FORM 10-QSB/A
                                 AMENDMENT NO. 1


                     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, 2005

[   ]     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 registrant as specified in its charter)


                             Colorado                            84-1374613

                (State or other jurisdiction of                (IRS Employer
                   incorporation or organization)           Identification No.)


                   13855 Stowe Drive, Poway, California 92064

                    (Address of principal executive offices)

(Issuer's  telephone  number)   (858)  375-2030.
                               ----------------
--------------------------------------------------------------------------------
(Former  name,  former  address  and  former  fiscal year, if changed since last
report)

Checkmark  whether  the issuer (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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
                 -----    ----

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:  22,264,183 shares of Issuer's voting
common  stock  were  outstanding  on  August  10,  2005.


Explanatory  Note  - This Form 10-QSB/A is being filed solely for the purpose of
re-filing  the redacted Exhibit 10.1 (Subcontract - Small Tug:  Miniature Flight
Experiment  Demonstrating  Cislunar Tug Technologies dated  July  27,  2005) and
does  not  reflect any events occurring after the date of filing of the original
Form  10-QSB  or  otherwise  modify  or  update any of the information contained
therein.



                                      PAGE

                                 SPACEDEV, INC.
                         AMENDMENT NO. 1 TO FORM 10-QSB
                       FOR THE QUARTER ENDED JUNE 30, 2005


INDEX                                                                       PAGE
-----                                                                       ----

PART  I  --  FINANCIAL  INFORMATION                                            1
     ITEM  1.     FINANCIAL  STATEMENTS                                        1
       Consolidated  Balance  Sheets                                           1
       Consolidated  Balance  Sheets                                           2
       Consolidated  Statements  of  Operations                                3
       Consolidated  Statements  of  Cash  Flows                               4
       Notes  to  Consolidated  Financial  Statements                          6

     ITEM  2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS  OF  OPERATIONS                                 14

     ITEM  3.  CONTROLS  AND  PROCEDURES                                      31

PART  II  --  OTHER  INFORMATION                                              32
     ITEM  1.     LEGAL  PROCEEDINGS                                          32

     ITEM  2.     CHANGES  IN  SECURITIES                                     32

     ITEM  3.     DEFAULTS  UPON  SENIOR  SECURITIES                          32

     ITEM  4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         32

     ITEM  5.     OTHER  INFORMATION                                          32

     ITEM  6.     EXHIBITS  AND  REPORTS  ON  FORM  8-K                       32

SIGNATURES                                                                    33

                                      PAGE

                         PART I -- FINANCIAL INFORMATION

ITEM  1.     FINANCIAL  STATEMENTS

                          SPACEDEV, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
<S>                              <C>         <C>
At June 30, . . . . . . . . . .        2005        2004
-------------------------------  ----------  ----------

 ASSETS

 CURRENT ASSETS
      Cash and cash equivalents  $5,443,052  $1,226,529
      Accounts receivable . . .     845,181     602,151
      Work in progress. . . . .      54,729      10,316
-------------------------------  ----------  ----------
 Total current assets . . . . .   6,342,962   1,838,996

 FIXED ASSETS - NET . . . . . .     586,562     184,996

 OTHER ASSETS . . . . . . . . .     170,249      30,574
-------------------------------  ----------  ----------
                                 $7,099,773  $2,054,566
-------------------------------  ----------  ----------
-------------------------------  ----------  ----------

</TABLE>

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

                                        1
                                      PAGE

                          SPACEDEV, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

<S>                                                                       <C>            <C>
 At June 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2005           2004
------------------------------------------------------------------------  -------------  -------------

 LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)

 CURRENT LIABILITIES
      Current portion of notes payable  (Note 3(a)). . . . . . . . . . .  $     28,021   $     35,778
      Current portion of capitalized lease obligations . . . . . . . . .         3,445          4,257
      Note payable - related party (Note 3(b)) . . . . . . . . . . . . .             -         80,000
      Accounts payable and accrued expenses. . . . . . . . . . . . . . .       463,523        202,908
      Accrued payroll, vacation and related taxes. . . . . . . . . . . .       224,281        246,983
      Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . .        59,063         28,400
      Revolving line of credit  (Note 3(c)). . . . . . . . . . . . . . .             -        408,003
      Employee stock purchase plan . . . . . . . . . . . . . . . . . . .        22,763          5,238
      Other accrued liabilities. . . . . . . . . . . . . . . . . . . . .       219,172        146,595
------------------------------------------------------------------------  -------------  -------------

 TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . .     1,020,268      1,158,162

 NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 3(A)). . . . . . . . . . .             -         28,021

 CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES. . . . . . . . .             -          3,445

 NOTE PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES  (NOTE 3(B)). . .             -        116,445

 DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 3(A)). . . . . . . . . . . .       889,313      1,006,585
------------------------------------------------------------------------  -------------  -------------

 TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . .     1,909,581      2,312,658

 COMMITMENTS AND CONTINGENCIES

 STOCKHOLDERSEQUITY (DEFICIT)
      Convertible preferred stock, $.001 par value, 10,000,000 shares
           authorized, and 250,000 shares issued or outstanding (Note 4)           250              -
      Common stock, $.0001 par value; 50,000,000 shares authorized, and
           22,186,446 and 18,985,285  shares issued and outstanding,
           respectively (Note 4) . . . . . . . . . . . . . . . . . . . .         2,218          1,898
      Additional paid-in capital (Note 4). . . . . . . . . . . . . . . .    19,466,281     12,787,202
      Additional paid-in capital - stock options . . . . . . . . . . . .       750,000        750,000
      Deferred compensation. . . . . . . . . . . . . . . . . . . . . . .      (250,000)      (250,000)
      Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . .   (14,778,557)   (13,547,192)
------------------------------------------------------------------------  -------------  -------------
 TOTAL STOCKHOLDERS EQUITY (DEFICIT) . . . . . . . . . . . . . . . . . .     5,190,192       (258,092)
------------------------------------------------------------------------  -------------  -------------
 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY . . . . . . . . . . . . . . .  $  7,099,773   $  2,054,566
------------------------------------------------------------------------  -------------  -------------
------------------------------------------------------------------------  -------------  -------------

</TABLE>

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


                                        2
                                      PAGE

                          SPACEDEV, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

Three and Six Months Ending                          Three-Months Ending                         Six-Months Ending
                                      -------------------------------------------  ------------------------------------------
                   June 30,               2005         %         2004        %        2005          %       2004        %
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
<S>                                   <C>            <C>     <C>           <C>     <C>           <C>     <C>          <C>
 NET SALES . . . . . . . . . . . . .  $ 1,901,659    100.0%  $ 1,200,692   100.0%  $ 3,708,548   100.0%  $ 2,215,443   100.0%

 TOTAL COST OF SALES . . . . . . . .    1,465,593     77.1%     942,116     78.5%    2,862,428    77.2%    1,749,639    79.0%

 GROSS MARGIN. . . . . . . . . . . .      436,066     22.9%     258,576     21.5%      846,120    22.8%      465,804    21.0%
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
 OPERATING EXPENSES
    Marketing and sales expense. . .      159,673      4.3%      116,132     5.2%      304,689     8.2%      215,284     9.7%
    General and administrative . . .      201,712      5.4%      109,579     4.9%      401,183    10.8%      205,735     9.3%
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
 TOTAL OPERATING EXPENSES. . . . . .      361,385     19.0%      225,711    18.8%      705,872    19.0%      421,019    19.0%
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
 INCOME FROM OPERATIONS . . . . . .        74,681      3.9%      32,865      2.7%      140,248     3.8%       44,785     2.0%
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
 NON-OPERATING (INCOME) EXPENSE
    Interest income . . . . . . . .       (36,823)    -1.0%            -     0.0%      (44,783)   -1.2%            -     0.0%
    Interest expense . . . . . . . .          609      0.0%       19,736     1.6%        1,830     0.0%       39,524     1.8%
    Gain on Building Sale (Note 3(a))     (29,318)    -1.5%      (29,318)   -2.4%      (58,636)   -1.6%      (58,636)   -2.6%
    Non-Cash Loan Fee -
      Equity Conversions (Note 3(c))       28,875      1.5%    1,329,313   110.7%       28,875     0.8%     1,793,313   80.9%
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
 TOTAL NON-OPERATING (INCOME)
      EXPENSE . . . . . . . . . . .       (36,657)    -1.9%    1,319,731   109.9%      (72,714)   -2.0%     1,774,201   80.1%
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------

 INCOME (LOSS) BEFORE TAXES . . . .       111,338      5.9%    (1,286,866) -107.2%     212,962     5.7%   (1,729,416)  -78.1%

 INCOME TAX PROVISION. . . . . . . .          400      0.0%             -     0.0%         800     0.0%            -     0.0%
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
 NET INCOME (LOSS). . . . . . . . .   $   110,938      5.8%  $ (1,286,866) -107.2%  $  212,162     5.7%  $(1,729,416)  -78.1%
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
------------------------------------- ------------   ------  -----------  -------  ------------  ------  -----------  -------
 NET INCOME (LOSS) PER SHARE:
      Net income (loss). . . . . . .  $       0.01           $     (0.07)           $      0.01           $    (0.09)
------------------------------------- ------------           -----------           ------------          -----------
------------------------------------- ------------           -----------           ------------          -----------
Weighted-Average Shares Outstanding    21,792,987            17,986,803             21,541,549           17,410,651
------------------------------------- ------------           -----------           ------------          -----------
 FULLY DILUTED NET INCOME (LOSS) PER SHARE:
      Net income (loss). . . . . . .  $       0.00           $     (0.07)           $      0.01           $    (0.09)
------------------------------------- ------------           -----------           ------------          -----------
------------------------------------- ------------           -----------           ------------          -----------
 Fully Diluted Weighted-Average
      Shares Outstanding . . . . . .    30,593,912            17,986,803             30,515,291           17,410,651
------------------------------------- ------------           -----------           ------------          -----------
------------------------------------- ------------           -----------           ------------          -----------

</TABLE>

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

                                        3
                                      PAGE

                          SPACEDEV, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

<S>                                                            <C>          <C>
 Six-Months Ending June 30, . . . . . . . . . . . . . . . . .        2005          2004
-------------------------------------------------------------  -----------  ------------
 CASH FLOWS FROM OPERATING ACTIVITIES
      Net income (loss) . . . . . . . . . . . . . . . . . . .  $  212,162   $(1,729,416)
      Adjustments to reconcile net income (loss) to net cash
          provided by (used in) operating activities:
           Depreciation and amortization. . . . . . . . . . .      64,137        32,487
           Gain on disposal of building sale. . . . . . . . .     (58,636)      (58,636)
           Non-cash loan fees . . . . . . . . . . . . . . . .      28,875     1,793,313
           Change in operating assets and liabilities . . . .     (75,437)     (274,410)
-------------------------------------------------------------  -----------  ------------
 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . . .     171,101      (236,662)
-------------------------------------------------------------  -----------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
      Purchases of fixed assets . . . . . . . . . . . . . . .    (371,318)      (79,951)
-------------------------------------------------------------  -----------  ------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . .    (371,318)      (79,951)
-------------------------------------------------------------  -----------  ------------
 CASH FLOWS FROM FINANCING ACTIVITIES
      Principal payments on notes payable . . . . . . . . . .     (18,106)      (23,792)
      Principal payments on capitalized lease obligations . .      (1,808)       (7,883)
      Employee Stock Purchase Plan. . . . . . . . . . . . . .      24,734             -
      Payments on notes payable - related party . . . . . . .           -      (415,000)
      Proceeds from issuance of common stock. . . . . . . . .     569,848       978,889
      Proceeds from revolving credit facility . . . . . . . .           -       418,922
-------------------------------------------------------------  -----------  ------------
 NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . . . . . .     574,668       951,136
-------------------------------------------------------------  -----------  ------------
 Net increase in cash . . . . . . . . . . . . . . . . . . . .     374,451       634,523
-------------------------------------------------------------  -----------  ------------
 CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . .   5,068,601       592,006
-------------------------------------------------------------  -----------  ------------
 CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . .  $5,443,052   $ 1,226,529
-------------------------------------------------------------  -----------  ------------
-------------------------------------------------------------  -----------  ------------

</TABLE>

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

                                        4
                                      PAGE

                          SPACEDEV, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D.
                                   (UNAUDITED)

<TABLE>
<CAPTION>

<S>                                                  <C>     <C>

 Six-Months Ending June 30, . . . . . . . . . . . .    2005     2004
---------------------------------------------------  ------  -------

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid during the period for:
           Interest . . . . . . . . . . . . . . . .  $1,830  $82,614
---------------------------------------------------  ------  -------

</TABLE>

 NONCASH  INVESTING  AND  FINANCING  ACTIVITIES:

During  the  six-months  ending  June  30,  2005 and 2004, the Company converted
     $11,303 and $6,400 of employee stock purchase plan contributions into 7,915
     and  7,076  shares  of  common  stock,  respectively.

During  the  six-months  ending  June  30,  2005, the Company declared dividends
     Payable  of  $84,922  to  the  holders  of  its  preferred  stock.

During  the  six-months  ending  June  30, 2005, the Company converted dividends
     Payable  of  $117,268  into 76,148 shares of common stock to the holders of
     its  preferred  stock.

During  the six-months ending June 30, 2004, the Company issued 1,403,182 shares
     of  its  common  stock to the Laurus Master Fund from conversions under its
     revolving  credit  facility, thereby realizing a corresponding reduction in
     current  liabilities  of  approximately  $772,000   The  Company   recorded
     additional non-cash loan fees of approximately $1,178,000 and charged these
     fees  to  expense.

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

                                        5
                                      PAGE

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       BASIS  OF  PRESENTATION

The  accompanying  consolidated  financial  statements  of  SpaceDev, Inc. ("the
Company")  include  the  accounts  of  the  Company and its inactive subsidiary,
SpaceDev,  Inc.,  an  Oklahoma  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  March 28, 2005 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
three- and six-month periods ending June 30, 2005 are not necessarily indicative
of  results that may be expected for the fiscal year ending December 31, 2005 or
any  future  period,  and  the Company makes no representations related thereto.

As  of  June  30,  2005,  management  continues  the  opinion that the Company's
auditors,  PKF,  expressed  in their formal auditors' opinion dated February 10,
2005,  that  in their opinion,  based on their audit, the Company's consolidated
financial  statements  referred  to  herein  present  fairly,  in  all  material
respects,  the  consolidated financial position of SPACEDEV, INC. AND SUBSIDIARY
as  of  December  31,  2004,  and  the  consolidated  results  of  the Company's
operations  and  cash  flows  for  the  year  then  ended,  in  conformity  with
accounting  principles  generally accepted in the United States of America.  The
accompanying  consolidated  financial  statements  as of June 30, 2005 have been
prepared  assuming  the  Company  will  continue  as  a  going  concern.

During  the  first six-months of 2005, the Company had a working capital balance
of  $5,355,564  and  incurred  a  net  profit of $212,162 as compared to working
capital  of  $680,834 and a net loss of $1,729,416 for the same six-month period
in  2004.  Also  during  the  first  six  months  of  2005,   the  Company   had
non-operating  income  of  $72,714  as  compared  to  non-operating  expenses of
$1,774,201 for the same six-month  period  in  2004,  with the  majority  of the
difference  representing  non-cash  interest expenses in 2004 and an increase in
interest  income  in  2005.

On  March  31,  2004,  the  Company  was awarded a $43,362,271 contract from the
Missile  Defense  Agency.  The first Task Order was awarded on April 1, 2004 and
completed  on  September 30, 2004.  The second Task Order was awarded on October
20,  2004  (although  effective  October  1,  2004)  and  is   expected  to   be
completed  by  January  31,  2006.

Management  intends  to  obtain  new  government  contracts, seek new commercial
contracts, use its revolving credit facility only for specially funded programs,
if  at  all,  and  possibly  raise some additional equity capital in a public or
private  offering  or  fund-raising  effort  in 2005 or beyond.  There can be no
assurance that existing contracts will be completed  successfully  or  that  new
contracts  or  additional  debt  or  equity  financing  that  may  be needed  to
fund  operations  will  be  available  or, if available,  obtained in sufficient
amounts necessary to meet the Company's needs or  on terms that are favorable to
the  Company.  Management  does  believe  that,  if  current contracts remain on
schedule and are funded as expected, they will be sufficient to fund the Company
through  2005.

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.

                                        6
                                      PAGE

2.       REVENUE  RECOGNITION

The  Company's  revenues  for  the  six-months   ending   June  30,   2005  were
derived  primarily  from  United  States  government  cost plus fixed fee (CPFF)
contracts  compared  to  primarily  the same type of CPFF contracts for the same
six-month  period  in  2004.  Revenues  from the CPFF contracts during the first
six-months  ending  June  30,  2005  and  2004  were recognized as expenses were
incurred.  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.  Actual  results  of  contracts may differ from
management's  estimates   and   such  differences  could  be  material  to   the
consolidated financial statements.  Professional fees are billed to customers on
a  time  and  materials  basis.  Time  and  material  revenues are recognized as
services  are  performed  and  costs  incurred.

3.     NOTES  PAYABLE

a)     Building  and  Settlement  Notes

In  December  2002, the Company entered an agreement to sell its interest in its
facility.  The  transaction  closed  in  January  2003.  The  escrow transaction
included  the  sale  of the land and building.  Net fixed assets were reduced by
approximately  $1.9 million and notes payable were reduced by approximately $2.4
million  while  a deferred gain was recorded.  In conjunction with the sale, the
Company  entered  into  a  lease  agreement  with  the  buyer  to  leaseback its
facilities.  The  Company's Chief Executive Officer provided a guarantee for the
leaseback.  The  gain  on the sale of the facility was deferred and amortized in
proportion to the gross rental charged to expense over the lease term.  Deferred
gain  of  $1,172,720 is being amortized at the rate of $117,272 per year for ten
(10)  years  ending in January 2013.  As of June 30, 2005, the deferred gain was
$889,313.  This  amortization  will  be  included in the Company's occupancy and
facility  expense, which is included in the Company's non-operating expenses and
totaled  $58,636  and  $58,636 for the six-months ending June 30, 2005 and 2004,
respectively.

Deferred  Gain  consisted  of  the  following:

Six-Months  Ending  June  30,  2005
----------------------     ---------------
Original Deferred Gain      $    1,172,720
Less Amortization 2003           (107,499)
Less Amortization 2004           (117,272)
Less Amortization 2005            (58,636)
----------------------     ---------------
                           $       889,313
----------------------     ---------------

In  2001, the Company entered into three settlement loan agreements with various
vendors.  The  total of $171,402 for all three loans called for payments between
24  and 50 months with interest that ranges from 0% to 8%.  At June 30, 2005 and
2004,  the  outstanding  balances  on  these  notes  were  $28,021  and $63,799,
respectively,  with  interest  expense  for  the six-months ending June 30, 2005
and  2004 of $965 and $1,847,  respectively.  As of June 30, 2005, only one note
remained  outstanding.

Future  minimum  principal  payments  on  settlement  notes  are  as  follows:

For  Twelve  Months  Ending  June  30,

----------------------     ---------
2005                        $ 28,021
2006                               -
2007                               -
----------------------     ---------
Total Settlement Notes      $ 28,021
----------------------     ---------

                                        7
                                      PAGE

b)     Related  Parties

The  Company  had  a  note  payable  to its CEO.  At June 30, 2005 and 2004, the
balances  were  $0 and $196,445, respectively, with interest accrued at 10%.  As
part  of  the Company's preferred stock offering (see Note 5), the note was paid
in  full  during  the  third  quarter  of  2004.

Interest expense on this note was $0 and $25,923 for the six-month period ending
June  30,  2005  and  2004,  respectively.

c)     Revolving  Credit  Facility.

On  June  3,  2003,  the  Company  entered  into  a  Security Agreement, Secured
Convertible  Note,  Registration  Rights  Agreement  and  Common  Stock Purchase
Warrant  with  the  Laurus  Master Fund, Ltd. ("Laurus"), which were reported on
Form  8-K filed June 18, 2003.  Pursuant to the agreements, the Company received
a  $1  million revolving credit facility in the form of a three-year Convertible
Note  secured  by  its  assets  subject  to  the  amount  of  eligible  accounts
receivables.  The  net  proceeds from the Convertible Note were used for general
working  capital  purposes.  Advances  on the Convertible Note are repaid at the
Company's  option,  in  cash  or through the issuance of the Company's shares of
common  stock provided the market price is 118% of the fixed conversion price or
greater.  The  Convertible  Note carries an interest rate of Wall Street Journal
Prime  plus  0.75%  on  any  outstanding  balance.  In  addition, the Company is
required  to  pay  a  collateral  management  payment  of  0.55%  of the average
aggregate  outstanding  balance  during the month plus an unused line payment of
0.20%  per annum.  Approximately $19,500 in interest and approximately $5,000 in
fees  were  expensed  under the revolving credit facility in 2004.  There was no
outstanding  balance  on  the  revolving  credit  facility  at  June  30,  2005.

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

The  Convertible Note includes a right of conversion in favor of Laurus.  Laurus
exercised  its  conversion  rights  from  time  to  time  in  2003  and  2004 on
outstanding  balances.  There  have  been no outstanding balances in 2005.  When
Laurus  chose  to  exercise  its  conversion  rights,  the  Convertible Note was
converted into shares of the Company's common stock at a fixed conversion price,
subject  to  adjustments  for  stock  splits, combinations and dividends and for
shares  of common stock issued for less than the fixed conversion price  (unless
exempted  pursuant  to the agreements).  The Agreement was modified on March 31,
2004  to  provide for a six-month waiver of the accounts receivable restrictions
and  a fixed conversion price to Laurus of $0.85 per share on the first $500,000
after  the  first  $1 million.  The agreement was further modified on August 25,
2004 to provide for a fixed conversion price to Laurus of $1.00 per share on the
next  $1  million.  Thereafter,  the  fixed conversion price will be adjusted to
103%  of  the  then  fair  market  value  of  our  common stock ("Adjusted Fixed
Conversion  Price").

Laurus  converted  $771,750  under  the  Convertible  Note into 1,403,182 shares
during the six-months ending June 30, 2004 as compared to no conversions for the
same  period in 2005.  Laurus has converted a total of $2,500,000 into 3,406,417
shares  under  the  Convertible Note since the inception of the revolving credit
facility.  For  the  six-month period ending June 30, 2004, the Company expensed
$1,177,846 for the non-cash loan fee based on the fair market value of the stock
when Laurus converted and $2,607,099 for the non-cash loan fee expense since the
inception  of  the  revolving  credit  facility.  There have been no conversions
during  the  first  six-months  of 2005.  The fair market value used in 2003 was
established  using a 20% discount to the closing price on the date of conversion
based  on  the  restricted and thinly-traded nature of the Company stock in 2003
and  the  fair market value used in 2004 was established using the closing price
on  the date of conversion with no discount taken due to the increased volume in
the  Company's  stock.

                                        8
                                      PAGE

Availability  of  funds  under  the  revolving  credit  facility is based on the
Company's  accounts  receivable,  except  as waivers are provided by Laurus.  In
2003,  an  initial  three  (3)  month  waiver was offered by Laurus, under which
Laurus  permitted  a  credit  advance  up  to  $300,000, which amount would have
otherwise  exceeded  eligible  accounts  receivable  during  the period.  Laurus
subsequently extended the waiver for two additional six (6) month periods, under
which  Laurus  permitted  a  credit advance up to $1 million, which amount would
have  otherwise  exceeded  eligible  accounts receivable during the period.  The
revolving  credit  facility  is  secured  by  all  of the assets of the Company.

In  conjunction  with this transaction, Laurus was paid a fee of $20,000 for the
first  year,  which  was  expensed  as additional interest expense in 2003.  The
Company  is  required to pay a continuation fee of $10,000 each year thereafter.
In  addition,  Laurus  received  a  warrant  to  purchase  200,000 shares of the
Company's  common stock for the initial $1 million revolving credit facility, as
stated  herein.  The  warrant  exercise price was computed as follows: $0.63 per
share for the purchase of up to 125,000 shares; $0.69 per share for the purchase
of  an  additional  50,000  shares;  and  $0.80 per share for the purchase of an
additional  25,000  shares.  The  warrant exercise price may be paid in cash, in
shares  of the Company's common stock, or by a combination of both.  The warrant
expiration  date  is  June  3,  2008 and approximately 175,000 of these warrants
remain  outstanding.  The  warrant  exercise  price  and  the  number  of shares
underlying the warrant are subject to adjustments for stock splits, combinations
and  dividends.

In  addition  to  the  initial  warrant,  the  Company was obligated to issue an
additional  five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten  dollars  ($10)  in  principal of the Convertible Note converted into common
stock  if  and  when  over  $1  million was converted under the revolving credit
facility.  The  value of the warrant was determined when issued, and was treated
as additional interest expense and is being amortized over the remaining term of
the  Convertible  Note, unless sooner terminated.  On June 18, 2004, the Company
issued  an  additional warrant to purchase 50,000 shares at an exercise price of
$1.0625  per  share  in  relation  to  the  $500,000  revolving  credit facility
expansion  convertible  at  $0.85  per  share.   This  additional  warrant   was
exercised  by  Laurus  on  April  19,  2005  and resulted in a non-cash interest
expense  of  $28,875  for  the  six-months  ending  June 30, 2005 similar to the
convertible  debt  notes.  Since  no more than an aggregate of 100,000 shares of
the  Company's  common  stock  were  authorized as additional warrants under the
Laurus  Agreements, on August 25, 2004, the Company issued an additional warrant
to  purchase  50,000 shares at an exercise price of $1.925 per share in relation
to  the  $1 million revolving credit facility expansion convertible at $1.00 per
share.

The  Company  may  terminate  its  agreements  with Laurus before the end of the
initial  three-year  term  and  Laurus  will release its security interests upon
payment  to  Laurus  of all obligations, if the Company has: (i) provided Laurus
with  an  executed  release  of  all claims which the Company may have under the
agreements;  and, (ii) paid to Laurus an early payment fee in an amount equal to
two percent (2%) of the Capital Availability Amount if such payment occurs after
June  3,  2005 and prior to June 3, 2006.  The early payment fee is also due and
payable  by  the Company to Laurus if the Company terminates its Agreement after
the  occurrence  of  an  Event  of  Default,  as  defined  in  the  agreements.

As  stated above, in conjunction with the Company's Preferred Stock financing on
August  25, 2004, Laurus agreed to extend the revolving credit facility reported
on  Form  8-K  filed June 18, 2003 from $1.0 million to $1.5 million.  The first
$1.0 million converted under the revolving credit facility was converted in 2003
and  early 2004 at a rate of $0.55 per share.  On March 31, 2004, the conversion
price for the next $500,000 under the revolving credit facility was set at $0.85
per  share.  The  next  $1  million  under  the  revolving  credit  facility was
convertible  at a rate of $1.00 per share. The fixed conversion price for future
amounts  under  the  revolving  credit  facilty  will be set at 103% of the fair
market  value of our common stock.  There was no balance on the revolving credit
facility  for  the  period  ending  June  30, 2005, and, at this time, we do not
anticipate  further  draws  under  the  revolving  credit  facility.


                                        9
                                      PAGE

4.     STOCKHOLDER'S  EQUITY  -  PREFERRED  STOCK,  COMMON  STOCK  AND  WARRANTS

PREFERRED  STOCK

On  August  25,  2004,  the Company entered into a Securities Purchase Agreement
with  the Laurus Master Fund, Ltd., whereby the Company issued 250,000 shares of
its  Series  C  Convertible  Preferred  Stock,  par  value $0.001 per share (the
"Preferred  Stock"),  to Laurus for an aggregate purchase price of $2,500,000 or
$10.00  per  share  (the  "Stated Value").  The preferred shares are convertible
into  shares  of the Company's $0.0001 par value common stock at a rate of $1.54
per  share at any time after the date of issuance, and pay quarterly, cumulative
dividends at a rate of 6.85% with the first payment due on January 1, 2005.  For
the  six  months ended June 30, 2005, approximately $85,000 has been accrued for
dividends  with  approximately  $56,300  paid  in shares of the Company's stock.
Dividends  are  payable  in  cash or shares of the Company's common stock at the
holder's  option with the exception that dividends must be paid in shares of the
Company's  common  stock for up to 25% of the aggregate dollar trading volume if
the  fair  market  value of the Company's common stock for the 20-days preceding
the  conversion  date exceeds 120% of the conversion rate.  On January 11, 2005,
$60,967  was  converted  into  39,589  shares of the Company's common stock from
previous dividend accruals and on May 5, 2005, $56,300 was converted into 36,559
shares of the Company's common stock from dividends accrued from January 1, 2005
through  April  30, 2005.  The preferred shares are redeemable by the Company in
whole  or in part at any time after issuance for (a) 115% of the Stated Value if
the  average  closing  price  of  the  common  stock for the 22 days immediately
preceding  the date of conversion does not exceed the conversion rate or (b) the
Stated  Value  if  the average closing price of our common stock for the 22 days
immediately  preceding  the  date  of  conversion  exceeds the Stated Value. The
preferred  shares  have  a  liquidation right equal to the Stated Value upon the
Company's  dissolution, liquidation or winding-up.  The preferred shares have no
voting  rights.

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

COMMON  STOCK  AND  WARRANTS

The  Company has elected to account for its stock-based compensation plans under
APB  25.  However,  the Company has computed, for pro forma disclosure purposes,
the  value of all options granted during the six-months ending June 30, 2005 and
2004  using  the  minimum  value method as prescribed by SFAS 123 and amended by
SFAS  148.  Under  this  method, the Company used the risk-free interest rate at
the  date of grant, the expected volatility, the expected dividend yield and the
expected life of the options to determine the fair value of options granted. The
risk-free interest rates ranged from 6.0% to 6.5%, expected volatility was 117%,
the  dividend yield was assumed to be zero, and the expected life of the options
was  assumed  to  be  three to five years based on the average vesting period of
options  granted.

If  the Company had accounted for these options in accordance with SFAS 123, the
total  value of options granted during the six-month period ending June 30, 2005
and  2004 would be amortized on a pro forma basis over the vesting period of the
options.  Thus,  the Company's consolidated net income (loss) would have been as
follows:

                                       10
                                      PAGE

--------------------------------------      --------------      ----------------
NET INCOME (LOSS)                                     2005                  2004
--------------------------------------      --------------      ----------------
As reported                                 $      212,162      $    (1,729,416)
 Add:    Stock based employee
         compensation expense included
         in reported net income             $            -      $              -
 Deduct: Stock  based  employee
         compensation expense
         determined under the fair value
         based method for all awards        $      395,347      $      (133,632)
--------------------------------------      --------------      ----------------
Pro forma                                   $     (183,185)     $    (1,863,048)
--------------------------------------      --------------      ----------------
--------------------------------------      --------------      ----------------
 Net  Income  (Loss)  Per  Share:

As reported                                 $        0.00       $         (0.09)
Pro forma                                   $       (0.01)      $         (0.10)
--------------------------------------      --------------      ----------------

Beginning  January  2006,  the  Company  plans to adopt SFAS 123(R) as currently
required  by  the  Securities and Exchange Commission.  As of June 30, 2005, the
Company  had  not  yet  determined  the  impact  of SFAS 123(R) on its financial
statements.

On  November  21,  1997,  the  Company  entered  into a five (5) year employment
agreement  with  its  CEO.  On July 16, 2000, the Company amended the employment
agreement  with  its CEO extending the term until July 16, 2005.  As part of the
original  employment  agreement,  the  Company  granted  options  to  the CEO to
purchase  up  to  2,500,000  shares of the Company's $.0001 par value restricted
common stock.  The Compensation Committee of the Board of Directors is currently
negotiating  a  new  agreement with the CEO; however, at this time, the terms of
such  an  agreement are not known.  The Company's CEO is currently continuing as
an  employee  "at  will"  under  the  laws  of  the  State  of  California.

The  options  previously  granted to the Company's CEO as part of his employment
contract were subject to the following vesting conditions, which were amended on
January  21,  2000  and  later  ratified  by  the  Board  on July 16, 2000.  The
agreement  provided  an  option  for the Board to award options on an additional
1,500,000  shares  of  restricted  common  stock at a later date.  The terms and
exercise  prices  are  set  forth  in  the  following  chart:

                                       11
                                      PAGE

<TABLE>
<CAPTION>

                                                                                                                Exercise
                       Number                                                                                  price per
                       Of shares         Vesting Conditions                                                        share
----------------       ---------         -----------------------------------------------------------   -----------------
<S>                    <C>               <C>                                                           <C>
Granted Options:
                       500,000. . . . .  Currently vested                                              $            1.00
                       500,000. . . . .  Obtaining $6,500,000 additional equity capital                $            1.50
                       500,000. . . . .  Financing and executing a definitive space launch agreement   $            2.00
                       500,000. . . . .  Launching of first lunar or deep-space mission                $            2.50
                       500,000. . . . .  Successful completion of first lunar or deep-space mission    $            3.00
Options to be Granted
upon the Occurrence of
Certain Vesting Conditions,
if achieved during the term
of contract:
                       250,000. . . . .  Upon the Company market capitalization reaching $250 million    $          5.00
                       500,000. . . . .  Upon the Company market capitalization reaching $500 million    $         10.00
                       750,000. . . . .  Upon the Company market capitalization reaching $1 billion      $         20.00
----------------       ---------         -----------------------------------------------------------   -----------------

</TABLE>

Only options on the first 500,000 shares of SpaceDev common stock were vested at
the  time  the  employment  agreement  expired.  None  of  the other performance
measurements  were  achieved  during  the  term  of  the  employment   contract;
therefore,  all  the  other  options  expired  on  July  16,  2005.

In  accordance  with  APB  25,  the  Company recognized $500,000 of compensation
expense  and  $250,000  of deferred compensation in 1997. The options on 500,000
shares  of  the  Company's  common  stock  granted and vested to the CEO have an
exercise  price  of  $1.00  per  share  and will expire on July 16, 2010, if not
previously  exercised.

On  August  27,  2001, as part of an annual review process, an additional 10,000
options  were  granted to the CEO at the exercise price of $0.9469 per share (or
110%  of the then fair market value) with a set vesting schedule of 3,333 shares
per  year  after  issuance with the third year having 3,334 options vest.  These
options were not tied to an employment contract and expire five years from grant
date.

6.     NEW  ACCOUNTING  PRONOUNCEMENTS

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

                                       12
                                      PAGE

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

In  March  2005,  the  Securities  and  Exchange Commission ("SEC") issued Staff
Accounting  Bulletin  No.  107  ("SAB  No. 107"), Share-Based Payment, providing
guidance  on  option valuation methods, the accounting for income tax effects of
share-based  payment  arrangements  upon  adoption  of  SFAS  No.  123R, and the
disclosures in MD&A subsequent to the adoption. The Company will provide SAB No.
107  required  disclosures upon adoption of SFAS No. 123R on January 1, 2006 and
is currently evaluating the impact the adoption of the standard will have on the
Company's  financial  condition,  results  of  operations,  and  cash  flows.

In  April  2005,  the Securities and Exchange Commission adopted a new rule that
amends  the  compliance  dates  for  SFAS  No. 123R. The Statement requires that
compensation  cost relating to share-based payment transactions be recognized in
financial  statements  and that this cost be measured based on the fair value of
the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based  compensation arrangements including share options, restricted share
plans,  performance-based  awards, share appreciation rights, and employee share
purchase  plans.  The Company will adopt SFAS No. 123R on January 1, 2006 and is
currently  evaluating  the  impact the adoption of the standard will have on the
Company's  results  of  operations.

In  June  2005,  the  FASB  issued  SFAS  No. 154, Accounting Changes and Errors
Corrections,  a  replacement  of APB Opinion No. 20 and FAS No. 3. The Statement
applies  to  all  voluntary  changes  in  accounting  principle, and changes the
requirements  for  accounting  for  and  reporting  of  a  change  in accounting
principle.  SFAS  No.  154  requires retrospective application to prior periods'
financial  statements of a voluntary change in accounting principle unless it is
impractical.

APB Opinion No. 20 previously required that most voluntary changes in accounting
principle  be  recognized by including in net income of the period of the change
the  cumulative  effect of changing to the new accounting principle. SFAS No.154
improves  the  financial  reporting  because  its   requirements   enhance   the
consistency  of  financial  reporting  between  periods.

7.     SUBSEQUENT  EVENTS

On  July  24,  2005,  SpaceDev  was awarded a small contract by Lunar Enterprise
Corporation,  a  wholly-owned  subsidiary  of  Space  Age Publishing Company, to
perform  the  work  necessary  to  create  a conceptual mission architecture and
mission  design  for  a human servicing mission to the Lunar south pole targeted
for  the  period  of  2010  to  2015.  The  contract  is valued at approximately
$125,000  and  is  a  fixed  price  contract.   The  study will explore existing
technology, technology currently under development, and proposed technology that
could  be developed by NASA, other countries or the private sector in time to be
incorporated  into  the  mission.

                                       13
                                      PAGE

ITEM  2.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF FINANCIAL CONDITION AND
RESULTS  OF  OPERATIONS

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

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

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

OVERVIEW

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

                                       14
                                      PAGE

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

SELECTION  OF  SIGNIFICANT  CONTRACTS

On  July  24,  2005,  we  were  awarded  a  small  contract  by Lunar Enterprise
Corporation,  a  wholly  owned  subsidiary  of  Space  Age Publishing Company to
perform  the  work  necessary  to  create  a conceptual mission architecture and
mission  design  for  a human servicing mission to the Lunar south pole targeted
for  the  period  of  2010  to  2015.  The  contract  is valued at approximately
$125,000  and  is  a  fixed  price  contract.  The  study  will explore existing
technology, technology currently under development, and proposed technology that
could  be developed by NASA, other countries or the private sector in time to be
incorporated  into the mission.  The study will seek to combine those technology
capabilities  in  order  to arrive at an elegantly simple solution, because that
approach  should  result  in a mission that is low risk and low in cost.  We can
give  no assurance that any additional contracts will be awarded to us from this
contract.

On  June  27,  2005,  we were awarded a $1.25 million fixed price subcontract by
Andrews  Space  "Andrews"  to  design a small spacecraft that will travel to the
vicinity of the Moon through a gravity tunnel that is part of the InterPlanetary
Superhighway  (IPS),  a  route  which  requires  significantly  less  fuel  than
conventional  trajectories.  In  early  June  2005,  we  were  awarded  a letter
subcontract  not to exceed $100,000 by Andrews Space for the same program.   The
overall  program,  which  Andrews  Space  has  signed  with  NASA, is to design,
develop,  launch, and operate a small low cost spacecraft, called SmallTug, on a
mission  to  the  Lunar  L1  point  to demonstrate key technologies and advanced
orbital mechanics in support of NASA's human and robotic exploration of the Moon
and Mars.  The subcontract is part of a larger $18.7 million contract awarded to
Andrews  Space  by  NASA and is expected to be completed in several phases.  The
current  subcontract  phase  is  expected  to  take approximately nine-months to
complete.  Revenues  for  the  six-months  ending  June  30, 2005 were $100,000.

On  September  29,  2004,  we  were awarded a Phase II Small Business Innovation
Research  contract by Air Force Research Lab to design and effectively begin the
development of our small launch vehicle.  The SpaceDev Small Launch Vehicle will
be  designed to responsively and affordably lift up to 1,000 pounds to Low Earth
Orbit.  The  concept  is  based  on a proprietary combination of technologies to
increase  the  performance  of  hybrid  rocket  motor technology.  Hybrid rocket
motors  are  a  combination  of  solid  fuel  and  liquid  oxidizer,  and can be
relatively  safe, clean, non-explosive, and storable, and can be throttled, shut
down  and  restarted.  This contract is valued at approximately $1,557,000.  The
contract  outlines  the  development  and  test  firing of our large Common Core
Booster  for  the  SpaceDev  Small  Launch  Vehicle.  Congress  has  awarded  us
approximately  $3.0  million  in  additional  funding for this project, which we
expect  will be available beginning in September 2005.  These funds are expected
to  be  earned between September 2005 and September 2006.  We believe that there
is  additional  interest  by Congress in providing further funding to expand and
accelerate  the  scope of the work; however, there can be no assurance that such
work will be awarded to us.  Revenue from this project for the six-months ending
June  30,  2005  was  approximately  $412,000.

                                       15
                                      PAGE

On  August  23,  2004,  we were awarded a cost plus fixed fee Phase II Air Force
Research Laboratory Small Business Innovation Research contract to develop micro
and  nanosatellite bus and subsystem designs.  The contract was later amended on
September 8, 2004, to shorten the length of the overall contract, which is worth
approximately  $739,000.  This  contract should enable us to explore the further
miniaturization of our unique and innovative microsatellite subsystems.  It also
should  enable  us  to  explore  ways to reduce the time and cost to build small
satellites  through  further  standardization  in  order to help define de facto
standards  for  payload  hardware  and  software  interfaces.  Revenues  for the
six-months  ending  June  30,  2005  were  approximately  $373,000 for Phase II.

On  July  24,  2004,  we  were  awarded a follow-on phase by Lunar Enterprise of
California  for  a  conceptual  mission and spacecraft design for a lunar lander
program  to  further analyze launch opportunities, spacecraft design, trajectory
possibilities, potential landing areas, available technologies for a small radio
astronomy  system,  and  communications  and  data  handling  requirements.  The
contract  value  was  approximately  $150,000.  Although the complete project is
currently  unfunded, if the project were to proceed past the analysis stage, the
total mission cost could exceed $50-$75 million.  We successfully completed this
stage  of  the  project,  and all revenues were recognized in the second half of
2004.

On March 31, 2004, we were awarded a $43,362,271, five-year, cost-plus-fixed fee
indefinite  delivery/indefinite  quantity  contract  to conduct a microsatellite
distributed sensing experiment, an option for a laser communications experiment,
and  other  microsatellite studies and experiments as required in support of the
Advanced  Systems  Deputate  of the Missile Defense Agency.  This effort will be
accomplished  in  a phased approach.  The total five-year contract has a ceiling
amount  of  $43,362,271.  The  principal  place  of  performance  will be at our
facilities  located  in Poway, California.  We expect to complete the work under
the  contract  before March 2009.   Government contract funds will not expire at
the  end  of the current government fiscal year.  The microsatellite distributed
sensing  experiment  is  intended  to  design  and  build  up to six responsive,
affordable,  high  performance  microsatellites  to  support  national   missile
defense.  The  milestone-based,  multiyear, multiphase contract had an effective
start  date  of  March  1, 2004.  The first phase was completed on September 30,
2004  and  resulted  in  detailed mission and microsat designs.  The first phase
revenue  was  approximately $1.14 million.  On October 1, 2004, the second phase
of  the contract began with an approximate value of $8.3 million and is expected
to last approximately 16 months.  During the six-months ending June 30, 2005, we
recognized  approximately  $2,683,000  in  revenues from this second phase.  The
overall contract calls for us to analyze, design, develop, fabricate, integrate,
test,  operate  and  support a networked cluster of three formation-flying boost
phase and midcourse tracking microsatellites, with an option to design, develop,
fabricate,  integrate,  test,  operate  and  support  a  second cluster of three
formation-flying  microsats  to  be  networked  on-orbit  with  high speed laser
communications  technology.

On  December  18,  2003,  we  were  awarded  a  contract by the Defense Advanced
Research  Projects  Agency  for the study of Novel Satcom Microsat Constellation
Deployment.  The contract was a milestone-based, fixed price contract with total
consideration  of  approximately  $200,000.  On  August  6,  2004, an additional
$39,849  was  added  to  the  contract  for  increased  scope bringing the total
contract  value  on  this fixed price effort to approximately $240,000.  We have
successfully  completed  this  contract  and the entire revenue of approximately
$240,000  was  realized  in  2004,  with  approximately  $136,000  in  the first
six-months  of 2004.  We expect to either further expand this contract or obtain
new  contracts  under  the Defense Advanced Research Projects Agency program(s);
however,  there  can be no assurance as to whether or when such contract(s) will
be awarded to us, or, if awarded, there can be no assurance as to the amounts or
terms  of  the  awards.

On  October 2, 2003, we were awarded an exclusive, follow-on contract to provide
the  hybrid  rocket  motor systems and components for SpaceShipOne.  We provided
our  facilities,  resources  and  a team of launch vehicle and hybrid propulsion
engineers  and  technical personnel in support of the SpaceShipOne program.  The
contract  called  for  us to use our best efforts to satisfy the requirements of
the  SpaceShipOne  program,  based  on our experience with the prior phases.  We
provided re-usable flight test hardware, including a bulkhead, commonly known as
the  SpaceDev  bulkhead,  machined  in the flight configuration, a main oxidizer
valve  of  the  current  design  and  associated  interfaces and plumbing to the
SpaceDev  bulkhead,  a  motor  control  system,   igniter   housings,   pressure

                                       16
                                      PAGE

transducers,  and  thermocouples  as  required  for  input  to the motor control
system.  In  addition,  we produced and assembled test motors, including but not
limited to, all expendable or semi-reusable materials as defined by our baseline
design  motor.  We  also provided on-site engineering test support and post-test
analysis.  Provisions  were made in the contract for minimum monthly payments in
the  event of customer schedule slippage as well as additional levels of support
via  engineering  change  orders,  if  required.  The  total  contract value was
originally  estimated  at  $615,000.  Approximately  $686,000  of  revenue   was
realized in 2004, with approximately $180,000 from engineering change orders and
the  remaining $506,000 from the contract. Of this total, approximately $394,000
was  recognized  during  the  first  six-months  of  2004.

On  July  24, 2003, we were awarded a contract by Lunar Enterprise of California
for  a  first  phase  project  to  begin  developing  a  conceptual  mission and
spacecraft  design for a lunar lander program. The unmanned mission was designed
to put a small dish antenna near the south pole of the Moon.  From that location
it  will  be in near-constant sunlight for solar power generation, and should be
able  to  perform  multi-wavelength  astronomy  while  communicating with ground
stations on Earth.  The contract value was $100,000.  The contract was completed
by  November  2003.

On  July  9,  2003,  we were awarded a contract by the Missile Defense Agency to
explore  the  use  of  microsatellites  in  national  missile defense.  It was a
precursor  contract  to  the  $43  million  contract   mentioned   above.    Our
microsatellites  are  operated over the Internet and are capable of pointing and
tracking  targets  in space or on the ground.  This study explored fast response
microsatellite  launch  and  commissioning;  small,  low-power  passive sensors;
target  acquisition  and  tracking;  formation  flying and local area networking
within  a  cluster of microsatellites; and an extension of our proven use of the
Internet  for  on-orbit  command,  control  and  data handling. The contract was
successfully  concluded  on  February  27,  2004.  The  total contract value was
$800,000  with  approximately  $319,000  of  revenue   realized   in  2004   and
approximately  $481,000  of  revenue  realized  in  2003.  This   contract   was
considered  an  investigatory  phase  by  MDA.

Also,  on  July  9,  2003,  we  were awarded a Phase I Small Business Innovation
Research  contract by Air Force Research Lab to design and effectively begin the
development  of  our  small  launch  vehicle.  This  contract  was   valued   at
approximately  $100,000, and was a fixed price, milestone-based agreement, which
was  completed  in  about one year.  Revenues for the six-months ending June 30,
2004  were  approximately  $48,000  for  Phase  I.

Also,  on  July 9, 2003, we were awarded a Phase I contract to develop micro and
nanosatellite  bus  and  subsystem  designs.  This Air Force Research Laboratory
Small  Business  Innovation  Research  contract  was  valued  at   approximately
$100,000.  The  contract  was  fixed  price,  milestone-based  and was completed
within  one  year.  Revenues  for  the  six-months  ending  June  30,  2004 were
approximately  $32,000  for  Phase  I.

On  March  28,  2003,  we  were  awarded  Phase  II  of  a contract to develop a
Shuttle-compatible propulsion module for the Air Force Research Laboratory.  The
first  two  phases  of the contract (including an additional add-on option) were
worth approximately $2.5 million, of which $100,000 was awarded for Phase I, and
approximately  $1.4  million was awarded for Phase II.  Phase II was a cost-plus
fixed  fee  contract.  In  order  to  complete  Phase  II, we requested and were
granted  approximately four months of additional time and approximately $240,000
of  additional funding, memorialized by a contract amendment executed on July 7,
2004.  In addition to the Phase I and Phase II awards, there was an option worth
approximately  $800,000,  which  was  initiated  on  May  3,  2004,   of   which
approximately  $565,000  was  funded  and the balance was unfunded.  Part of the
funding  for Phase II came from the original $1 million option; thereby reducing
the  option  to  approximately  $800,000.  An  additional  effort  to  develop a
miniaturized  Shuttle-compatible  propulsion  module  was added to this contract
worth  approximately  $150,000.  These  program  funds were expended in 2004, so
there  were  no  revenues on this contract for 2005.  Revenue for the six-months
ending  June  30,  2004  was  approximately  $663,000  for  Phase  II.

In  November  1999, we won a $4.9 million mission contract by the Space Sciences
Laboratory  at  the  University  of California at Berkeley.  We were selected to
design, build, integrate, test and operate, for one year, a small NASA-sponsored
scientific, Earth-orbiting spacecraft called CHIPSat.  CHIPSat is the first and,

                                       17
                                      PAGE

to  our  knowledge,  only successful mission of NASA's low-cost University-Class
Explorer  series  to  date.  Due  to  additional  NASA  and  customer   reviews,
additional  work,  schedule  extensions  and  a  fee  for  one year of satellite
operations,  the  CHIPSat  contract  award  was  increased by approximately $2.5
million  in  2001 and 2002, bringing the total contract value for design, build,
launch  and  operations  to  approximately  $7.4 million.  CHIPSat launched as a
secondary  payload  on  a  Delta-II  rocket on January 12, 2003.  CHIPSat is the
world's  first orbiting Internet node, achieved 3-axis stabilization, meaning it
was  pointing  and tracking properly, with all individual components and systems
successfully  operating, and is continuing to work well in orbit after more than
two  and  a  half years.  As of December 31, 2004, the total contract costs were
expended.  CHIPSat  is still operating successfully and providing the University
of  California  at Berkeley with data.  The University of California at Berkeley
requested  to  extend  the  program  and  we negotiated a new time and materials
contract  in  the first quarter of 2004 in the form of a purchase order with the
University  of  California  at  Berkeley for continuing support of this project.
The  contract  will  continue  until  the  University  of California at Berkeley
decides  that  no  further  relevant  information  is  forthcoming or funding is
terminated,  at which time the use of the microsatellite will revert to NASA and
then to us.  Revenues for the six-months ending June 30, 2004 were approximately
$22,000.  There  were  no  revenues  for  the  six-months  ending June 30, 2005.

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

      SIX-MONTHS ENDING JUNE 30, 2005 -VS.- SIX-MONTHS ENDING JUNE 30, 2004

During  the  six-months  ending June 30, 2005, we had net sales of approximately
$3,709,000  as  compared  to  net sales of approximately $2,215,000 for the same
period  in 2004.  Sales increased primarily due to our ability to execute on our
new  and  existing  government  contracts  with increasingly valued task orders.
Sales  in  2005  reflected our continued work on the Missile Defense Agency Task
Order 2 contract of approximately $2,683,000, which is part of our approximately
$43  million  contract.   We also had ongoing Small Business Innovation Research
contracts  with the Air Force Research Laboratory.  These contracts are both for
Phase  II  efforts,  and  are for SpaceDev's Small Launch Vehicle as well as our
micro and nanosatellite bus and subsystem designs work.  Sales for these efforts
totaled $412,500 and $373,500, respectively.  We also had a smaller project that
had approximately $90,000 in revenue with the California Space Grant Foundation.
In addition, we started our Phase I effort with Andrews Space which had revenues
for  the six-months ending June 30, 2005 of $100,000 and two small Phase I Small
Business  Innovation  Research  contracts with the Air Force Research Laboratory
which totaled $50,000 in revenues during the first six-months of 2005.  Revenues
for the six-months ending June 30, 2004 were comprised of approximately $663,000
from  the  Air  Force  Research  Laboratory Phase II contract, $557,000 from the
Missile  Defense  Agency  Phase I, $318,000 also from the Missile Defense Agency
Phase  0  contract  (which was the precursor to Phase I contract), $394,000 from
the  SpaceShipOne  program, $136,000 from our Defense Advanced Research Projects
Agency  contract,  $80,000  from  our  two  Small  Business  Innovation Research
contracts  listed  above,  and  $67,000  from  all  other  programs.

For  the  six-months  ending  June  30,  2005, we had costs of sales (direct and
allocated  costs  associated   with  individual  contracts)   of   approximately
$2,862,000,  or  77.2% of net sales, as compared to approximately $1,750,000, or
79.0%  of  net  sales,  during the same period in 2004.  The increase in cost of
sales  was  primarily  due  to higher engineering costs related to executing the
above-named  projects  and  contracts;  however,  the  decrease in cost of sales
percentage from the prior year was mainly due to our focused efforts on managing
our  growth  including  but  not  limited  to  recruiting  new talented and cost
efficient  engineers,  developing  and  enhancing  project management skills and
creating  systems  and  processes  to  assist  in  the  efficient  and effective
management  of  our  projects.  The  gross  margin percentage for the six-months
ending  June  30, 2005 was 22.8% of net sales, an increase of 1.8% of net sales,
as  compared  to  21.0%  of  net sales for the same period in 2004.  The limited
increase  in gross margin, despite the improvements listed above, is a result of
the  cost  plus  fixed  fee  nature  of  our  business.

                                       18
                                      PAGE

We  experienced an increase of approximately $285,000 in operating expenses from
approximately  $421,000,  or  19.0% of net sales, for the six-months ending June
30,  2004  to  approximately $706,000, or 19.0% of net sales, for the six-months
ending  June  30,  2005.  Although  operating expense dollars increased, we also
experienced  a  corresponding increase in revenue, causing the operating expense
percentage  to  remain  constant.  Operating  expenses   include   general   and
administrative expenses, which includes our research and development expenses as
well  as  marketing  and  sales  expenses.

     -    Marketing  and sales expenses increased during the first six-months of
          2005  (but  decreased  as  a  percentage of sales), from approximately
          $215,000,  or  9.7%  of  net sales, for the six-months ending June 30,
          2004, to approximately $305,000, or 8.2% of net sales, during the same
          period  in  2005.  The  total  dollar value increased by approximately
          $90,000,  mainly due to our decision to expand our marketing and sales
          department  with  partial  costs of our Vice President of New Business
          Development and our Chief Executive Officer being charged to marketing
          and  sales expenses as well as our decision to commit a certain amount
          of  resources  to  draft  various  proposals  for  new  business.

     -    General  and  administrative expenses increased approximately $196,000
          from  approximately $206,000, or 9.3% of net sales, for the six-months
          ending June 30, 2004 to approximately $401,000, or 10.8% of net sales,
          for  the  same  six-month  period  in  2005.  This  increase is mainly
          attributed  to  the need for more support personnel, including a human
          resources  director  for engineer recruiting, a contract administrator
          and  upcoming  SEC compliance issues, including Sarbanes Oxley 404 and
          FASB  123(R).  We  also  incurred  research  and  development costs of
          approximately  $9,000,  or  0.0% of net sales, and $35,000, or 1.6% of
          net  sales,  during  the  six-months  ending  June  30, 2005 and 2004,
          respectively,  which  are  included  in  general  and  administrative
          expenses.

Non-operating  expense  (income) consisted of interest expense and deferred gain
on  the  sale of our building, as well as other non-cash loan fees and expenses.
Non-operating  expenses  decreased  to  the point that we recorded non-operating
income  for  the  first  half  of  2005.

     -    Interest  expense for the six-months ending June 30, 2005 and 2004 was
          approximately $1,800, or 0.0% of net sales, and approximately $40,000,
          or  1.8%  of  net  sales,  respectively.  The  decrease  was  due to a
          reduction  in  debt  with  fewer  notes  payable.  We  continue to pay
          interest  expense  on  certain  capital  leases  and settlement notes,
          although the balances continue to decline. We ceased accruing interest
          expense on our related party note, which was paid in full during 2004,
          and  on  our  revolving credit facility, which also had a zero balance
          for  the  six-months ending June 30, 2005. For the first six-months of
          2004,  we  accrued interest on our related party note (which was later
          paid  in full last year) of approximately $26,000. We also accrued and
          paid  approximately  $1,800  of interest on our various capital leases
          and notes payable and accrued and paid approximately $12,000. Interest
          expense  on  our  settlement  notes/capital  leases  for the six-month
          period  ending  June  30,  2005  and  2004  were  $1,800  and  $1,800,
          respectively. We began generating interest income in late 2004, and as
          of  June 30, 2005, we recognized approximately $45,000, or 1.2% of net
          sales,  in  interest  income  due  to  increasing  cash  balances.

     -    We  recognized  approximately $59,000 and $59,000 of the deferred gain
          on the sale of the building during the six-months ending June 30, 2005
          and 2004, respectively, and we will continue to amortize the remaining
          deferred gain of approximately $889,000 into non-operating income over
          the  remainder  of  the lease. We also accrued an income tax provision
          expense  of  $800  at  June  30,  2005.

     -    For  the  six-months  ending  June 30, 2005 and 2004, we realized loan
          fees related to our revolving credit facility of approximately $29,000
          and  $1,793,000,  respectively.  Although we did not have a balance on
          our  revolving  credit  facility  in  2005,  we incurred approximately
          $29,000 in non-cash loan fees when Laurus converted warrants on 50,000
          shares  of  our  common  stock  that  were  granted in 2004. We do not
          anticipate  additional  non-cash  loan  fees  in the immediate future;
          however,  additional  fees will be incurred as the Laurus warrants are
          exercised.

                                       19
                                      PAGE

During  the  six-months  ending  June  30,  2005,  we  generated a net profit of
approximately  $212,000,  or  5.7%  of  net  sales,  compared  to  a net loss of
approximately  $1,729,000,  or 78.1% of net sales, for the same six-month period
in  2004.  During  the  six-months  ending June 30, 2005, we incurred a positive
EBITDA  (earnings  before  interest  taxes  depreciation  and  amortization)  of
approximately  $204,000,  or  5.5%  of  net  sales,  compared  to  an  EBITDA of
approximately  $77,000, or 3.5% of net sales, for the six-months ending June 30,
2004.

The following table reconciles Earnings Before Interest, Taxes, Depreciation and
Amortization  (EBITDA)  to  net income (loss) for the six-months ending June 30,
2005  and  2004,  respectively:

<TABLE>
<CAPTION>



<S>                             <C>              <C>
FOR THE SIX-MONTHS ENDING. . .  JUNE 30, 2005    June 30, 2004
                                    (UNAUDITED)      (Unaudited)
NET INCOME (LOSS). . . . . . .  $      212,162      ($1,729,416)
------------------------------  ---------------  ---------------

Interest Income. . . . . . . .         (44,783)               -
Interest Expense . . . . . . .           1,830           39,524
Gain on Building Sale. . . . .         (58,636)         (58,636)
Loan Fee - Equity Conversion.           28,875        1,793,313
Provision for income taxes . .             800                -
Depreciation and Amortization.          64,137           32,487
------------------------------  ---------------  ---------------
EBITDA . . . . . . . . . . . .  $      204,385   $       77,272
------------------------------  ---------------  ---------------
</TABLE>

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.   Beginning in 2003
through  the  current  quarter  in  2005,  we showed continued progress in total
revenue  as  well  as  in  EBITDA.

                               [GRAPHIC  OMITED]

                                       20
                                      PAGE

                               [GRAPHIC  OMITED]

                                       21
                                      PAGE

    THREE-MONTHS ENDING JUNE 30, 2005 -VS.- THREE-MONTHS ENDING JUNE 30, 2004

During  the three-months ending June 30, 2005, we had net sales of approximately
$1,902,000  as  compared  to  net sales of approximately $1,201,000 for the same
period  in 2004.  Sales increased primarily due to our ability to execute on our
new  and  existing  government  contracts  with increasingly valued task orders.
Sales  in  2005  reflected our continued work on the Missile Defense Agency Task
Order 2 contract of approximately $1,239,000, which is part of our approximately
$43  million  contract.  We  also had ongoing Small Business Innovation Research
contracts  with the Air Force Research Laboratory.  These contracts are both for
Phase  II  efforts,  and  are for SpaceDev's Small Launch Vehicle as well as our
micro and nanosatellite bus and subsystem designs work.  Sales for these efforts
totaled $219,000 and $258,000, respectively.  We also had a smaller project that
had approximately $36,000 in revenue with the California Space Grant Foundation.
In  addition,  we  started  our  Phase  I  effort  with Andrews Space, which had
revenues  for  the  three-months  ending June 30, 2005 of $100,000 and two small
Phase I Small Business Innovation Research contracts with the Air Force Research
Laboratory which totaled $50,000 in revenues during the same three-month period.
Revenues  for  the  three-months  ending  June  30,   2004  were   comprised  of
approximately  $557,000  from the Missile Defense Agency Phase I,  $250,000 from
Air  Force Research Laboratory Phase II, $288,000 from the SpaceShipOne program,
$45,000  from  our  Defense  Advanced Research Projects Agency contract, $36,000
from  our  two  Small  Business  Innovation Research contracts listed above, and
$25,000  from  all  other  programs.

For  the  three-months  ending  June 30, 2005, we had costs of sales (direct and
allocated  costs  associated  with  individual   contracts)   of   approximately
$1,466,000  or  77.1%  of  net  sales, as compared to approximately $942,000, or
78.5%  of  net  sales,  during the same period in 2004.  The increase in cost of
sales  was  primarily  due  to higher engineering costs related to executing the
above-named  projects  and  contracts;  however,  the  decrease in cost of sales
percentage from the prior year was mainly due to our focused efforts on managing
our  growth  including  but  not  limited  to  recruiting  new talented and cost
efficient  engineers,  developing  and  enhancing  project management skills and
creating  systems  and  processes  to  assist  in  the  efficient  and effective
management  of  our  projects.  The gross margin percentage for the three-months
ending  June  30, 2005 was 22.9% of net sales, an increase of 1.4% of net sales,
as  compared  to  21.5%  of  net sales for the same period in 2004.  The limited
increase  in gross margin, despite the improvements listed above, is as a result
of  the  cost  plus  fixed  fee  nature  of  our  business.

We  experienced an increase of approximately $135,000 in operating expenses from
approximately  $226,000, or 18.8% of net sales, for the three-months ending June
30,  2004 to approximately $361,000, or 19.0% of net sales, for the three-months
ending  June  30,  2005.  Although  operating  expense dollars increased, so did
revenue,  we  also  experienced a corresponding increase in revenue, causing the
operating  expense  percentage  to  remain constant.  Operating expenses include
general and administrative expenses, which includes our research and development
expenses  as  well  as  marketing  and  sales  expenses.

     -    Marketing  and sales expenses increased during the three-months ending
          June  30,  2005  (but  decreased  as  a  percentage  of  sales),  from
          approximately  $116,000,  or  5.2%  of net sales, for the three-months
          ending June 30, 2004, to approximately $160,000, or 4.3% of net sales,
          during  the  same  period in 2005. The total dollar value increased by
          approximately  $44,000,  mainly  due  to  our  decision  to expand our
          marketing  and  sales  department  with  partial  costs  of  our  Vice
          President  of New Business Development and our Chief Executive Officer
          being  charged to marketing and sales expenses as well as our decision
          to commit a certain amount of resources to draft various proposals for
          new  business.

     -    General  and  administrative  expenses increased approximately $92,000
          from  approximately  $110,000,  or  4.9%  of  net   sales,   for   the
          three-months  ending  June 30, 2004 to approximately $202,000, or 5.4%
          of  net  sales, for the same three month period in 2005. This increase
          is  attributed  to  the  need  for more support personnel, including a
          human  resources  director  for  engineer   recruiting,   a   contract
          administrator  and  upcoming SEC compliance issues, including Sarbanes
          Oxley  404  and FASB 123(R). We also incurred research and development
          costs  of  approximately  $640,  or 0.0% of net sales, and $19,500, or
          1.6%  of  net  sales, during the three-months ending June 30, 2005 and
          2004,  respectively,  which are included in general and administrative
          expenses.

                                       22
                                      PAGE

Non-operating  expense  (income) consisted of interest expense and deferred gain
on  the  sale of our building, as well as other non-cash loan fees and expenses.
Non-operating  expenses  decreased  to  the point that we recorded non-operating
income  for  the  three-months  ending  June  30,  2005.

     -    Interest  expense  for  the three-months ending June 30, 2005 and 2004
          was  approximately $600, or 0.0% of net sales, and $20,000, or 1.6% of
          net  sales,  respectively. The decrease was due to a reduction in debt
          with  fewer  notes  payable.  We  continue  to pay interest expense on
          certain  capital  leases  and  settlement notes, although the balances
          continue  to  decline.  We  ceased  accruing  interest  expense on our
          related  party  note,  which  was paid in full during 2004, and on our
          revolving  credit  facility,  which  also  had  a zero balance for the
          three-months  ending June 30, 2005. For the same three-months of 2004,
          we accrued interest on our related party note (which was later paid in
          full  last  year)  of  approximately $11,000. We also accrued and paid
          approximately $600 of interest on our various capital leases and notes
          payable and accrued and paid approximately $8,000. Interest expense on
          our  settlement notes/capital leases for the three-month period ending
          June  30,  2005  and  2004  were $600 and $600, respectively. We began
          generating  interest  income  in  late  2004, and for the three-months
          ending  June 30, 2005, we recognized approximately $37,000, or 1.0% of
          net  sales,  in  interest  income  due  to  increasing  cash balances.

     -    We  recognized  approximately $29,000 and $29,000 of the deferred gain
          on  the  sale  of the building during the three-months ending June 30,
          2005  and  2004,  respectively,  and  we will continue to amortize the
          remaining  deferred  gain of approximately $889,000 into non-operating
          income  over the remainder of the lease. We also accrued an income tax
          provision  expense  of $400 for the three-months ending June 30, 2004.

     -    For  the  three-months ending June 30, 2005 and 2004, we realized loan
          fees related to our revolving credit facility of approximately $29,000
          and  $1,329,000,  respectively.  Although we did not have a balance on
          our  revolving  credit  facility  in  2005,  we incurred approximately
          $29,000  in  non-cash  loan  fees  in  the  second quarter when Laurus
          converted  warrants  on  50,000  shares  of our common stock that were
          granted in 2004. We do not anticipate additional non-cash loan fees in
          the immediate future; however, additional fees will be incurred as the
          Laurus  warrants  are  exercised.

During  the  three-months  ending  June  30,  2005, we generated a net profit of
approximately  $111,000,  or  5.8%  of  net  sales,  compared  to  a net loss of
approximately  $1,287,000,  or  107.2%  of  net  sales, for the same three-month
period  in  2004.  During  the  three-months ending June 30, 2005, we incurred a
positive  EBITDA  (earnings before interest taxes depreciation and amortization)
of  approximately  $110,000,  or  5.8%  of  net  sales, compared to an EBITDA of
approximately  $49,000,  or  4.1% of net sales, for the three-months ending June
30,  2004.

The following table reconciles Earnings Before Interest, Taxes, Depreciation and
Amortization  (EBITDA) to net income (loss) for the three-months ending June 30,
2005  and  2004,  respectively:

                                       23
                                      PAGE

<TABLE>
<CAPTION>

<S>                             <C>              <C>
FOR THE THREE-MONTHS ENDING. .   JUNE 30, 2005     June 30, 2004
                                    (UNAUDITED)      (Unaudited)
NET INCOME (LOSS). . . . . . .  $      110,938      ($1,286,866)
------------------------------  ---------------  ---------------

Interest Income. . . . . . . .         (36,823)               -
Interest Expense . . . . . . .             609           19,736
Gain on Building Sale. . . . .         (29,318)         (29,318)
 Loan Fee - Equity Conversion.          28,875        1,329,313
Provision for income taxes . .             400                -
Depreciation and Amortization.          35,076           16,533
------------------------------  ---------------  ---------------
EBITDA . . . . . . . . . . . .  $      109,757   $       49,398
------------------------------  ---------------  ---------------
</TABLE>

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.   Beginning in 2003
through  the  current  quarter  in  2005,  we showed continued progress in total
revenue  as  well  as  in  EBITDA.

                               [GRAPHIC  OMITED]

                                       24
                                      PAGE

                               [GRAPHIC  OMITED]

LIQUIDITY  AND  CAPITAL  RESOURCES

     CASH POSITION FOR SIX-MONTHS ENDED JUNE, 2005 - VS. - SIX-MONTHS ENDED JUNE
30,  2004

Net  increase  in  cash  during  the  six-months  ending  June  30,   2005   was
approximately  $374,000 compared to a net increase of approximately $635,000 for
the  same  six-month  period in 2004.  Net cash provided by operating activities
totaled  approximately  $171,000  for  the  six-months  ending June 30, 2005, an
increase of approximately $408,000 as compared to approximately $237,000 used in
operating  activities during the same six-month period in 2004.  The improvement
in  cash  position  from  operations was mainly due to our ability to profitably
execute  on  our  existing  contracts and generate a net income of approximately
$212,000  for  the  six-month  period ending June 30, 2005, versus a net loss of
approximately  $1,729,000 for the same six-month period last year, combined with
an  increase  in  depreciation  expense  and an increase in accounts payable and
related  accruals, which generated cash for the six-month period ending June 30,
2005.

Net  cash  used  in  investing activities totaled approximately $371,000 for the
six-months  ending  June  30,  2005,  compared  to approximately $80,000 used in
investing  activities during the same six-month period in 2004.  The increase in
cash  used  in  investing  activities  is  attributable to the purchase of fixed
assets,  primarily  the  build-out  of our fabrication and test facility for our
hybrid rocket motors and additional computer hardware and software tools in 2005
to  support  our  growing  engineering  staff.

Net cash provided by financing activities totaled approximately $575,000 for the
six-months  ending  June 30, 2005, which is a decrease of approximately $376,000
from the approximately $951,000 provided by financing activities during the same
six-months  in  2004.  This  is  primarily  attributable  to  warrant and option
exercises  versus  the  advances/conversions under our revolving credit facility
with  the  Laurus  Master  Fund  in  2004.

At  June 30, 2005, our cash, which includes cash reserves and cash available for
investment,  was  approximately  $5,443,000,  as   compared   to   approximately
$1,227,000  at June 30, 2004, an increase of approximately $4,216,000 mainly due
to  the  issuance  of  our  preferred  stock in August 2004 of $2.5 million, the
exercise  of  stock options and warrants throughout the first six-months of 2005
of approximately $570,000 and those done  during the second half of 2004 as well
as  advances/conversions  under our revolving credit facility in the second half
of  2004.

                                       25
                                      PAGE

As  of  June  30,  2005,  our  backlog  of  funded  and  non-funded business was
approximately  $44 million, compared to approximately $44 million as of June 30,
2004.  We  continue  to  generate  new  business  while  we  execute on existing
backorders.  With  respect  to  the  Missile  Defense  Agency program, we expect
approximately  $8  million  in  revenue  to  be generated in 2005.  Although the
Missile  Defense  Agency  contract  was awarded to us, there can be no assurance
that  the contract will be continued through all phases, and, if continued, that
it  will  generate  the  amounts  anticipated.

Deferred  income  taxes  are  provided  for temporary differences in recognizing
certain  income and expense items for financial and tax reporting purposes.  The
net  deferred  tax  asset  of $2,249,000 and  $2,808,000 as of June 30, 2005 and
2004,  respectively,  consisted  primarily  of  the income tax benefits from net
operating  loss  and  capital  loss  carryforwards, amortization of goodwill and
research  and  development  credits.  A valuation allowance has been recorded to
fully  offset  the  deferred  tax  asset  as it is more likely than not that the
assets  will  not  be utilized.  The valuation allowance decreased approximately
$69,000  in  2005 from $2,318,000 at December 31, 2004 to $2,249,000 at June 30,
2005.

At  June  30, 2005, the Company has federal and state tax net operating loss and
capital  loss  carryforwards  of  approximately   $4,579,000   and   $1,883,000,
respectively.  The  federal and state tax loss carryforwards will expire in 2023
and  2013,  respectively,  unless  previously utilized.  The State of California
suspended  the  utilization of net operating loss for 2002 and 2003, and limited
them  for  2004.

CRITICAL  ACCOUNTING  STANDARDS

Our  revenues  transitioned in 2003 and early 2004 from being based primarily on
fixed  -price  contracts,  where  revenues  are recognized using the percentage-
of-completion  method  of  contract accounting based on the ratio of total costs
incurred  to  total estimated costs, to primarily cost-plus fixed fee contracts,
where  revenues are recognized as costs are incurred and services are performed.
Losses  on  contracts  are  recognized  when  they  become  known and reasonably
estimable  (see  Notes to the Consolidated Financial Statements). Actual results
of  contracts  may differ from management's estimates and such differences could
be  material  to  the  consolidated  financial statements. Professional fees are
billed  to  customers  on  a  time-and-materials basis, a fixed-price basis or a
per-transaction  basis.  Time-and-materials  revenues are recognized as services
are  performed. Deferred revenue represents amounts collected from customers for
services  to  be  provided  at a future date. Research and development costs are
expensed  as  incurred.

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

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

                                       26
                                      PAGE

CASH  POSITION

Although  we  remain cash flow positive during the first six-months of 2005, our
ability  to  increase  cash generation from operations and thereby continue as a
going  concern without the need to raise equity capital depends upon our ability
to  ultimately  implement  our business plan, which includes (but is not limited
to)  generating  substantial  new  revenue  from  the  Missile Defense Agency by
successfully performing under our $43 million contract and continuing to attract
and  successfully  complete  other  government  and  commercial  contracts.  The
Missile  Defense  Agency  contract  is  staged, and we cannot guarantee that all
subsequent  phases  will  be  awarded or will be awarded to us.  Although we are
relatively  confident  in  the  funding  for the Missile Defense Agency program,
recent  budget  cuts  may  affect  government  spending  on  these  space-based
contracts.

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

In  addition,  we  need  to  continue  developing project management and systems
engineering  expertise  to  profitably  execute  on  new  business contracts and
develop better proposal writing skills to effectively and efficiently bid on and
win  new business.  We have no current need to draw any funds from our revolving
credit  facility  and  we  will  only  investigate  the  possibility  of raising
additional capital if we have a compelling need to do so or as new contracts and
business  opportunities materialize.  New business opportunities can come from a
variety  of  sources,  including  state  and  federal  grants and government and
commercial  customer  programs.  However, there can be no assurance that we will
be  able  to  obtain  such  new  business  contracts  or,  if such contracts are
available,  that  we  can  obtain  then  on terms favorable to the Company.  The
likelihood  of  our  success  must  be  considered  in  light  of  the expenses,
difficulties and delays frequently encountered in connection with the developing
businesses,  those  historically  encountered   by  us,   and  the   competitive
environment  in  which  we  operate.

At  the  end  of 2002, we raised $475,000 from certain directors and officers by
issuing  2.03%  convertible debentures.  The convertible debentures entitled the
holder  to  convert  the  principal  and unpaid accrued interest into our common
stock  when  the  note  matured.  The original maturity on the notes was six (6)
months  from  issue  date;  however,  on  March  19, 2003, the maturity date was
extended to twelve (12) months from issue date.  The convertible debentures were
exercisable  into  common  shares  at  a conversion price that equals the 20-day
average  asking  price  less 10%, which was established when the debentures were
issued,  or  the  initial conversion price.  Concurrent with the issuance of the
convertible debentures, we issued warrants to purchase up to 1,229,705 shares of
our  common  stock to the subscribers.  These warrants are exercisable for three
(3)  years  from  the  date  of  issuance  at the initial exercise price, or the
initial  conversion  price  on  the debentures.  On September 5, 2003, we repaid
one-half  of  the  convertible  notes,  with the condition that the note holders
would  convert  the  other half.  Also, as a condition of the partial repayment,
the  note holders were required to relinquish one-half of the 1,229,705 warrants
previously  issued.  As  additional  consideration for the transaction, the note
holders  were  offered 5% interest on their notes, rather than the stated 2.03%.
All  the  note holders accepted the offer and the convertible notes were retired
in  2003.  All  of  the  remaining warrants for 614,853 shares were exercised in
2004.

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

                                       27
                                      PAGE

We have sustained ourselves over the last few years with a mixture of government
and  commercial  contracts  and  capital  raised  in  the  private  market.   In
particular,  we  anticipated  and  received an award from the Air Force Research
Laboratory  on  March  28, 2003 and from the Missile Defense Agency on March 31,
2004.  Both  awards  were  cost-plus  fixed  fee contracts, which required us to
incur  certain costs in advance of regular contract reimbursements.  Although we
have  needed  a certain amount of cash to fund advance payments on the contract,
we  have  been  entitled, as a small business concern, to recover our costs on a
weekly basis and we established the Laurus Master Fund revolving credit facility
at  the  end of the second quarter of 2003 to support our advance payment needs.
There was no balance on the revolving credit facility at June 30, 2005 and we do
not  anticipate  further need to draw on the revolving credit facility; however,
the  revolving  credit  facility  will  remain in place pursuant to our original
agreement  with the Laurus Master Fund until June 2006, unless sooner terminated
by  either  party.   We  would  be  required to pay Laurus a termination fee for
early  termination  of  the  revolving  credit  facility.

On  March  31,  2004, we negotiated an amendment to our Secured Convertible Note
dated  June  3, 2003 with the Laurus Master Fund to add a fixed conversion price
at  $0.85  per  share for the next $500,000 converted under the revolving credit
facility  after  the  initial  $1  million  conversion.  In  exchange  for   the
amendment,  Laurus  granted  us a six-month waiver to utilize the full revolving
credit  facility  in  advance  of  eligible  accounts.  On  August  25, 2004, we
negotiated  an  amendment  to  our  Secured  Convertible  Note  to  add  a fixed
conversion  price at $1.00 per share for the next $1 million converted under the
revolving  credit  facility after the $500,000 mentioned above.  In exchange for
the  amendment,  Laurus granted us a waiver to utilize the full revolving credit
facility  in advance of eligible accounts and committed to convert the entire $1
million  into  equity  by  the  end  of  2004.  At December 31, 2004, Laurus had
converted  approximately  $2,272,000  of  debt  into  2,990,000 shares under the
revolving  credit  facility.

We  continued to show positive cash flow in the second quarter of 2005.  We also
realized  operating  profit  in  the  first  two  quarters  of  2005  and  2004,
respectively;  and  incurred  a  net  profit for the first and second quarter in
2005.  We  anticipate that with our projected increase in revenue and backorders
from  near  term  contracts,  combined  with our fiscally responsible budget and
project  controls, that net positive cash flow from operations will continue and
will  be sufficient to fund both operations and capital expenditures in 2005 and
beyond.  There  is  no  assurance,  however, that we will be able to sustain our
current  positive  cash  flow  or  our  operating  profit  now or in the future.

RECENT  ACCOUNTING  PRONOUNCEMENTS

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

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

                                       28
                                      PAGE

In  March  2005,  the  Securities  and  Exchange Commission ("SEC") issued Staff
Accounting  Bulletin  No.  107  ("SAB  No. 107"), Share-Based Payment, providing
guidance  on  option valuation methods, the accounting for income tax effects of
share-based  payment  arrangements  upon  adoption  of  SFAS  No.  123R, and the
disclosures in MD&A subsequent to the adoption. The Company will provide SAB No.
107  required  disclosures upon adoption of SFAS No. 123R on January 1, 2006 and
is currently evaluating the impact the adoption of the standard will have on the
Company's  financial  condition,  results  of  operations,  and  cash  flows.

In  April  2005,  the Securities and Exchange Commission adopted a new rule that
amends  the  compliance  dates  for  SFAS  No. 123R. The Statement requires that
compensation  cost relating to share-based payment transactions be recognized in
financial  statements  and that this cost be measured based on the fair value of
the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based  compensation arrangements including share options, restricted share
plans,  performance-based  awards, share appreciation rights, and employee share
purchase  plans.  The Company will adopt SFAS No. 123R on January 1, 2006 and is
currently  evaluating  the  impact the adoption of the standard will have on the
Company's  results  of  operations.

In  June  2005,  the  FASB  issued  SFAS  No. 154, Accounting Changes and Errors
Corrections,  a  replacement  of APB Opinion No. 20 and FAS No. 3. The Statement
applies  to  all  voluntary  changes  in  accounting  principle, and changes the
requirements  for  accounting  for  and  reporting  of  a  change  in accounting
principle.  SFAS  No.  154  requires retrospective application to prior periods'
financial  statements of a voluntary change in accounting principle unless it is
impractical.

APB Opinion No. 20 previously required that most voluntary changes in accounting
principle  be  recognized by including in net income of the period of the change
the  cumulative  effect of changing to the new accounting principle. SFAS No.154
improves  the  financial  reporting  because  its   requirements   enhance   the
consistency  of  financial  reporting  between  periods.

FORWARD-LOOKING  STATEMENTS  AND  RISK  ANALYSIS
During  the  first  six-months  of  2005, we submitted three bids for government
programs,  continued  our  work  with  the  United  States  Congress to identify
directed  funding  for our programs and are actively working to identify several
commercial  programs.  We  believe that we will win some of these opportunities,
which would enable us to continue to enhance our backorder, continue to grow and
broaden  our  business  base,  although  there  can  be  no assurance that these
contracts  will  be  awarded  to  us.

To date, we have maintained a mix of government and commercial business.  During
the  first   six-months  of   2005,   we   had   about   100%   government   and
government-related  work,  where 93% was from direct government contracts and 7%
was from government-related work through subcontracts with others.   In 2004, we
had  about  90%  government  or  government-related  work.  We  anticipate   the
remainder of 2005 to be over 90% government or government-related work.  We will
continue to do both government and commercial business and anticipate the mix of
government revenues to continue to be above 70% for the next several years as we
increase  our  government  and  commercial  marketing  efforts  for  both of our
technology and product areas.  Currently, we are focusing on the domestic United
States  government market, which we believe is only about one-half of the global
government  market  for  our technology, products and services.  Although we are
interested in exploring international revenue and contract opportunities, we are
restricted  by  export  control regulations, e.g., International Traffic in Arms
Regulations, which may limit our ability to develop market opportunities outside
the  United States. The concentration of government work makes us susceptible to
government  budget  cuts,  which may impact the award of new contracts or future
phases  of  existing  contracts.  Although  we  believe  that  we could offset a
reduction  in government contract awards with awards from the commercial sector,
we  can  give  no assurance that we would be able to do so or that the timing or
amount  of  such  awards  would  be  sufficient  to  make  up  for  the  loss of
government-related  work.

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                                      PAGE

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

We  believe that we will experience an accelerated growth in sales over the next
few  years.  At  this  time, over 90% of the forecasted sales for 2005 are under
contract  or  near  contract  award.  There  is no guarantee and there can be no
assurance  that  we  will win enough new business to achieve our targeted growth
projection or to maintain a positive cash flow position.  Additionally, there is
no  guarantee  that awarded contracts will not be altered or terminated prior to
us  recognizing  our  projected  revenue  from  them.  Many contracts have "exit
ramps",  i.e., provides the customer the right to terminate the contract for any
of  a variety of reasons, including but not limited to non-performance by us, or
are  awarded  in  phases  the award of which is not guaranteed to us.  We do not
believe  that  any of our contracts will be terminated early; however, there can
be no assurance that they will not be terminated prior to completion or that all
phases  of  any  of  our  contracts  will  be  awarded to us.  Finally, with the
exception  of  our  investment  in  a fabrication facility for our hybrid rocket
motor  testing,  we do not believe that significant capital expenditures will be
required  to  achieve this increase in sales; however, additional capital may be
required  to  support  and  sustain our growth.  We may also be required to make
certain  capital  expenditures  to  bring  our  facilities  into compliance with
classified  government projects if and when awarded to us, although at this time
we  have  insufficient  information  to  estimate the cost of any such measures.

During  the  six-months  ending  June 30, 2005, we raised approximately $570,000
through the exercise of options and warrants.  During the six-months ending June
30,  2004,  we  raised  approximately  $1,751,000  through  a   combination   of
conversions  on  our  revolving  credit  facility  and  exercises of options and
warrants.  To  execute  our  strategy of rapidly growing our Company with small,
capable,  low-cost micro- and nanosatellites, hybrid propulsion products and new
commercial  revenue  sources,  we may require additional funding in order to win
significant government and commercial programs.  We believe investor or customer
funding  of  $10  to $30 million may be required in the future, which could come
from  a combination of private and/or public equity placements or government and
commercial customers.  Our intent is to only raise additional capital when it is
required or when it makes sense to do so.  We do not have any ongoing private or
public  equity  offerings  and  the  Board  has  not  authorized  any additional
financings  at  this  time.

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

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                                      PAGE

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

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

ITEM  3.  CONTROLS  AND  PROCEDURES

Within  90  days  prior  to  the  filing  date of this report, we carried out an
evaluation,  under the supervision and with the participation of our management,
including  our  Chief  Executive  Officer  and  Chief  Financial Officer, of the
effectiveness  of  the  design  and  operation  of  our  disclosure controls and
procedures.  Based  upon  that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective  to  ensure  that  information  required  to be disclosed by us in the
reports  that  we file under the Exchange Act is accumulated and communicated to
management,  including  our Chief Executive Officer and Chief Financial Officer,
as  appropriate  to allow timely decisions regarding required disclosure.  There
have  been  no  significant changes in our internal controls or in other factors
that  could significantly affect internal controls subsequent to the date of our
evaluation,  including  any  significant actions regarding any deficiencies.  We
intend  to  review  our controls and procedure regularly with our management and
Board  of  Directors.



                                       31
                                      PAGE

                          PART II -- OTHER INFORMATION

ITEM  1.     LEGAL  PROCEEDINGS
None.

ITEM  2.     CHANGES  IN  SECURITIES
None.

ITEM  3.     DEFAULTS  UPON  SENIOR  SECURITIES
None.

ITEM  4.     SUBMISSION  OF  MATTERS  TO  A  VOTE  OF  SECURITY  HOLDERS
None.

ITEM  5.     OTHER  INFORMATION
None.

ITEM  6.     EXHIBITS  AND  REPORTS  ON  FORM  8-K

(a)     Exhibits

<TABLE>
<CAPTION>



<S>                                                                                             <C>

Subcontract - Small Tug:  Miniature Flight Experiment Demonstrating Cislunar
     Tug Technologies  dated  July  27,  2005 . . . . . . . . . . . . . . . . . . . . . . . .   10.1
Statement of Work - Small Tug:  Miniature Flight Experiment Demonstrating Cislunar
     Tug Technologies  dated  July  27,  2005 . . . . . . . . . . . . . . . . . . . . . . . .   10.2
Certificate of James W. Benson Pursuant to Rule 13a-14(a) promulgated under the
     Securities and Exchange act of 1934 as amended. . . . . . . . . . . . . . . . . . . . . .  31.1
Certificate of Richard B. Slansky Pursuant to Rule 13a-14(a) promulgated under the
     Securities and Exchange act of 1934 as amended. . . . . . . . . . . . . . . . . . . . . .  31.2
Certificate of James W. Benson Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code. .  32.1
Certificate of Richard B. Slansky Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code  32.2
</TABLE>

(b)     Reports  on  Form  8-K

We  have  filed  three reports on Form 8-K, since fiscal year ended December 31,
2004.  These  reports,  dated  April 13, 2005, April 15, 2005 and June 27, 2005,
disclosed: 1) our appointment of Susan C. Benson to our Board of Directors; 2) a
contract  to  expand  our  facilities  for  fabrication and testing of scaled-up
hybrid  rocket  motors;  and  3) a subcontract awarded to us by Andrews Space of
Seattle,  which  calls for the design, development,  launch,  and operation of a
small  low cost spacecraft on a mission to the Lunar L1 point to demonstrate key
technologies in support of NASA's Human and Robotics Technology SmallTug Program
to  explore  the  Moon  and  Mars.

                                       32
                                      PAGE

                                   SIGNATURES


Pursuant  to  the  requirements  of  the  Securities  Exchange  Act of 1934, the
Registrant  has  duly  caused  this  report  to  be  signed on its behalf by the
undersigned  thereunto  duly  authorized.

                                                                 SPACEDEV,  INC.
                                                                      Registrant


Dated:  December 22,  2005                         /s/  James  W.  Benson
                                                          ----------------------
                                                               James  W.  Benson
                                                       Chief  Executive  Officer



Dated:  December 22,  2005                      /s/  Richard  B.  Slansky
                                                       -------------------------
                                                            Richard  B.  Slansky
                                         President  &  Chief  Financial  Officer

                                       33
                                      PAGE