007, we had costs of sales (direct and allocated
        costs associated with individual contracts) of approximately $13.1 million,
        or
        74.1% of net sales, as compared to approximately $11.6 million, or 73.4%
        of net
        sales, during the same period in 2006.  The increase in cost of sales
        is primarily related to higher revenues overall combined with our efforts
        to
        conclude loss generating fixed price development contracts.  We also
        incurred additional facility costs in the form of rental on two Colorado
        facilities for two months and other costs related to moving our Boulder
        operation to Louisville, Colorado and moving our Durham operations in North
        Carolina to another Durham location.  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.




Table
          of Contents
 18


We
        experienced a slight decrease of approximately $35,000 in operating expenses
        for
        the six month period ended June 30, 2007, compared to the same period in
        2006;
        even though the six month period in 2006 only included five months of the
        Starsys operating expenses.  Total operating expenses as a percentage
        of net sales improved from 26.9% for the six months ended June 30, 2006 to
        23.8%
        for the six months ended June 30, 2007.  The improvement was mainly
        due to a decrease in our research and development expenses.  Our
        efforts to streamline certain business management functions within our company
        continue, although partially offset by the increasing costs related to
        Sarbanes-Oxley compliance requirements.
 
 ·
              General
                  and administrative expenses decreased approximately $51,000 from
                  approximately $2.7 million, or 17.1% of net sales, for the six
                  months
                  ended June 30, 2006 to approximately $2.7 million, or 15.0% of
                  net sales,
                  for the same six month period in 2007.  The small decrease can
                  be attributed mainly to the six versus five month comparison since
                  the
                  merger did not take place until January 31, 2006.  On a
                  pro-forma basis difference and as a percentage of total revenue
                  general
                  and administrative expenses decreased approximately $362,000 from
                  approximately $3.0 million on a pro forma basis for the six months
                  ended
                  June 30, 2006.  As a percentage of total revenues general and
                  administrative expenses decreased approximately 2.1% from 17.1%
                  of net
                  sales for the six months ended June 30, 2006 to 15.0% of net sales
                  for the
                  six months ended June 30, 2007.
 
 ·
              Research
                  and development expenses decreased to approximately $163,000, or
                  0.9% of
                  net sales, for the six months ended June 30, 2007, from approximately
                  $205,000, or 1.3% of net sales, during the same period in
                  2006.  The decrease was primarily due to the resignation of our
                  Chief Technology Officer at the end of the third quarter of 2006,
                  who has
                  not yet been replaced.
 
 ·
              Marketing
                  and sales expenses increased to approximately $1.4 million, or
                  7.9% of net
                  sales, for the six months ended June 30, 2007, from approximately
                  $1.3
                  million, or 8.4% of net sales, during the same period in
                  2006.  The total dollar increase of approximately $58,000 was
                  mainly due to 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. The risk-free interest rate was estimated at 4.0%,
                  expected volatility ranged from 86% to 100% 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 three years based on the average
                  vesting
                  period of options granted.  The total expense for the six months
                  ended June 30, 2007 and 2006 was approximately $212,000 and $116,000,
                  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 six months ended June 30, 2007 and
                  2006 was
                  approximately $113,000 and $11,000, respectively.  The increase
                  was mainly attributable to utilization of our revolving credit
                  facility in
                  2007; whereas, we did not borrow any significant amount during
                  the same
                  period in 2006.  We generated interest and other income in the
                  six months ended June 30, 2007 and 2006 of approximately $31,000
                  and
                  $41,000, respectively, the decrease was primarily due to lower
                  cash
                  balances in 2007.




Table
          of Contents
 19




·
              We
                  recognized approximately $59,000 of the deferred gain on the 2003
                  sale of
                  our Poway headquarters building during each of the six month periods
                  ended
                  June 30, 2007 and 2006, and we will continue to amortize the remaining
                  deferred gain of approximately $655,000 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 $174,000 for the six month period ended June 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; we are amortizing
                  this
                  expense over the initial one-year term of the credit facility.
                  We will
                  continue to expense the remaining $87,000 through September 2007.
                  If the
                  revolving credit facility is extended for another year, we will
                  issue an
                  additional $200,000 in our common stock to Laurus and amortize
                  its cost
                  over that twelve month period.
 
 During
        the six months ended June 30, 2007 we generated net income of approximately
        $156,000, or 0.9% of net sales, despite recognizing approximately $212,000
        in
        non-cash charges related to expensing stock options under SFAS 123(R), compared
        to net income of approximately $43,000, or 0.3% of net sales, for the same
        six
        month period in 2006 (after the approximate $106,000 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 must be subtracted from net income when calculating
        earnings per share.
 
 During
        the six months ended June 30, 2007, we had a positive EBITDA of approximately
        $1.2 million, or 6.7% of net sales, compared to an EBITDA of approximately
        $336,000, or 2.1% of net sales, for the six months ended June 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, stock option expense, non-cash loan fees
        and
        gain on our 2003 building sale.
 
 The
        following table reconciles EBITDA to net income for the six months ended
        June
        30, 2007 and 2006, respectively:


***For
                  the six months ending***
              
              **June
                  30, 2007**
              
              
              June
                  30, 2006**(Unaudited)**
              
              
              (Unaudited)**Net
                  Income**
              
              ***$***
              ***156,416***
              
              
              *$*
              *43,221*Interest
                  Income
              
              ******
              ***(30,979***
              ***)***
              
              **
              *(40,752*
              *)*Interest
                  Expense
              
              ******
              ***133,313***
              
              
              **
              *10,629*Non-Cash
                  Loan Fee
              
              ******
              ***173,562***
              
              
              **
              *-*Provision
                  for Income Taxes
              
              ******
              ***800***
              
              
              **
              *9,235*Depreciation
                  and Amortization
              
              ****
              **592,916**
              
              
              **
              *372,500*Stock
                  Option Expense
              
              ******
              ***212,103***
              
              
              **
              *115,693*Gain
                  on Building Sale
              
              ******
              ***(58,636***
              ***)***
              
              **
              *(58,637*
              *)***EBITDA
                  ***
              
              ***$***
              ***1,179,495***
              
              
              *$*
              *451,889*




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.
 
 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 six months of 2007 and 2006 we had stock
        option expense of approximately $212,000 and $116,000 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:




Table
          of Contents
 20




*Three
                  Months Ended*
              *Six
                  Months Ended**June
                  30,*
              **2007**
              **%**
              2006
              %
              **2007**
              **%**
              2006
              %**GAAP
                  Operating Income**
              **$    153,028**
              **1.8%**
              $       10,094
              0.1%
              **$    374,476**
              **2.1%**
              $    (36,304)
              -0.2%SFAS
                  123(R) stock -based compensation
              **107,484**
              **1.2%**
              24,992
              0.2%
              **212,103**
              **1.2%**
              115,693
              0.7%**Non-GAAP
                  Operating Income**
              **260,512**
              **1.5%**
              35,086
              0.2%
              **586,580**
              **3.3%**
              79,389
              0.5%**Non-Operating
                  Income/(Expense)**Interest
                  income
              **10,023**
              **0.1%**
              7,137
              0.0%
              **30,979**
              **0.2%**
              40,752
              0.3%Interest
                  and other expense
              **(57,955)**
              **-0.3%**
              (5,346)
              0.0%
              **(133,313)**
              **-0.8%**
              (10,629)
              -0.1%Gain
                  on building sale (Note 3(a))
              **(87,261)**
              **-0.5%**
              0
              0.0%
              **(173,562)**
              **-1.0%**
              0
              0.0%Non-Cash
                  loan fee - (Note 3(b))
              **29,318**
              **0.2%**
              29,319.00
              0.2%
              **58,636**
              **0.3%**
              58,637.00
              0.4%**Total
                  Non-Operating Income**
              **(105,876)**
              **-0.6%**
              31,110
              0.2%
              **(217,261)**
              **-1.2%**
              88,760
              0.6%**Non-GAAP
                  Net Income Before Taxes**
              **$    154,636**
              **0.9%**
              $       66,196
              0.4%
              **$    369,319**
              **2.1%**
              $      168,149
              1.1%**Income
                  Tax Provision**
              **-**
              **0.0%**
              5,000
              0.0%
              **(800)**
              **0.0%**
              9,235
              0.1%**Non-GAAP
                  Net Income**
              **$    154,636**
              **0.9%**
              $        61,196
              0.4%
              **$     370,119**
              **2.1%**
              $      158,914
              1.0%**Non-GAAP
                  Net Income**
              **154,636**
              
              61,196
              
              **370,119**
              
              158,914Less
                  Preferred Dividend Payments
              **(138,866)**
              
              (98,774)
              
              **(282,633)**
              
              (197,684)**Adjusted
                  Net Income/(Loss) for EPS Calculation**
              **15,770**
              
              (37,578)
              
              **87,486**
              
              (38,770)**Non-GAAP
                  Net Income Per Share**
              **$          0.00**
              
              $         (0.00)
              
              **$          0.00**
              
              $         (0.00)Weighted-Average
                  Shares Outstanding
              **29,643,246**
              
              28,818,403
              
              **29,606,975**
              
              28,818,403




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 June 30, 2007 -vs.- Three-Months Ended June 30,
        2006***
 
 During
        the three months ended June 30, 2007, we had net sales of approximately $8.6
        million as compared to equivalent net sales of approximately $8.6 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 June 30, 2007 from government and government related work was
        approximately $6.4 million and revenue from commercial customers was
        approximately $2.2 million.  In comparison, in the three months ended
        June 30, 2006, revenue from government and government related work was
        approximately $7.6 million and revenue from commercial customers was
        approximately $1.0 million.




Table
          of Contents
 21


For
        the
        three months ended June 30, 2007, we had costs of sales (direct and allocated
        costs associated with individual contracts) of approximately $6.2 million,
        or
        71.1% of net sales, as compared to approximately $6.3 million, or 73.3% of
        net
        sales, during the same period in 2006.  The decrease in cost of sales
        is primarily related our efforts to conclude loss generating fixed price
        development contracts and the release of accruals recorded in prior
        periods.  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.
 
 We
        experienced a slight increase of approximately $52,000 in operating expenses
        for
        the three month period ended June 30, 2007, compared to the same period in
        2006.  Total operating expenses as a percentage of net sales increased
        slightly from 26.5% for the three months ended June 30, 2006 to 27.1% for
        the
        three months ended June 30, 2007.  The dollar increase was mainly due
        to increases in marketing and sales and general and administrative expenses,
        offset by certain reductions in research and development expenses.
 
 ·
              General
                  and administrative expenses decreased approximately $64,000 from
                  approximately $1.5 million, or 17.1% of net sales, for the three
                  months
                  ended June 30, 2006 to approximately $1.4 million, or 16.3% of
                  net sales,
                  for the same three month period in 2007.  The slight decrease
                  can be attributed mainly to moving the Durham facility, improving
                  the
                  infrastructure on our new Louisville facility and certain increases
                  related to Sarbanes-Oxley compliance requirements, which were partially
                  offset by ongoing cost control
                  efforts.
 
 ·
              Research
                  and development expenses remained relatively the same for the three
                  months
                  ended June 30, 2007 and 2006 at approximately $123,000, or 1.4%
                  of net
                  sales, respectively.
 
 ·
              Marketing
                  and sales expenses increased to approximately $806,000, or 9.3%
                  of net
                  sales, for the three months ended June 30, 2007, from approximately
                  $691,000, or 8.0% of net sales, during the same period in
                  2006.  The increase of approximately $115,000 was mainly due to
                  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. The risk-free interest rate was estimated at 4.0%,
                  expected volatility ranged from 86% to 100% 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 three years based on the average
                  vesting
                  period of options granted.  The total expense for the three
                  months ended June 30, 2007 and 2006 was approximately $107,000 and
                  $25,000, 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 June 30, 2007
                  and 2006
                  was approximately $58,000 and $5,000, respectively.  The
                  increase was mainly attributable to utilization of our revolving
                  credit
                  facility in 2007; whereas, we did not borrow any significant amount
                  during
                  the same period in 2006.  We generated interest and other income
                  in the three months ended June 30, 2007 and 2006 of approximately
                  $10,000
                  and $7,000, respectively.
 
 ·
              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 June 30, 2007 and 2006, and we will continue to amortize
                  the
                  remaining deferred gain of approximately $655,000 into non-operating
                  income over the remainder of the leaseback, which expires in January
                  2013.




Table
          of Contents
 22


·
              We
                  recorded non-cash loan fees related to our revolving credit facility
                  of
                  approximately $87,000 for the three month period ended June 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; we are amortizing
                  this
                  expense over the initial one-year term of the credit facility.
                  We will
                  continue to expense the remaining $87,000 through September 2007.
                  If the
                  revolving credit facility is extended for another year, we will
                  issue an
                  additional $200,000 in our common stock to Laurus and amortize
                  its cost
                  over that twelve month period.
 
 During
        the three months ended June 30, 2007 we generated net income of approximately
        $47,000, or 0.5% of net sales, despite recognizing approximately $107,000
        in
        non-cash charges related to expensing stock options under SFAS 123(R), compared
        to net income of approximately $36,000, or 0.4% of net sales, for the same
        three
        month period in 2006 (after the approximate $25,000 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 must be subtracted from net income when calculating
        earnings per share.
 
 During
        the three months ended June 30, 2007, we had a positive EBITDA of approximately
        $537,000, or 6.2% of net sales, compared to a EBITDA of approximately $260,000,
        or 3.0% of net sales, for the three months ended June 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, stock option expense, non-cash loan fees
        and
        gain on our 2003 building sale.
 
 The
        following table reconciles EBITDA to net income for the three months ended
        June
        30, 2007 and 2006, respectively:


***For
                  the three months ended***
              
              **June
                  30, 2007**
              
              
              June
                  30, 2006**(Unaudited)**
              
              
              (Unaudited)**Net
                  Income**
              
              ***$***
              ***47,152***
              
              
              $
              36,204Interest
                  Income
              
              ******
              ***(10,023***
              ***)***
              
              
              (7,137
              )Interest
                  Expense
              
              ******
              ***57,955***
              
              
              
              5,346Non-Cash
                  Loan Fee
              
              ******
              ***87,261***
              
              
              
              -Provision
                  for Income Taxes
              
              ******
              ***-***
              
              
              
              5,000Depreciation
                  and Amortization
              
              ****
              **276,678**
              
              
              
              225,130Stock
                  Option Expense
              
              ******
              ***107,484***
              
              
              
              24,992Gain
                  on Building Sale
              
              ******
              ***(29,318***
              ***)***
              
              
              (29,318
              )**EBITDA**
              
              ***$***
              ***537,190***
              
              
              $
              260,217


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.
 
 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 June 30, 2007 and 2006 we had
        stock option expense of approximately $107,000 and $25,000 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:




Table
          of Contents
 23




*Three
                  Months Ended*
              
              *Six
                  Months Ended**June
                  30,*
              
              **2007**
              
              
              **%**
              
              
              2006
              
              
              %
              
              
              **2007**
              
              
              **%**
              
              
              2006
              
              
              %**GAAP
                  Operating Income**
              
              **$**
              **153,028**
              
              
              ****
              **1.8**
              **%**
              
              $
              10,094
              
              
              
              0.1
              %
              
              **$**
              **374,476**
              
              
              ****
              **2.1**
              **%**
              
              $
              (36,304
              )
              
              
              -0.2
              %SFAS
                  123(R) stock -based compensation
              
              ****
              **107,484**
              
              
              ****
              **1.2**
              **%**
              
              
              24,992
              
              
              
              0.2
              %
              
              ****
              **212,103**
              
              
              ****
              **1.2**
              **%**
              
              
              115,693
              
              
              
              0.7
              %**Non-GAAP
                  Operating Income**
              
              ****
              **260,512**
              
              
              ****
              **1.5**
              **%**
              
              
              35,086
              
              
              
              0.2
              %
              
              ****
              **586,580**
              
              
              ****
              **3.3**
              **%**
              
              
              79,389
              
              
              
              0.5
              %**Non-Operating
                  Income/(Expense)**Interest
                  income
              
              ****
              **10,023**
              
              
              ****
              **0.1**
              **%**
              
              
              7,137
              
              
              
              0.0
              %
              
              ****
              **30,979**
              
              
              ****
              **0.2**
              **%**
              
              
              40,752
              
              
              
              0.3
              %Interest
                  and other expense
              
              ****
              **(57,955**
              **)**
              
              ****
              **-0.3**
              **%**
              
              
              (5,346
              )
              
              
              0.0
              %
              
              ****
              **(133,313**
              **)**
              
              ****
              **-0.8**
              **%**
              
              
              (10,629
              )
              
              
              -0.1
              %Gain
                  on building sale (Note 3(a))
              
              ****
              **(87,261**
              **)**
              
              ****
              **-0.5**
              **%**
              
              
              0
              
              
              
              0.0
              %
              
              ****
              **(173,562**
              **)**
              
              ****
              **-1.0**
              **%**
              
              
              0
              
              
              
              0.0
              %Non-Cash
                  loan fee - (Note 3(b))
              
              ****
              **29,318**
              
              
              ****
              **0.2**
              **%**
              
              
              29,319.00
              
              
              
              0.2
              %
              
              ****
              **58,636**
              
              
              ****
              **0.3**
              **%**
              
              
              58,637.00
              
              
              
              0.4
              %**Total
                  Non-Operating Income**
              
              ****
              **(105,876**
              **)**
              
              ****
              **-0.6**
              **%**
              
              
              31,110
              
              
              
              0.2
              %
              
              ****
              **(217,261**
              **)**
              
              ****
              **-1.2**
              **%**
              
              
              88,760
              
              
              
              0.6
              %**Non-GAAP
                  Net Income Before Taxes**
              
              **$**
              **154,636**
              
              
              ****
              **0.9**
              **%**
              
              $
              66,196
              
              
              
              0.4
              %
              
              **$**
              **369,319**
              
              
              ****
              **2.1**
              **%**
              
              $
              168,149
              
              
              
              1.1
              %**Income
                  Tax Provision**
              
              ****
              **-**
              
              
              ****
              **0.0**
              **%**
              
              
              5,000
              
              
              
              0.0
              %
              
              ****
              **(800**
              **)**
              
              ****
              **0.0**
              **%**
              
              
              9,235
              
              
              
              0.1
              %**Non-GAAP
                  Net Income**
              
              **$**
              **154,636**
              
              
              ****
              **0.9**
              **%**
              
              $
              61,196
              
              
              
              0.4
              %
              
              **$**
              **370,119**
              
              
              ****
              **2.1**
              **%**
              
              $
              158,914
              
              
              
              1.0
              %**Non-GAAP
                  Net Income**
              
              ****
              **154,636**
              
              
              
              
              
              
              
              61,196
              
              
              
              
              
              
              ****
              **370,119**
              
              
              
              
              
              
              
              158,914Less
                  Preferred Dividend Payments
              
              ****
              **(138,866**
              **)**
              
              
              
              
              
              
              (98,774
              )
              
              
              
              
              
              ****
              **(282,633**
              **)**
              
              
              
              
              
              
              (197,684
              )**Adjusted
                  Net Income/(Loss) for EPS Calculation**
              
              ****
              **15,770**
              
              
              
              
              
              
              
              (37,578
              )
              
              
              
              
              
              ****
              **87,486**
              
              
              
              
              
              
              
              (38,770
              )**Non-GAAP
                  Net Income Per Share**
              
              **$**
              **0.00**
              
              
              
              
              
              
              $
              (0.00
              )
              
              
              
              
              
              **$**
              **0.00**
              
              
              
              
              
              
              $
              (0.00
              )Weighted-Average
                  Shares Outstanding
              
              ****
              **29,643,246**
              
              
              
              
              
              
              
              28,818,403
              
              
              
              
              
              
              ****
              **29,606,975**
              
              
              
              
              
              
              
              28,818,403




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.
 
 **Liquidityand
        Capital Resources**
 
 Net
        increase in cash during the six months ended June 30, 2007 was approximately
        $1.5 million, primarily due to advances on our revolving credit facility,
        compared to a cash decrease of $4.5 million for the same six month period
        in
        2006, primarily due to the uses of cash in the merger with
        Starsys.  Net cash provided by operating activities totaled
        approximately $348,000 for the six months ended June 30, 2007, an increase
        of
        approximately $2.6 million as compared to approximately $2.3 million used
        in
        operating activities during the same six month period in 2006.  The
        increase 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 $543,000 for the six months
        ended June 30, 2007, compared to approximately $2.1 million used in investing
        activities during the same six 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.
 
 Net
        cash
        provided by financing activities totaled approximately $1.7 million for the
        six
        months ended June 30, 2007, which is an increase of approximately $1.7 million
        from approximately $59,000 provided by financing activities during the same
        six
        months in 2006.  This is primarily attributable to our new revolving
        credit facility, which provided over $2.2 million in cash during the first
        six
        months of 2007.  In the 2006 period, we raised approximately $4.8
        million net in our Series D-1 preferred stock financing but invested most
        of the
        proceeds in the Starsys merger.




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At
        June
        30, 2007, our cash, which included cash reserves and cash available for
        investment, was approximately $2.9 million, as compared to approximately
        $1.3
        million at June 30, 2006, a increase of approximately $1.6
        million.  At June 30, 2007, our working capital ratio was 1.1:1 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
        June 30, 2007, our backlog of funded and non-funded business was approximately
        $22 million, compared to approximately $20 million as of December 31, 2006
        and
        compared to $41 million as of June 30, 2006.
 
 As
        of
        June 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.
 
 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, including but not limited
        to,
        the Missile Defense Agency.  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.
 
 **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
        October 1995, the Financial Accounting Standards Board (FASB) issued Statement
        of Financial Accounting Standards (SFAS) No. 123, *Accounting for Stock-Based
        Compensation.*  We adopted SFAS No. 123 in
        1997.  Through December 31, 2005, we elected to measure compensation
        expense for our stock-based employee compensation plans using the intrinsic
        value method prescribed by APB Opinion No. 25, *Accounting for Stock Issued
        to Employees* and provided pro forma disclosures as if the fair value based
        method prescribed in SFAS No. 123 had been utilized.  (See Note 4 to
        our Consolidated Financial Statements.)
 
 SFAS
        No.
        148, *Accounting for Stock-Based Compensation – Transition and
        Disclosure*, which amends SFAS No. 123, *Accounting for Stock-Based
        Compensation*, was published by the FASB on December 31,
        2002.  The effective date of SFAS No. 148 was December 15,
        2002.  SFAS No. 123 prescribes a "fair value" methodology to measure
        the cost of stock options and other equity awards.  Companies may
        elect either to recognize fair value stock-based compensation costs in their
        financial statements or to disclose the pro forma impact of those costs in
        the
        footnotes.  Through December 31, 2005, we had chosen the latter
        approach.




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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 June 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 June 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.
 
 **RecentAccounting
        Pronouncements**
  There
        were no recent Accounting Pronouncements that affected us during the first
        six
        months of 2007.  For past pronouncements, please refer to our Form
        10-KSB filed on April 2, 2007.
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 26
 **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
        some
        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 $17.7 million and $17.4 million
        (on a pro-forma basis), respectively, and net income from operations of
        approximately $374,000 and a net loss from operations of approximately $101,000
        (on a pro-forma basis), respectively, for the six months ended June 30, 2007
        and
        2006.  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.  Although we are currently generating a modest amount of
        cash from operations, 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.
 
 ***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 and
        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 September 30, 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 informed in 2005 that the Missile
        Defense Agency had re-routed the laser communications experiment to another
        program and that they would not be exercising their option for the additional
        microsats at that time; however, the contract vehicle remained at $43 million
        and the Missile Defense Agency has authority to substitute other work within
        this contract vehicle if it wishes to.  The Missile Defense Agency has
        indicated that it may reduce or eliminate funding for the program in GFY
        2008
        due to government budget allocations and reductions. We are working with
        the Missile Defense Agency and other government agencies who may be interested
        in our microsat program both in addition to, and possibly in place of, the
        Missile Defense Agency program since there can be no assurances that our
        discussions with the Missile Defense Agency will be fruitful or that any
        additional task orders will be awarded in the future or that task order funding
        will be available.




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***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 developments. 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 June 30, 2007, we retained reserves of approximately $200,000
        for potential risks on development projects, which had begun prior to the
        merger
        in January 2006.
   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 and there may still be further dispute
        as to
        whether we completed all of our contract requirements.  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.
   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,
        which has the potential for significant profitability.
   Under
        cost plus fixed fee 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 fixed fee 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:




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·
              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 continue
                  to incur
                  major cost overruns or remains unprofitable for other
                  reasons.
 
 ***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 in 2007 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 six 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
        essentially 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.




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***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 has indicated that it may reduce or eliminate funding
        for
        the program in GFY 2008 due to government budget allocations and
        reductions. The Missile Defense Agency recently extended the end time of
        Task Order IV from March 1, 2007 to June 15, 2007 and then again to September
        30, 2007.  We are working with the Missile Defense Agency and other
        government agencies who may be interested in our microsat program both in
        addition to, and possibly in place of, the Missile Defense Agency program
        since
        there can be no assurances that our discussions with the MDA will be fruitful
        or
        that any additional task orders will be awarded in the future, or that task
        order funding will be available.
 
 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
        June 30, 2007, we are obligated to issue 6,126,856 shares of our common stock,
        of which 1,922,138 are represented by outstanding warrants and 4,204,718
        could
        be converted from our outstanding preferred stock.  In addition, as of
        June 30, 2007, we had outstanding stock options to purchase an aggregate
        of
        10,866,891 shares of our common stock, of which 8,524,405 are currently
        vested.  The total number of shares, issuable upon the exercise or
        conversion of currently vested warrants, options and preferred stock (14,453,261
        shares) represents approximately 48% of our issued and outstanding shares
        of
        common stock as of June 30, 2007.




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***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.
 
 ***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.


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***Our
          operating results could fluctuate on a quarterly and annual basis, which
          could
          cause our stock price to fluctuate or decline.***
 
 ·
              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.
 
 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 $535,000 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.




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***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. Until we develop our own launch vehicle,
        we
        will be dependent on the performance of third party companies like Space
        Exploration Technologies, a small company with limited operating history,
        which
        has not yet had a successful launch, for our first launch vehicle.
 
 ***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.***
 
 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.




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Historically,
        we have used vesting stock options to enhance our ability to retain key
        personnel.  If the employee leaves us before the vesting period has
        been completed, the employee must forfeit any unvested portion of the stock
        options.  In December 2005, in order to avoid adverse financial
        reporting effects in future years under SFAS 123(R) new accounting standard,
        we
        eliminated all future vesting requirements on all of our 8,031,036 stock
        options, then outstanding and in the hands of employees, officers, and
        directors.  To the extent the vesting requirement was operating as a
        retention device, the elimination of the vesting requirements eliminated
        the
        retention benefit.  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.
 
 ***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.
 
 ***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.
 
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***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.
 
 ***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.




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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.
 
 ***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
        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.




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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.
 
 ***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.*"
 
 ***Changes
        in stock option accounting rules may adversely affect our reported operating
        results prepared in accordance with generally accepted accounting principles,
        our stock price and our efforts in recruiting additional
        employees.***
 
 Technology
        companies, in general, and our company in particular, depend upon and use
        broad
        based employee stock option programs to hire, incentivize, and retain employees
        in a competitive marketplace. Through fiscal 2005, we did not recognize
        compensation expense for stock options issued to employees or directors,
        except
        in limited cases involving modifications of stock options, and we instead
        disclosed in the notes to our financial statements information about what
        such
        charges would be if they were expensed. An accounting standard setting body
        adopted SFAS 123(R), a new 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 will lead to a decrease in reported earnings,
        if we
        have earnings, or an increased loss, if we do not have earnings. This may
        negatively impact our future stock price. In order to protect reported earnings,
        we reduced the use of stock options, and 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.


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***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
        June 30, 2007, our executive officers and directors together beneficially
        owned
        approximately 34.2% of the issued and outstanding shares of our common
        stock.  James W. Benson and Susan C. Benson beneficially own
        approximately 31.7% 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., 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.  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.
 
 ***Our
        expansion into other new lines of business may divert management's attention
        from our existing operations and prove to be too
        costly.***
 
 Our
        current business plan contemplates the migration of 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.


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***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.***
 
 ***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 3,835 shares of our Series D-1 Preferred
        Stock.  Our Board of Directors may determine the terms of future
        preferred stock offerings without further action by our shareholders. If
        we
        issue additional preferred stock, it could affect your rights or reduce the
        value of your common stock. In particular, specific rights granted to future
        holders of preferred stock could be used to restrict our ability to merge
        with
        or sell our assets to a third party. These terms may include voting rights,
        preferences as to dividends and liquidation, conversion and redemption rights,
        and sinking fund provisions.  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.
 
 ***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 $3.0 million. We paid a loan fee at closing in the form
        of
        common stock valued at $350,000 which is being spread over the first year
        of the
        line of credit.  In addition, we will be required to pay Laurus
        additional loan fees in the form of common stock valued at $200,000 on each
        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;




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·
              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 June 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.




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**PARTII
        -- 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**
 None.
 
 **ITEM
        5.                      OTHER
        INFORMATION**
  None.






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**ITEM
        6.                      EXHIBITS**
  Exhibit
                    No.
                Description
                Filed
                    Herewith
                Incorporated
                    by Reference
                Form
                Date
                    Filed with SEC
                Exhibit
                    No.10.1
                Warrant
                    Exercise Offer - Form of Letter sent to all Series D-1 Preferred
                    Shareholders
                X10.2
                Escrow
                    Consent and Waiver
                X31.1
                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
 
 **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:  August
        13,
        2007                                                            By: /s/ Mark
        N.
        Sirangelo
 Mark
        N.
        Sirangelo
 Chief
        Executive Officer
 
 
 
 Dated:  August
        13,
        2007                                                             By:
        /s/ Richard B. Slansky
 Richard
        B.
        Slansky
 President
        & Chief Financial Officer
 
 
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