FORM 10-QSB

                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20429


(Mark  One)
[X]     QUARTERLY  REPORT  PURSUANT  TO  SECTION  13  OR  15(d)  OF  THE
        SECURITIES  EXCHANGE  ACT  OF  1934

             For  the  quarterly  period  ended  September  30,  2004

[   ]     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:  20,148,660 shares of Issuer's voting
common  stock  were  outstanding  on  November  9,  2004.


                                 SPACEDEV, INC.
                                   FORM 10-QSB
                    FOR THE QUARTER ENDED SEPTEMBER 30, 2004


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                         15

   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                            33

   ITEM  4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS           33

   ITEM  5.     OTHER INFORMATION                                             33

   ITEM  6.     EXHIBITS AND REPORTS ON FORM 8-K                              33

SIGNATURES                                                                    35
--------------------------------------------------------------------------------


                                    PAGE

                         PART I -- FINANCIAL INFORMATION

ITEM  1.     FINANCIAL  STATEMENTS

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

<TABLE>
<CAPTION>

<S>                             <C>         <C>
At September 30, . . . . . . .        2004      2003
------------------------------  ----------  --------

 ASSETS

 CURRENT ASSETS
      Cash . . . . . . . . . .  $4,078,593  $314,229
      Accounts receivable, net     427,358   297,037
      Work in Progress . . . .       5,754    10,581
------------------------------  ----------  --------

 Total current assets. . . . .   4,511,705   621,847

 FIXED ASSETS - NET. . . . . .     248,066   115,288

 OTHER ASSETS. . . . . . . . .      43,042    35,544
------------------------------  ----------  --------

                                $4,802,813  $772,679
------------------------------  ----------  --------
------------------------------  ----------  --------

</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 September 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2004           2003
-------------------------------------------------------------------------  -------------  -------------

 LIABILITIES AND STOCKHOLDERSEQUITY (DEFICIT)

 CURRENT LIABILITIES
      Current portion of notes payable. . . . . . . . . . . . . . . . . .  $     36,239   $     44,654
      Current portion of capitalized lease obligations. . . . . . . . . .         3,943         19,804
      Note payable - related party (Note 3(b)). . . . . . . . . . . . . .             -         80,000
      Accounts payable and accrued expenses . . . . . . . . . . . . . . .       161,980        349,464
      Accrued payroll, vacation and related taxes . . . . . . . . . . . .       210,434        116,725
      Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . .        49,779              -
      Revolving credit facility (Note 3(c)) . . . . . . . . . . . . . . .             -        629,500
      Other accrued liabilities . . . . . . . . . . . . . . . . . . . . .       260,547        139,759
-------------------------------------------------------------------------  -------------  -------------

 TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . .       722,922      1,379,906

 NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 3(A)) . . . . . . . . . . .        18,797         55,012

 CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES . . . . . . . . .         2,479          6,239

 NOTE PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES. . . . . . . . . .             -        506,397

 DEFERRED GAIN - ON BUILDING SALE (NOTE 3(A)) . . . . . . . . . . . . . .       977,267      1,094,539

 DEFERRED REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . .         5,000          5,000
-------------------------------------------------------------------------  -------------  -------------

 TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .     1,726,465      3,047,093

 COMMITMENTS AND CONTINGENCIES

 STOCKHOLDERS EQUITY (DEFICIT)
      Preferred stock, Series C, $0.001 par value, 10,000,000 shares
           authorized and 250,000 issued and outstanding . . . . . . . .            250              -
      Common stock, $0.0001 par value; 50,000,000 shares authorized, and
           20,026,263 and 16,029,360 shares issued and outstanding,
           respectively . . . . . . . . . . . . . . . . . . . . . . . . .         2,002          1,602
      Additional paid-in capital (Note 3(c), 4 & 5) . . . . . . . . . . .    16,724,176      8,921,791
      Additional paid-in capital - stock options. . . . . . . . . . . . .       750,000        750,000
      Deferred compensation (Note 5). . . . . . . . . . . . . . . . . . .      (250,000)      (250,000)
      Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . .   (14,150,080)   (11,697,807)
-------------------------------------------------------------------------  -------------  -------------

 TOTAL STOCKHOLDERS EQUITY (DEFICIT) . . . . . . . . . . . . . . . . . . .    3,076,348     (2,274,414)
-------------------------------------------------------------------------  -------------  -------------

                                                                           $  4,802,813   $    772,679
-------------------------------------------------------------------------  -------------  -------------
-------------------------------------------------------------------------  -------------  -------------

</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-Months Ending                     Nine-Months Ending

Three and Nine Months Ending           2004        %       2003        %       2004          %       2003          %
September 30, 2004 and 2003
<S>                                   <C>          <C>     <C>         <C>     <C>           <C>     <C>           <C>
 NET SALES . . . . . . . . . . . . .  $1,230,126   100.0%  $ 767,780     100%  $ 3,445,569   100.0%  $ 2,054,576     100%

 TOTAL COST OF SALES . . . . . . . .     952,944    77.5%    642,940    83.7%    2,702,583    78.4%    1,682,424    81.9%

 GROSS MARGIN. . . . . . . . . . . .     277,182    22.5%    124,840    16.3%      742,986    21.6%      372,152    18.1%
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------

 OPERATING EXPENSES
  Marketing and sales expense. . . .     120,367     9.8%    112,321    14.6%      335,652     9.7%      311,368    15.2%
  Research and development . . . . .       4,522     0.4%     20,555     2.7%       39,326     1.1%      272,537    13.3%
  Stock and stock option
   based compensation. . . . . . . .           -     0.0%      4,685     0.6%            -     0.0%        4,685     0.2%
  General and administrative . . . .     103,527     8.4%    137,324    17.9%      274,458     8.0%      661,943    32.2%
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------

 TOTAL OPERATING EXPENSES. . . . . .     228,416    18.6%    274,885    35.8%      649,436    18.8%    1,250,533    60.9%
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------

 PROFIT (LOSS) FROM OPERATIONS . . .      48,766     4.0%   (150,045)  -19.5%       93,550     2.7%     (878,381)  -42.8%
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------

 NON-OPERATING EXPENSE (INCOME)
   Interest income . . . . . . . . .      (5,619)   -0.5%          -     0.0%       (5,619)   -0.2%            -     0.0%
   Interest expense. . . . . . . . .      23,110     1.9%     30,056     3.9%       62,633     1.8%       64,683     3.1%
   Non-cash interest expense
    debt discount (Note 4) . . . . .           -     0.0%    (88,408)  -11.5%            -     0.0%      112,500     5.5%
   Gain on Building Sale (Note 3(a))     (29,318)   -2.4%    (29,318)   -3.8%      (87,954)   -2.6%      (78,181)   -3.8%
   Non-Cash Loan Fee -
    Equity Conversions (Note 3(c)) .     663,481    53.9%    148,412    19.3%    2,456,794    71.3%      148,412     7.2%
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------

 TOTAL NON-OPERATING EXPENSE . . . .     651,654    53.0%     60,742     7.9%    2,425,854    70.4%      247,414    12.0%
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------

 LOSS BEFORE TAXES . . . . . . . . .    (602,888)  -49.0%   (210,787)  -27.5%   (2,332,304)  -67.7%   (1,125,795)  -54.8%

 INCOME TAX PROVISION. . . . . . . .           -     0.0%     (2,526)   -0.3%            -     0.0%            -     0.0%

 NET LOSS. . . . . . . . . . . . . .  $ (602,888)  -49.0%  $(208,261)  -27.1%  $(2,332,304)  -67.7%  $(1,125,795)  -54.8%
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------
 NET LOSS PER SHARE:
   Net loss. . . . . .                $    (0.03)          $  (0.01)           $    (0.13)           $     (0.07)
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------
   Weighted-Average
    Shares Outstanding                19,228,019           15,525,203            18,019,886            15,408,961
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------
------------------------------------  -----------  ------  ----------  ------  ------------  ------  ------------  ------

</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>
 For the Nine Months Ending September 30, 2004 and 2003 . . . .         2004          2003
---------------------------------------------------------------  ------------  ------------
 CASH FLOWS FROM OPERATING ACTIVITIES
      Net loss. . . . . . . . . . . . . . . . . . . . . . . . .  $(2,332,304)  $(1,125,795)
      Adjustments to reconcile net loss to net cash
           used in operating activities:
           Depreciation and amortization. . . . . . . . . . . .       55,236       153,023
           Gain on building sale. . . . . . . . . . . . . . . .      (87,954)      (78,181)
           Non-cash interest expense - convertible debt program            -       112,500
           Non-cash loan fees . . . . . . . . . . . . . . . . .    2,456,794       153,028
           Change in operating assets and liabilities:. . . . .      (25,552)     (159,147)
---------------------------------------------------------------  ------------  ------------
 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . . . .       66,220      (944,572)
---------------------------------------------------------------  ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
      Proceeds from the sale of building. . . . . . . . . . . .            -     3,150,124
      Purchases of fixed assets . . . . . . . . . . . . . . . .     (165,770)       (3,100)
---------------------------------------------------------------  ------------  ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . . . .     (165,770)    3,147,024
---------------------------------------------------------------  ------------  ------------
 CASH FLOWS FROM FINANCING ACTIVITIES
      Principle payments on notes payable . . . . . . . . . . .      (32,555)   (2,542,131)
      Principal payments on capitalized lease obligations . . .       (9,163)      (25,306)
      Payments on notes payable - related party . . . . . . . .     (614,778)     (179,999)
      Proceeds from issuance of common and preferred stock. . .    3,783,725       466,115
      Payments on convertible debt program. . . . . . . . . . .     (257,736)
      Proceeds from revolving credit facility . . . . . . . . .      458,908       623,186
---------------------------------------------------------------  ------------  ------------
 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . . . .    3,586,137    (1,915,871)
---------------------------------------------------------------  ------------  ------------
 NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . .    3,486,587       286,581
---------------------------------------------------------------  ------------  ------------
 CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . .      592,006        27,648
---------------------------------------------------------------  ------------  ------------
 CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . .  $ 4,078,593   $   314,229
---------------------------------------------------------------  ------------  ------------
</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>
 For the Nine Months Ending September 30, 2004 and 2003      2004     2003
-------------------------------------------------------  --------  -------

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid during the period for:
           Interest . . . . . . . . . . . . . . . . . .  $305,038  $30,470
</TABLE>
 NONCASH  INVESTING  AND  FINANCING  ACTIVITIES:

During  the  nine-months  ending September 30, 2004 the Company issued 1,954,661
     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 $1,240,507 The Company recorded
     additional non-cash loan fees of approximately $1,718,120 and charged these
     fees  to  expense.

During  the  nine-months  ending  September  30, 2004 the Company issued 589,212
     shares  of  its  common  stock  to the participates in our convertible debt
     program  in 2003 from conversions of warrants thereby receiving cash in the
     amount  of  $227,500. The Company recorded additional non-cash loan fees of
     approximately  $738,700  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 April 6, 2004 and other reports the Company filed
with  the  U.S.  Securities  and Exchange Commission for additional disclosures,
including  a  summary  of  the  Company's  accounting  policies,  which have not
materially  changed.  The consolidated results of operations for the nine-months
ending  September 30, 2004 are not necessarily indicative of results that may be
expected  for the fiscal year ending December 31, 2004 or any future period, and
the  Company  makes  no  representations  related  thereto.

As  of  September  30, 2004, management continues the opinion that the Company's
auditors,  PKF,  expressed  in their formal auditors' opinion dated February 11,
2004  (except  for Note 11 as to which the date is April 2, 2004), 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, 2003, 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 September 30, 2004 have been prepared assuming the Company will continue as a
going  concern.

During  the first nine-months of 2004, the Company had a working capital balance
of  $3,788,783  and  incurred  a net loss of $2,332,304 as compared to a working
capital deficit of $758,059 and a net loss of $1,125,795 for the same nine-month
period  in  2003.  Also  during  the  first nine-months of 2004, the Company had
non-operating  expenses  of  $2,425,855  as  compared  to  $247,414 for the same
nine-month  period  in  2003,  with  the  majority  of the increase representing
non-cash  interest  expenses.

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  and  is  expected  to  be  completed  by  January  31,  2006.

Management intends to obtain new commercial and government contracts, reduce the
utilization  of  its  revolving  credit facility in 2004 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

Beginning  in  the  second  quarter  of 2002, the Company's capitalized software
costs  were  amortized over their estimated useful lives using the straight-line
method.  Periodically  and  at  least annually, management performs a review for
impairment  in  accordance  with  SFAS  No.  144.  During  the nine-months ended
September  30,  2003,  these  capitalized  software  costs were fully amortized.

2.       REVENUE  RECOGNITION

The  Company's  revenues  for  the  nine-months  ending  September 30, 2004 were
derived  primarily  from  United  States  government  cost plus fixed fee (CPFF)
contracts  compared  to  a  predominance  of  fixed price contracts for the same
nine-months  in  2003.  Revenues  from  the  CPFF  contracts  during  the  first
nine-months  of  2004  were  recognized  as  expenses  were incurred compared to
revenues  from  fixed  price  contracts  for the same period in 2003, which were
recognized   using  the   percentage-of-completion  method.  Estimated  contract
profits  are  taken  into earnings in proportion to revenues recorded.  Revenues
under certain long-term fixed price contracts, which provide for the delivery of
minimal  quantities  or  require  significant  amounts  of development effort in
relation  to  total contract value, are recorded upon achievement of performance
milestones  or  using  the  cost-to-cost method of accounting where revenues and
profits  are  recorded  based  on the ratio of costs incurred to estimated total
costs  at completion.  Time and material revenues are recognized as services are
preformed and costs incurred.  Losses on contracts are recognized when estimated
costs  are  reasonably  determined.  Actual results of contracts may differ from
management's   estimates   and   such  differences  could  be  material  to  the
consolidated financial statements.  Professional fees are billed to customers on
a  time  and  materials  basis,  a  fixed price basis or a per-transaction basis
depending  on  the  terms  and  conditions  of  the specific contract.  Time and
material  revenues  are recognized as services are performed and costs incurred.

Deferred  revenue  represents  amounts  collected  from  customers for projects,
products  or services to be provided at a future date.  Deferred revenue for the
nine-months  ended  September  30,  2004  was  $49,779 and primarily represented
advanced  payments  on  our  small  private  fixed  price  contracts.

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 September 30, 2004, the deferred gain
was $977,267.  This amortization will be included in the Company's occupancy and
facility  expense  and  totaled  $87,954  and $78,181 for the nine-months ending
September  30,  2004  and  2003,  respectively.

                                     7
                                    PAGE

Deferred  Gain  consisted  of  the  following:

<TABLE>
<CAPTION>
<S>                                    <C>
Nine-Months Ending September 30, 2004

Original Deferred Gain. . . . . . . .  $1,172,720
Less Amortization 2003. . . . . . . .    (107,499)
Less Amortization 2004. . . . . . . .     (87,954)
--------------------------------------------------
                                       $  977,267
--------------------------------------------------
</TABLE>

In  2001, the Company entered into three settlement loan agreements with various
vendors.  The  total  of $171,402 for all three loans called for payment between
24 and 50 months with interest that ranges from 0% to 8%.  At September 30, 2004
and  2003,  the  outstanding  balances  on these notes were $55,036 and $99,666,
respectively,  with  interest  expense  for the nine-months ending September 30,
2004  and  2003  of  $3,691  and  $5,638,  respectively.

Future  minimum  principal  payments  on  settlement  notes  are  as  follows:

<TABLE>
<CAPTION>

<S>                                      <C>
For Twelve Months Ending
September 30,

2005. . . . . . . . . . . . . . . . . .  $36,239
2006. . . . . . . . . . . . . . . . . .   18,797
2007. . . . . . . . . . . . . . . . . .        0
------------------------------------------------
Total Settlement Notes. . . . . . . . .  $55,036
------------------------------------------------
</TABLE>

b)     Related  Parties

The  Company had a note payable to its CEO.  At September 30, 2004 and 2003, the
balances were $0 and $586,397, respectively, with interest accruing at 10%.  The
note  was amended on March 20, 2000 to call for annual payments of not less than
$80,000 per year with interest at 10%.  As part of the Company's preferred stock
offering  (see  Note  5),  the note was paid in full during the third quarter of
2004.

Interest expense on this note was $29,256 and $27,899 for the nine-month periods
ending  September  30,  2004  and  2003,  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 Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form 8-K
dated  June  18,  2003.  Pursuant  to  the agreements, the Company received a $1
million  revolving  credit facility in the form of a three-year Convertible Note
secured  by its assets.  The net proceeds from the Convertible Note are used for
general  working  capital needs.  Advances on the Convertible Note may be repaid
at the Company's option, in cash or through the issuance of the Company's shares
of  common  stock.  The  Convertible  Note carries an interest rate of WSJ 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  $29,600  in  interest  and approximately $4,000 fees were
accrued  under  the  revolving credit facility in the first nine-months of 2004.
There  was  no outstanding balance on the revolving credit facility at September
30,  2004.

                                     8
                                    PAGE

The  Company  filed  a  Form  SB-2  registration  statement  on July 25, 2003 in
connection with this transaction. The shares were registered with the Securities
and  Exchange  Commission  ("SEC")  for  public  resale  on  August  6, 2003 and
subsequently  updated  the filing on May 7, 2004. 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  has  exercised  its  conversion  rights from time to time on outstanding
balances. When Laurus chooses to exercise its conversion rights, the Convertible
Note  is  convertible  into  shares  of  the  Company's  common stock at a fixed
conversion  price,  subject  to  adjustments  for stock splits, combinations and
dividends  and  for  shares  of  common  stock  issued  for  less than the fixed
conversion price (unless exempted pursuant to the agreements). The agreement was
modified  on  March 31, 2004 to provide for a six-month waiver to us and a fixed
conversion  price  to  Laurus of $0.85 per share on the first $500,000 after the
first  $1  million.  The  agreement  was  further modified on August 25, 2004 to
provide for a fixed conversion price to Laurus of $1.00 per share on the next $1
million.  Thereafter,  the  fixed  conversion  price  will  be  adjusted   after
conversion  of  $2.5 million to 103% of the then fair market value of our common
stock  ("Adjusted  Fixed  Conversion  Price").

Laurus converted 1,954,661 shares to reduce the Company's debt by $1,240,507 for
the  nine-month  period  ending September 30, 2004.  Laurus converted a total of
2,369,661  shares  to  reduce  the debt by $1,468,757 since the inception of the
revolving credit facility.  For the nine-month period ending September 30, 2004,
the  Company  expensed $1,718,120 for the non-cash loan fee expense based on the
fair  market  value  of  the  stock  when  Laurus  converted  and  approximately
$1,857,000  for  the  non-cash  loan  fee  expense  since  the  inception of the
revolving  credit  facility.  The fair market value used in 2003 was established
using a 20% discount to the closing price on the date of conversion based on the
restricted  and  thinly-traded  nature of the Company stock in 2003 and the fair
market value used in 2004 was established using the closing price on the date of
conversion  with  no discount taken due to the increased volume in the Company's
stock.

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

In  conjunction  with this transaction, Laurus was paid a fee of $20,000 for the
first  year,  which  was  expensed  as additional interest expense in 2003.  The
Company  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 is computed as follows: $0.63 per
share for the purchase of up to 125,000 shares; $0.69 per share for the purchase
of  an  additional  50,000  shares;  and  $0.80 per share for the purchase of an
additional  25,000  shares.  The  warrant exercise price may be paid in cash, in
shares  of the Company's common stock, or by a combination of both.  The warrant
expiration  date  is June 3, 2008.  The warrant exercise price and the number of
shares  underlying  the  warrant  are  subject  to adjustments for stock splits,
combinations  and  dividends.

                                      9
                                    PAGE

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

The  Company  may  terminate  its  agreements  with Laurus before the end of the
initial  three  year  term  and  Laurus will release its security interests upon
payment  to  Laurus  of all obligations, if the Company has: (i) provided Laurus
with  an  executed  release  of  all claims which the Company may have under the
agreements;  and, (ii) paid to Laurus an early payment fee in an amount equal to
(x) three percent (3%) of the Capital Availability Amount if such payment occurs
after  the  first  anniversary  (i.e.,  June  3,  2004)  and prior to the second
anniversary  of  the  Initial  Term;  and,  (y)  two percent (2%) of the Capital
Availability  Amount  if  such  payment  occurs after the second anniversary and
prior  to  the  end  of the Initial Term.  The early payment fee is also due and
payable  by  the Company to Laurus if the Company terminates its Agreement after
the  occurrence  of  an  Event  of  Default,  as  defined  in  the  agreements.

As  stated above, in conjunction with the Company's Preferred Stock financing on
August  25,  2004, Laurus agreed to extend our current revolving credit facility
reported on Form 8-K filed June 18, 2003 from $1.0 million to $1.5 million.  The
first  $1.0  million converted under the revolving credit facility was converted
last  year  and  earlier  this  year at a rate of $0.55 per share.  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  will be convertible at a rate of $1.00 per share. There was no
balance  on  the  revolving  credit facility at September 30, 2004; however, the
Company  did  draw  $1 million on the revolving credit facility in October 2004,
since  Laurus  has  committed  to  convert  the  next  $1.0 million drawn on the
Convertible  Note  into  our  common  stock  on  or  prior to December 31, 2004.

4.     CONVERTIBLE  DEBT  NOTES  PAYABLE

From  October  14, 2002 through November 14, 2002, the Company sold an aggregate
of  $475,000 of 2.03% convertible notes to various directors and officers of the
Company.  The total funding was completed on November 14, 2002.  The convertible
notes  entitled  the holder to convert the principal and unpaid accrued interest
into  the  Company's  common  stock when the notes matured.  The maturity on the
notes  was  six (6) months from issue date.  On March 25, 2003, an amendment was
executed  which  extended  these  notes  an  additional  six  (6)  months.   The
convertible  notes were exercisable into a number of the Company's common shares
at  a  conversion  price  that  equaled  the  20-day average ask price less 10%,
established  when  the  note  was  issued,  or  the  initial  conversion  price.

Concurrent  with  the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of the Company's common stock to the
subscribers.  These  warrants  are exercisable for three (3) years from the date
of  issuance at the initial exercise price, which is equal to the 20-day average
ask  price  less  10%,  which was established when the notes were issued, or the
initial  conversion price of the notes.  Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance  and  the  estimated  fair  value  was recorded as debt discount.  As a
result  of  the  change  to  the  maturity  date  of  the  convertible debt, the
amortization  period  for  the debt discounts was also extended during the first
quarter  in  2003.

                                     10
                                    PAGE

All  debt  discounts are to be amortized as additional interest expense over the
term of the convertible notes.  As of September 30, 2003, $475,000 was reflected
as  debt  discount  of which $267,879 was amortized to non-cash interest expense
and  $155,379  was  credited  back  to  compensate  for an adjustment during the
nine-months  ending  September  30,  2003.  Fair  market  value of the stock was
determined  by  discounting  the  closing  market  price  on  the  date  of  the
transaction  by 20%, based on the nature of the restricted securities and thinly
traded  stock.

On September 5, 2003, the Company repaid one-half of the convertible notes, with
the  condition  that  the  note  holders  convert  the  other  half.  Also, as a
condition of the partial repayment, the note holders were required to relinquish
one-half   of   the   previously   issued   warrants.  Finally,   as  additional
consideration  for the transaction, the note holders were offered 5% interest on
their notes, rather than the stated 2.03%.  All of the note holders accepted the
offer  and  the  convertible  notes  were  retired.

Balances  as  of  September  30,  2004  were:

<TABLE>
<CAPTION>

<S>                                           <C>
Convertible debentures - beginning balance .  $ 475,000
     Total interest expense incurred . . . .  $  20,236
     Accrued interest paid - current year. .  $ (18,161)
     Accrued interest paid - prior year. . .  $  (2,075)
     Convertible debtures paid . . . . . . .  $(237,500)
     Convertible debtures converted. . . . .  $(237,500)
-------------------------------------------------------
                                              $(475,000)
-------------------------------------------------------
Convertible debentures - ending balance. . .  $       0
--------------------------------------------  ----------

Debt discount (Warrants) - beginning balance  $ 475,000
     Amount forfeited. . . . . . . . . . . .  $(237,500)
     Amount expensed prior year. . . . . . .  $(125,000)
     Amount expensed current year. . . . . .  $(267,879)
     Current year - adjustment . . . . . . .  $ 155,379
-------------------------------------------------------
                                              $(475,000)
-------------------------------------------------------

Debt discount (Warrants) - ending balance. .  $       0
--------------------------------------------  ----------
</TABLE>

5.     STOCKHOLDERS'  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  Non-Redeemable Convertible Preferred Stock, par value $0.001 per
share  (the  "Preferred  Stock"),  to  Laurus for an aggregate purchase price of
$2,500,000  or  $10.00 per share (the "Stated Value").  The preferred shares are
convertible  into  shares  of  the Company's $0.0001 par value common stock at a
rate  of  $1.54  per  share  at  any  time  after  the date of issuance, and pay
quarterly, cumulative dividends at a rate of 6.85% with the first payment due on
January  1,  2005.  As  of  September  30,  2004, approximately $17,600 has been
accrued  for  dividends and are payable in cash or shares of our common stock at
the  holder's option with the exception that dividends must be paid in shares of
our  common  stock  for  up to 25% of the aggregate dollar trading volume if the
fair  market  value  of the Company's common stock for the 20-days preceding the
conversion  date  exceeds  120% of the conversion rate. The preferred shares are
redeemable by the Company in whole or in part at any time after issuance for (a)
115%  of  the  Stated Value if the average closing price of the common stock for
the  22  days  immediately  preceding the date of conversion does not exceed the
conversion  rate  or  (b)  the  Stated Value if the average closing price of our
common  stock  for  the  22  days  immediately  preceding the date of conversion
exceeds the Stated Value. The preferred shares have a liquidation right equal to
the Stated Value upon the Company's dissolution, liquidation or winding-up.  The
preferred  shares  have  no  voting  rights.

                                     11
                                    PAGE

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
committed  to  register  all  of  the  shares of its common stock underlying the
Preferred  Shares and the warrant, as well as shares payable as dividends on the
Preferred  Shares,  for  resale.

COMMON  STOCK  AND  WARRANTS

On  November 5, 2000, the Company commenced a private placement offering ("PPO")
for  a  maximum  of  1,000,000  shares of the Company's $0.0001 par value common
stock  and  warrants  to purchase an additional 1,000,000 shares of common stock
(the  "Units").  The offering price of the Units was the five-day average of the
bid  and ask prices for the Company's common stock on the date of issuance, with
a  minimum  per Unit price of $1.00.  The warrants allowed the holder to acquire
additional  shares  at $0.50 above the offering price of the shares. The Company
sold  to  one  related-party  investor  under  these  terms.

On  March 2, 2001, the PPO offering price was amended to the average of the high
bid  prices on the date of issuance and four preceding days, with no minimum per
share  price,  and  the  warrants  were  amended  to allow the holder to acquire
additional  shares  at  the  Unit  price.

On  January 16, 2003 and February 14, 2003, pursuant to an extension of the PPO,
the Company sold 665,188 and 196,079 Units, respectively.   The Company received
approximately  $326,000 and $100,000, respectively, for the Units sold under the
PPO  during  the  first  quarter  2003.

The  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 periods ending September 30, 2004
and 2003 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 nine-month period ending September 30,
2004 and 2003 would be amortized on a pro forma basis over the vesting period of
the  options.  Thus,  the  Company's  consolidated  net  loss would have been as
follows:

<TABLE>
<CAPTION>

<S>                               <C>           <C>
Nine-Months Ending September 30,         2004          2003
------------------------------------------------------------
Net loss:
 As reported . . . . . . . . . .  $(2,332,304)  $(1,125,795)
 Pro forma . . . . . . . . . . .  $(2,635,729)  $(1,333,368)
------------------------------------------------------------
Loss per Share:
 As reported . . . . . . . . . .  $     (0.13)  $     (0.07)
 Pro forma . . . . . . . . . . .  $     (0.15)  $     (0.08)
------------------------------------------------------------
</TABLE>

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.

                                     12
                                    PAGE

The  options are 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 exercise
prices  are  set  forth  in  the  following  chart:

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

</TABLE>

All  options  expire  on  July  16,  2010.

In  accordance  with  APB  25,  the  Company recognized $500,000 of compensation
expense  and  $250,000 of deferred compensation in 1997.  The options granted to
the CEO are subject to vesting conditions and have exercise prices between $1.00
and  $3.00  per  share.

On  August  27,  2001, as part of an annual review process, an additional 10,000
options  were granted to the CEO at the exercise price of $0.9469 per share with
a  set  vesting  schedule of 3,333 shares per year after issuance with the third
year  having  3,334  options  vest.  These  options expire five years from grant
date.

6.     NEW  ACCOUNTING  PRONOUNCEMENTS

There  were  no  recent Accounting Pronouncements that affect the Company during
the  third  quarter  2004.  For  past  pronouncements please refer the Company's
10-KSB  filed  on  April  6,  2004.

7.     SUBSEQUENT  EVENTS

On  October 15, 2004, the Company drew $1.0 million down on its revolving credit
facility with Laurus.  In addition to the commitment on August 25, 2004, for the
Company to issue 250,000 shares of its Series C Convertible Preferred Stock, par
value  $0.001  per share to Laurus for an aggregate purchase price of $2,500,000
or  $10.00  per  share,  Laurus agreed to extend the Company's current revolving
credit  facility  reported  on Form 8-K filed June 18, 2003 from $1.0 million to
$1.5  million.  The  first  $1,000,000  converted  under  the  revolving  credit
facility  was  converted  last year and earlier this year 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 will be convertible by Laurus at a rate of $1.00
per  share.  Laurus has committed to convert the $1,000,000 into Common Stock on
or  prior  to  December  31,  2004.  On  October  4,  2004,  the Company filed a
registration  statement  with  the Securities and Exchange Commission related to
the  revolving  credit  facility  as  well as the Series C Convertible Preferred
Stock.  The  Company  made  a request for acceleration, which was granted by the
Securities  and  Exchange Commission and the registration statement was declared
effective  on  November  4,  2004.


                                     13
                                    PAGE

On  October  20,  2004,  the  Company  was  awarded  the  second Task Order in a
five-year,  cost-plus-fixed fee indefinite delivery/indefinite quantity contract
to  conduct  a  micro  satellite distributed sensing experiment, an option for a
laser  communications  experiment,  and  other   micro  satellite   studies  and
experiments  as  required  in  support  of  the Advanced Systems Deputate of the
Missile  Defense  Agency originally awarded on March 31, 2004.  This second Task
Order has a value of $8,257,283 out of the total contract amount of $43,362,271.
The  value  of  the  first  Task  Order  was  $1,141,404, which was successfully
completed  by September 30, 2004.  The period of performance for the second Task
Order is approximately sixteen months, i.e., October 1, 2004 through January 31,
2006.  The  principal place of performance will be Poway, California.  The micro
satellite  distributed  sensing experiment is intended to design and build up to
six  responsive,  affordable,  high  performance  micro  satellites  to  support
national  missile  defense.  The milestone-based, multiyear, multiphase contract
had  an  effective  start  date  of  March  1, 2004 for the first Task Order and
October  1,  2004 for the second Task Order.  The overall contract calls for the
Company  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.

                                     14
                                    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  10-KSB  and  quarterly  10-QSB  filings.

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

Actual  results  could  differ  materially  from  those   anticipated  by   such
forward-looking  statements.  Factors  that  could  cause  or contribute to such
differences  include,  but  are  not  limited  to,  the  level  of  sales to key
customers;  the  economic  conditions   affecting   our  industry;   actions  by
competitors;  fluctuations  in  the  price of raw materials; the availability of
outside  contractors  at  prices  favorable  to  the  Company; our dependence on
single-source  or  a  limited  number  of  suppliers; our ability to protect our
proprietary  technology;  market  conditions  influencing  prices or pricing; an
adverse  outcome in potential litigation, claims and other actions by or against
us;  technological  changes  and  introductions  of  new competing products; the
current recession; 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.

OVERVIEW

We are a high-tech space company 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  micro  satellites, nano satellites and related subsystems, hybrid
rocket  propulsion  systems  for  in-space  use,  hybrid-based expendable launch
vehicles and human space flight vehicles, as well as, associated engineering and
technical services primarily to government agencies, specifically the Department
of  Defense and the private sector.  Our products and solutions are sold, mainly
on  a  project-basis, directly to these customers and include sophisticated high
performance,  lower  cost  micro and nano satellites, 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 micro satellite
and nano satellite products and services in the long-term, the early adopters of
this technology appear to be government military agencies 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.

                                     15
                                    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  of  "SPDV."

SELECTION  OF  SIGNIFICANT  CONTRACTS

On  March  31, 2004, we were awarded a five-year, cost-plus-fixed fee indefinite
delivery/indefinite  quantity  contract for up to $43,362,271 to conduct a micro
satellite  distributed  sensing experiment, an option for a laser communications
experiment,  and  other  micro  satellite studies and experiments as required in
support  of  the  Advanced Systems Deputate of the Missile Defense Agency.  This
effort  will be accomplished in a phased approach, with the first Task Order for
approximately  $1.1  million awarded on April 1, 2004 and completed by September
30,  2004.  The  second Task Order for approximately $8.3 million was awarded on
October  20, 2004. The principal place of performance will be Poway, California.
We expect to complete the work under the contract before March 2009.  Government
contract funds will not expire at the end of the current government fiscal year.
The  micro  satellite  distributed  sensing experiment is intended to design and
build  up  to  six  responsive, affordable, high performance micro satellites to
support  national  missile  defense.  The milestone-based, multiyear, multiphase
contract  has  an  effective  start  date of March 1, 2004.  Approximately $1.14
million of revenue has been generated since the beginning of this contract.  The
first  phase,  (i.e.,  first Task Order), resulted in detailed mission and micro
satellite  designs.  The  second phase, (i.e., second Task Order), was signed on
October  20, 2004 with an effective date of October 1, 2004, so work has already
begun  on  this second Task Order.  The second phase is expected to be completed
by January 2006.  The overall contract calls for us to analyze, design, develop,
fabricate,  integrate,  test,  operate  and support a networked cluster of three
formation-flying  boost  phase  and midcourse tracking micro satellites, with an
option  to  design,  develop,  fabricate, integrate, test, operate and support a
second  cluster  of  three  formation  flying  micro  satellites to be networked
on-orbit  with  high  speed laser communications technology.  The third phase is
anticipated  to  begin  on  or  before  February  2006.

On  October 2, 2003, we were awarded an exclusive, follow-on contract to provide
the hybrid rocket motor systems and components for SpaceShipOne.  We provide our
facilities,  resources  and  a  team  of  launch  vehicle  and hybrid propulsion
engineers  and  technical  personnel  in  continued  support of the SpaceShipOne
program.  The  contract  called  for  us  to use our best efforts to satisfy the
requirements of the SpaceShipOne program, based on our experience with the prior
phases.  We  provided  re-usable  flight  test  hardware,  including a bulkhead,
commonly known as the SpaceDev bulkhead, machined in the flight configuration, a
main oxidizer valve of the current design and associated interfaces and plumbing
to  the  SpaceDev  bulkhead,  a motor control system, igniter housings, pressure
transducers,  and  thermocouples  as  required  for  input  to the motor control
system.  In  addition,  we produced and assembled test motors, including but not
limited to, all expendable or semi-reusable materials as defined by our baseline
design  motor.  We  also provided on-site engineering test support and post-test
analysis.  Provisions  were made in the contract for minimum monthly payments in
the  event of customer schedule slippage as well as additional levels of support
via  engineering  change  orders,  if  required.  The  total  contract  value is
estimated  at  $615,000.  Approximately  $610,000 of revenue was realized in the
nine-months  ending  September  30,  2004,  with  approximately  $147,000   from
engineering  change  orders  and  the  remaining  $463,000  from  the  contract.

                                     16
                                    PAGE

On  July  9,  2003,  we  were  awarded  a contract by the Missile Defense Agency
("MDA")  to explore the use of micro satellites in national missile defense.  It
was a precursor contract to the $43 million contract mentioned above.  Our micro
satellites  are  operated  over  the  Internet  and  are capable of pointing and
tracking  targets  in space or on the ground.  This study explored fast response
micro  satellite  launch  and  commissioning;  small, low-power passive sensors;
target  acquisition  and  tracking;  formation  flying and local area networking
within  a cluster of micro satellites; 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  $318,000  of  revenue  realized in the nine-month
period  ending  September  30,  2004.  The  total  value  of our micro satellite
studies  for  MDA  was over $1 million 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  ("SBIR")  contract  by  Air  Force Research Lab ("AFRL") to design and
effectively  begin  the  development  of  our small launch vehicle ("SLV").  The
SpaceDev  SLV  will  be designed to responsively and affordably lift up to 1,000
pounds  to  Low Earth Orbit.  The SpaceDev SLV concept is based on a proprietary
combination  of  technologies to increase the performance of hybrid rocket motor
technology.  Hybrid  rocket  motors  are  a combination of solid fuel and liquid
oxidizer,  and  can  be relatively safe, clean, non-explosive, and storable, and
can  be  throttled,  shut  down  and  restarted.  This  contract  was  valued at
approximately  $100,000, and was a fixed price, milestone-based agreement, which
was  completed  in  about  one  year.  The  Phase II of this SBIR was awarded on
September 29, 2004 and is worth approximately $1,557,000.  The contract outlines
the  development  and  test  firing  of  our  large  Common Core Booster for the
SpaceDev  small  launch  vehicle.  Congress  has  awarded  us approximately $3.0
million  in  additional  funding  for  this  project,  which  we  expect will be
available by mid-2005.  We believe that there is additional interest by Congress
in  providing  further  funding  to expand and accelerate the scope of the work;
however,  there  can  be  no  assurance  that  such  work will be awarded to us.
Revenue  from  this  project for the nine-month period ending September 30, 2004
was  approximately  $58,000.

Finally,  on  July  9, 2003, we were awarded a Phase I contract to develop micro
and nano satellite bus and subsystem designs. This AFRL SBIR contract, valued at
approximately $100,000, will enable us to explore the further miniaturization of
our unique and innovative micro satellite subsystems.  It will also 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.  The contract is fixed price, milestone-based
and should be completed within one year.  On August 23, 2004 we were awarded the
Phase  II  of this SBIR, which was later amended on September 8, 2004 to shorten
the  length  of  the  overall  contract,  worth   approximately   $739,000   for
carry-forward work. Revenues for the nine-month period ending September 30, 2004
were  approximately  $52,000  for Phase I and approximately $8,600 for Phase II.

On  July  24, 2003, we were awarded a contract by Lunar Enterprise of California
for  a  first  phase  project  to  begin  developing  a  conceptual  mission and
spacecraft  design  for  a  lunar  lander  program. The unmanned mission will be
designed  to put a small dish antenna near the south pole of the Moon. From that
location  it  will  be in near-constant sunlight for solar power generation, and
should  be  able  to perform multi-wavelength astronomy while communicating with
ground  stations  on Earth. The contract value was $100,000 and was completed by
November  2003.  We  were  awarded  a  follow-on phase to further analyze launch
opportunities,  spacecraft  design,  trajectory possibilities, potential landing
areas,  available  technologies  for  a  small  radio   astronomy   system,  and
communications  and data handling requirements on July 20, 2004 in the amount of
$150,000.  Although  this  project is currently unfunded, if the project were to
proceed  past  the  analysis  stage, the total mission cost could exceed $50-$75
million.  Again,  we can give no assurance that any additional contracts will be
awarded  to  us  from  this  contract.

                                     17
                                    PAGE

On  December  18,  2003,  we  were  awarded  a  contract by the Defense Advanced
Research  Projects  Agency  ("DARPA")  for  the  study  of Novel Satcom Microsat
Constellation  Deployment.  The  contract  is  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.
Revenues  for the nine-month period ending September 30, 2004 were approximately
$200,000.  We  expect  to  either further expand this award or obtain new awards
under  this  program; however, there can be no assurance as to whether such work
will  be  awarded  to  us,  or,  if awarded, there can be no assurance as to the
amounts  or  terms  of  the  awards.

On  April  30,  2002,  we  were  awarded  Phase  I  of  a  contract to develop a
Shuttle-compatible  propulsion  module for AFRL.  We received an award for Phase
II of the contract on March 28, 2003, and will use the project to further expand
our  product  line  to  satisfy  commercial  and government space transportation
requirements.  The  first  two  phases  of the contract (including an additional
add-on option) are worth up to approximately $2.5 million, of which $100,000 was
awarded  for  Phase  I, and approximately $1.4 million was awarded for Phase II.
AFRL  Phase  II  is  a  cost-plus fixed fee contract.  In order to complete AFRL
Phase  II, we requested and were granted approximately four months of additional
time  and  approximately  $240,000  of  additional  funding,  memorialized  by a
contract  amendment  executed  on  July 7, 2004.  In addition to the Phase I and
Phase  II  awards,  there  is  an option worth approximately $800,000, which was
initiated on May 3, 2004.  The additional funding to complete AFRL Phase II came
in  part  from  the  original  $1 million option; thereby reducing the option to
approximately  $800,000.  An  additional  effort  to  develop   a   miniaturized
Shuttle-compatible  propulsion  module  has  been  added  to this contract worth
approximately $150,000.  Revenues for the nine-month period ending September 30,
2004  were  approximately  $945,000  for  AFRL Phase II, including the exercised
option,  and  approximately  $12,000  for  the  new  add  on  contract.

In  November  1999,  we won a $4.9 million turnkey mission contract by the Space
Sciences  Laboratory  ("SSL") at UCB.  We were competitively selected by UCB/SSL
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  only  successful  mission  of  NASA's low-cost University-Class
Explorer  ("UNEX") series to date.  CHIPSat launched as a secondary payload on a
Delta-II  rocket  on   January  12,  2003.   The   satellite   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 one year.  In 2000, we reviewed the contract status at
year-end and determined that the total estimated costs at the end of the program
would  exceed  the  likely  revenue.  As  a  result,  we  accrued   a  loss   of
approximately  $860,000 based on the expected contract modification of $600,000,
which  was  approved  on June 15, 2001.  On November 28, 2001, a second contract
modification  was signed with UCB, which added approximately $1.2 million to the
contract  as  well  as  an increase in contract scope.  This increased the total
contract  revenue  to  approximately $6.8 million and reduced the total expected
loss  on  the  contract  to  approximately $460,000.  During 2002, an additional
contract  modification  for  approximately  $400,000  was  signed,  which   also
increased  the  contract  value  and  increased the scope of the contract to the
current  value  of  the  CHIPSat  project of approximately $7.4 million, thereby
increasing  the  total  expected loss to approximately $514,000.  In retrospect,
some  of  the  CHIPSat  expenses  creating  the loss could have been recorded as
research  and development costs associated with our ongoing satellite design and
development  programs.  As  of  December 31, 2003, the total contract costs were
expended,  mainly  as cost of goods sold.  The original support contract expired
on December 31, 2003.  CHIPSat is still operating successfully and providing UCB
with  new  and  interesting  data.  UCB  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 UCB for continuing support of this project.  The
contract will continue until UCB decides that no further relevant information is
forthcoming  or  funding  is  terminated,  at  which  time  the use of the micro
satellite  will  revert  to  NASA  and  then to us.  Revenues for the nine-month
periods  ending  September  30,  2004  and  2003  were approximately $25,000 and
$392,000,  respectively.

                                     18
                                    PAGE

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.

     Nine-Months  Ending  September  30, 2004 -vs.- Nine-Months Ending September
30,  2003

During  the  nine-months  ending  September  30,  2004,  we  had  net  sales  of
approximately  $3,446,000  as  compared to net sales of approximately $2,055,000
for  the  same  nine-month  period  in  2003,  an  increase  of over 67%.  Sales
increased  primarily  due  to the addition and expansion of government contacts,
e.g., AFRL and MDA, which created new revenue opportunities for us.  Revenues in
the  nine-month period ending September 30, 2004 were comprised of approximately
$957,000  from  AFRL Phase II including add on effort, $1,141,000 from MDA Phase
I,  $318,000 from the MDA Phase 0, $610,000 from SpaceShipOne, $200,000 from our
DARPA  contract, $110,000 from the two SBIR contracts listed above, $40,000 from
Phase B of the Lunar Lander Project and $70,000 from all other programs.  During
the  same  period  of  2003, sales were comprised of approximately $410,000 from
SpaceShipOne,  $395,000 from the MDA project, $346,000 from the CHIPSat program,
$705,000  from  Phase  I  and  Phase  II  of  the AFRL project and approximately
$199,000  from  all  other  programs.

For  the  nine-month  period  ending  September  30, 2004, we had costs of sales
(direct  and  allocated  costs   associated   with   individual  contracts)   of
approximately  $2,703,000,  or  78.4% of net sales, as compared to approximately
$1,682,000, or 81.9% of net sales, during the same period in 2003.  The increase
in  cost of sales was primarily due to higher revenues since the majority of our
current  contracts  are  cost  plus  fixed  fee contracts.  We continue to focus
efforts  on  developing  project management skills and reports and we are in the
process of implementing a new project management and project accounting software
package  to  assist  in  the efficient and effective management of our projects.
The  gross margin percentage for the nine-month period ending September 30, 2004
was  21.6%  of net sales, an increase of 3.7% of net sales, as compared to 18.1%
of  net sales for the same nine-month period in 2003, mainly due to the improved
management  of  our  projects  and  the influence of our fixed priced contracts,
which  carry  higher  margins  than  our  cost  plus  contracts.

We  experienced  a decrease of approximately $601,500 in operating expenses from
approximately  $1,250,500,  or  60.9%  of  net  sales, for the nine-month period
ending  September  30, 2003 to approximately $649,000 or 18.8% of net sales, for
the  nine-month period ending September 30, 2004, primarily due to non-recurring
development costs of CHIPSat in 2003, amortization of software costs in 2003 and
a  refinement  of  our  allocation  model in 2004.    Operating expenses include
general  and  administrative  expenses ("G&A"), marketing and sales expenses and
research  and  development  expenses  as  well  as  stock and stock option based
compensation  expenses.  Fluctuations  in  operating expenses for 2004 from 2003
are  primarily  attributable  to  the  following:

     -  Marketing  and  sales  expenses  increased  slightly  during  the  first
     nine-months  of  2004  compared to the same period in 2003. The increase in
     marketing  and  sales expense, from approximately $311,000, or 15.2% of net
     sales,  for  the  nine-month  period ending June 30, 2003, to approximately
     $336,000,  or 9.7% of net sales, during the same period in 2004, are mainly
     due  to  personnel expenses related to our decision to expand the marketing
     and  sales  department.  The  fact that there was only a slight increase is
     primarily  attributable  to  our  Vice  President  of  Business Development
     doubling  as Project Manager for our MDA project with a significant portion
     of  his  expenses  being  charged  directly  to  projects.

     -  Research  and  development  ("R&D")  expenses decreased during the first
     nine-months  of  2004  from approximately $272,500 or 13.3% of net sales in
     2003  to  approximately  $39,000  or  1.1%  of net sales for the nine-month
     period  ending  September 30, 2004, mainly due to non-recurring engineering
     development  costs of CHIPSat in 2003 and our decision to focus our limited
     resources  on billable projects and develop new technologies under existing
     contracts  in  2004  and  beyond.

                                     19
                                    PAGE

     - The decrease of approximately $387,000 in G&A expenses from approximately
     $662,000  for  the  nine-month  period   ending   September  30,  2003   to
     approximately  $274,000  for  the  same  nine-  month  period  in  2004 was
     primarily  due  to software amortization expense of $104,000 in 2003, which
     is  no longer present in 2004 as well as refinement of our allocation model
     to  more  appropriately  classify  certain  expenses  as cost of goods sold
     rather  than  G&A.

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

     -  Interest expense for the nine-month period ending September 30, 2004 and
     2003  was approximately $62,600, or 1.8% of net sales, and $65,000, or 3.1%
     of  net  sales,  respectively.  The  slight decrease was due to lower notes
     payable  in  2004. Interest expense is comprised of interest on our note to
     our  CEO,  interest  on  our revolving credit facility/convertible debt and
     interest  on our settlement notes/capital leases. For the nine-month period
     ending September 30, 2004 and 2003, interest expense on our note to our CEO
     was  approximately  $29,300  and  $28,000, respectively. For the nine-month
     period  ending  September  30,  2004  and  2003,  interest  expense  on our
     revolving  credit  facility/convertible  debt  was  $29,600  and   $31,400,
     respectively.  And  interest expense on our settlement notes/capital leases
     for  the  nine-month  period  ending  September  30,  2004  and  2003  were
     approximately  $3,700 and $5,600, respectively. We also had interest income
     for  the nine-months ending September 30, 2004 of approximately $5,600 from
     our  growing  cash  balances.

     -  We  recognized approximately $88,000 and $78,000 of the deferred gain on
     the sale of the building during the nine-month periods ending September 30,
     2004 and 2003, respectively, and we will continue to amortize the remaining
     deferred  gain of approximately $977,267 into non-operating income over the
     remainder  of  the  lease.  In  relation  to  the  gain  we received on the
     building,  we  also  accrued  an  income  tax  payable expense of $2,526 at
     September  30,  2003  of  which  none  remained  at  December 31, 2003. The
     reduction  of  the income tax payable was due to a change in estimate based
     on  the  net  loss  we  experienced  during  the  year.

     -  During  the nine-month period ending September 30, 2003, we expensed, in
     conjunction  with  our  convertible notes, part of the existing convertible
     debt  discount  related  to  warrants that accompanied the convertible debt
     issue in 2002 of approximately $475,000, later reduced to $237,500 based on
     a conversion in September 2003 of which approximately $112,500 was expensed
     during  the  nine-months  ended September 30, 2003 and paid or converted in
     September  2003.  There  was  no debt discount for the first nine-months of
     2004.

     - We realized $2,456,794 and $148,412 in non-cash interest expense and loan
     fees  during  the  nine-months  ending  September  30,   2004   and   2003,
     respectively.  The  non-cash  interest  expense  and loan fees consisted of
     approximately  $1,718,000  related  to  our  revolving  credit facility and
     approximately  $739,000  related to the conversion of notes to common stock
     below  fair  market  value  for  the nine-month period ending September 30,
     2004.  We  accrued  approximately  $50,900  of  interest for the nine-month
     period ending September 30, 2004, of which approximately 33,000 represented
     interest on our revolving credit facility and $17,600 was dividends owed on
     our  preferred stock transaction. We anticipate additional expenses related
     to  similar  note  to  equity  conversions  during  the  fourth  quarter.

                                     20
                                    PAGE

During  the  nine-month period ending September 30, 2004, we incurred a net loss
of  approximately  $2,332,000,  or 67.7% of net sales, compared to a net loss of
approximately  $1,126,000,  or 54.8% of net sales for the same nine-month period
in  2003,  primarily due to our non-cash charges as discussed above.  During the
nine-month  period  ending  September  30, 2004, we incurred an EBITDA (earnings
before  interest taxes depreciation and amortization) of approximately $149,000,
OR 4.3% OF NET SALES, compared to an EBITDA loss of approximately <$725,000>, or
<35.3>  %  of  net  sales,  for the nine-month period ending September 30, 2003.

The  following  table  reconciles  EBITDA  to net loss for the nine-month period
ending  September  30,  2004  and  2003,  respectively:

<TABLE>
<CAPTION>

<S>                                     <C>                   <C>
FOR THE NINE-MONTHS ENDING . . . . . .  SEPTEMBER 30, 2004    September 30, 2003
                                                 (UNAUDITED)           (Unaudited)
--------------------------------------  --------------------  --------------------

NET LOSS (INCOME). . . . . . . . . . .  $        (2,332,304)  $        (1,125,795)
--------------------------------------  --------------------  --------------------
Interest Income. . . . . . . . . . . .               (5,619)
Interest Expense . . . . . . . . . . .               62,634                64,683
Non-Cash Interest exp. (Debt Discount)                    -               112,500
Gain on Building Sale. . . . . . . . .              (87,954)              (78,181)
 Loan Fee - Equity Conversion. . . . .            2,456,794               148,412
Provision for income taxes . . . . . .                    -                     -
Depreciation and Amortization. . . . .               55,236               153,023
--------------------------------------  --------------------  --------------------
EBITDA . . . . . . . . . . . . . . . .  $           148,787   $          (725,358)
--------------------------------------  --------------------  --------------------
</TABLE>

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

     Three-Months  Ending September 30, 2004 -vs.- Three-Months Ending September
30,  2003

We  recorded  our  seventh  consecutive  quarter  of revenue growth.  During the
three-month  period ending September 30, 2004, we had net sales of approximately
$1,230,000  as  compared  to  net  sales  of approximately $768,000 for the same
three-month  period  in  2003,  an  increase  of  over  60.0%.  Sales  increased
primarily  due  to  the addition and expansion of our contracts such as AFRL and
MDA,  which created new revenue opportunities for us.  Revenue only increased 2%
from  $1,200,692  in  the  second quarter of 2004, mainly due to our decision to
focus  resources on new proposal work for new business development opportunities
and  to  a  lesser  extent  to preparing for the introduction of our new project
accounting/project  management   system  in   October  2004.   Revenues  in  the
three-month  period  ending  September  30, 2004 were comprised of approximately
$584,000  from  MDA  Phase  I,  $283,000  from  AFRL  Phase  II,  $216,000  from
SpaceShipOne,  $63,000  from  our  DARPA  contract,  $19,600  from  the two SBIR
contracts  listed  above,  $40,000 from phase B of the Lunar Enterprises project
and $24,400 from all other programs.  During the same period of 2003, sales were
comprised of approximately $145,000 from the MDA project, $463,000 from Phase II
of  the  AFRL project, $70,000 from the Lunar Enterprises contract, $36,000 from
the  AFRL  SBIR  programs,  $15,000  from  the  CHIPSat  program,  $13,000  from
SpaceShipOne,  and  approximately  $26,000  from  all  other  programs.

                                     21
                                    PAGE

For  the  three-month  period  ending  September 30, 2004, we had costs of sales
(direct  and  allocated  costs   associated   with   individual  contracts)   of
approximately  $953,000  or  77.5%  of  net  sales, as compared to approximately
$643,000  or 83.7% of net sales during the same period in 2003.  The increase in
cost  of  sales  was  primarily due to higher revenues since the majority of our
current  contracts  are  cost  plus  fixed  fee contracts.  We continue to focus
efforts  on  developing  project management skills and reports and we are in the
process of implementing a new project management and project accounting software
package  to  assist  in  the efficient and effective management of our projects.
The gross margin percentage for the three-month period ending September 30, 2004
was  22.5%  of net sales, an increase of 6.2% of net sales, as compared to 16.3%
of net sales for the same three-month period in 2003, mainly due to the improved
management  of  our  projects  and  the influence of our fixed priced contracts,
which  carry  higher  margins  than  our  cost  plus  contracts.

We  recorded  our  third  consecutive  quarter  of  profit  from operations.  We
experienced  a  decrease  of  approximately  $47,000  in operating expenses from
approximately $275,000, or 35.8% of net sales, for the three-month period ending
September  30,  2003  to  approximately $228,000, or 18.6% of net sales, for the
three-month  period  ending  September  30, 2004, primarily due to non-recurring
development costs of CHIPSat in 2003, amortization of software costs in 2003 and
a  refinement  of  our  allocation  model  in  2004.  Operating expenses include
general  and  administrative  expenses ("G&A"), marketing and sales expenses and
research  and  development  expenses  as  well  as  stock and stock option based
compensation  expenses.  Fluctuations  in  operating expenses for 2004 from 2003
are  primarily  attributable  to  the  following:

     -  Marketing  and  sales expenses increased slightly during the three-month
     period  ending  September 30, 2004 compared to the same period in 2003. The
     increase  in  marketing  and sales expense, from approximately $112,000, or
     14.6%  of  net  sales,  for  the three-months ending September 30, 2003, to
     approximately  $120,000,  or  9.8%  of net sales, during the same period in
     2004,  was  mainly due to more resources being transitioned into efforts on
     new  contracts  and the extension of current contracts for the Company. The
     fact that there was only a slight increase is primarily attributable to our
     Vice  President of Business Development doubling as Project Manager for our
     MDA  project  and contributing to other projects with a significant portion
     of  his  expenses  being  charged  directly  to  these  projects.

     -  Research  and  development  ("R&D")   expenses   decreased   during  the
     three-month period ending September 30, 2004 from approximately $20,500, or
     2.7%  of  net  sales  in  2003,  to  $4,500,  or  0.4% of net sales for the
     three-month  period  ending September 30, 2004, mainly due to non-recurring
     engineering  development costs of CHIPSat in 2003 and our decision to focus
     our  limited  resources  on  billable projects and develop new technologies
     under  existing  contracts  in  2004  and  beyond.

     -  The decrease of approximately $33,500 in G&A expenses from approximately
     $137,000  for  the  three-month  period  ending  September   30,  2003   to
     approximately  $103,500  for  the  same  three-month  period  in  2004  was
     primarily due to a refinement of our allocation model to more appropriately
     classify  certain  expenses  as  cost  of  goods  sold  rather  than  G&A.

     -  The  decrease  of  approximately  $4,600 in stock and stock option based
     compensation  from  approximately  $4,600 for the three-month period ending
     September  30, 2003 to none for the same three-month period in 2004 was due
     to  no  equity  issuances  for  products  or  services  in  lieu  of   cash
     expenditures.

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

                                     22
                                    PAGE

     -  Interest  expense  for the three-month periods ending September 30, 2004
     and  2003  was approximately $23,000, or 1.9% of net sales, and $30,000, or
     3.9%  of  net sales, respectively. The slight decrease was due to repayment
     on our revolving credit facility. Interest expense is comprised of interest
     on  our   note   to   our   CEO,   interest   on   our   revolving   credit
     facility/convertible  debt  and  interest  on  our settlement notes/capital
     leases.  For  the  three-month  period  ending September 30, 2004 and 2003,
     interest  expense  on  our  note  to  our  CEO was approximately $3,300 and
     $8,800,  respectively. For the three-month period ending September 30, 2004
     and  2003,  interest  expense  on our revolving credit facility/convertible
     debt  was  $19,000  and  $20,000, respectively. And interest expense on our
     settlement  notes/capital  leases  for  the   three-month   periods  ending
     September  30,  2004  and  2003  were   approximately   $700   and   $1,200
     respectively. We also earned interest income during the three months ending
     September  30, 2004 of approximately $5,600 from our growing cash balances.

     -  We  recognized approximately $29,300 and $29,300 of the deferred gain on
     the  sale of the building during the three-months ending September 30, 2004
     and  2003,  respectively,  and  we  will continue to amortize the remaining
     deferred  gain of approximately $977,267 into non-operating income over the
     remainder  of  the  lease.  In  relation  to  the  gain  we received on the
     building,  we  also  credited  our  accrued  income  tax payable expense by
     ($2,526)  during the three-month period ending September 30, 2003, of which
     none remained at December 31, 2003. The reduction of the income tax payable
     was due to a change in estimate based on the net loss we experienced during
     the  year.

     -  During  the three-month period ending September 30, 2003, we expensed in
     conjunction  with  our  convertible notes, part of the existing convertible
     debt  discount  related  to  warrants that accompanied the convertible debt
     issue  in  2002  of approximately $475,000 which was reduced to $237,500 in
     conjunction with a repayment and reallocation of remaining warrants. During
     the  three-months  ending  September  30,  2003  we experienced a credit of
     ($88,400)  which had previously been expensed during prior periods 2003 and
     paid  or  converted  in  September 2003. There was no debt discount for the
     same  period  of  2004.

     -  We realized $663,481 in non-cash interest expense and loan fees of which
     $540,000  was  related  to  our revolving credit facility and approximately
     $124,000  was related to the conversion of notes to common stock below fair
     market  value  for  the  three-month  period  ending September 30, 2004. We
     anticipate  additional  expenses  related  to   similar   note  to   equity
     conversions  in  the  fourth  quarter  of  2004.

During  the three-month period ending September 30, 2004, we incurred a net loss
of  approximately  $603,000  or  49.0%  of  net sales, compared to a net loss of
approximately  $208,000,  or 27.1% of net sales, for the same three-month period
in  2003,  primarily due to our non-cash charges as discussed above.  During the
three-month  period  ending  September 30, 2004, we incurred an EBITDA (earnings
before  interest  taxes depreciation and amortization) of approximately $71,500,
OR 5.8% OF NET SALES, compared to an EBITDA loss of approximately <$103,000>, or
<13.4>  %  of  net  sales,  for  the  three-months  ending  September  30, 2003.

                                     23
                                    PAGE

The  following  table  reconciles EBITDA to net loss for the three-months ending
September  30,  2004  and  2003,  respectively:

<TABLE>
<CAPTION>

<S>                                     <C>                   <C>
FOR THE THREE-MONTHS ENDING. . . . . .  SEPTEMBER 30, 2004    September 30, 2003
                                                 (UNAUDITED)           (Unaudited)
--------------------------------------  --------------------  --------------------
NET LOSS (INCOME). . . . . . . . . . .  $          (602,888)  $          (208,261)
--------------------------------------  --------------------  --------------------

Interest Income. . . . . . . . . . . .               (5,619)                    -
Interest Expense . . . . . . . . . . .               23,110                30,056
Non-Cash Interest exp. (Debt Discount)                    -               (88,408)
Gain on Building Sale. . . . . . . . .              (29,318)              (29,318)
 Loan Fee - Equity Conversion. . . . .              663,481               148,412
Provision for income taxes . . . . . .                    -                (2,526)
Depreciation and Amortization. . . . .               22,749                46,822
--------------------------------------  --------------------  --------------------
EBITDA . . . . . . . . . . . . . . . .  $            71,515   $          (103,223)
--------------------------------------  --------------------  --------------------
</TABLE>

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

                                     24
                                    PAGE

LIQUIDITY  AND  CAPITAL  RESOURCES

     CASH  POSITION  FOR NINE-MONTHS ENDING SEPTEMBER 30, 2004 -VS.- NINE-MONTHS
ENDING  SEPTEMBER  30,  2003

Net  cash  increased  during  the  nine-months  ending  September  30,  2004  by
approximately $3,486,600 to $4,078,600, compared to an increase of approximately
$286,500  to $314,200 for the same nine-month period in 2003.  Net cash provided
by operating activities totaled approximately $66,000 for the nine-months ending
September  30,  2004,  an  increase  of  approximately $1,011,000 as compared to
approximately  $945,000  used in operating activities during the same nine-month
period  in  2003, mainly due to increased revenues combined with the decrease in
operating expenses for the first nine-months of 2004 compared to the same period
in  2003.

Net  cash  used  in  investing activities totaled approximately $166,000 for the
nine-months  ending  September  30,  2004,  compared  to  $3,147,000 provided by
investing activities during the same nine-month period in 2003.  The decrease in
cash  provided  by  investing  activities  is  attributable  to  the sale of the
building  on January 31, 2003 and no comparable transaction in 2004.  During the
first  nine-month  period  in  2004,  we  invested  approximately   $80,000   in
specialized  software  and  certain  upgrades  to  computer  hardware  for   our
engineering  team  and  approximately  $80,000  in  a new accounting and project
management  system  software.

Net  cash  provided by financing activities totaled approximately $3,586,000 for
the  nine-month  period  ending  September  30,  2004,  which  is an increase of
approximately  $5,502,000  from  the  approximately $1,916,000 used in financing
activities  during  the  same period in 2003.  This is primarily attributable to
the  repayment  of  notes  payable  associated  with  the building sale in 2003,
payments  and  the pay-off of related party notes in 2004, conversions under our
revolving  credit  facility in 2004, a sale of non-redeemable preferred stock in
August 2004 as well as an increase in issuance of common stock from the exercise
of  stock  options  and  warrants.

At  September  30,  2004,  our  cash was approximately $4,078,600 as compared to
approximately  $314,200  at  September  30,  2003,  an increase of approximately
$3,764,400,  mainly  due to conversions under our revolving credit facility, the
non  redeemable  preferred  stock  sale in August 2004 and the exercise of stock
options  and  warrants.

As  of  September  30,  2004,  our backlog of funded and non-funded business was
approximately  $49 million, mainly due to the follow-on, five-year contract from
MDA  for  up to $43,362,271.  We expect approximately $2 million in revenue from
the  MDA  program  in 2004.  Although the MDA contract was awarded to us and the
first  Task  Order  was  issued to us for approximately $1.1 million on April 1,
2004,  and the second Task Order was issued to us for approximately $8.3 million
on  October  20,  2004,  there  can  be  no  assurance that the contract will be
continued  through  all  phases,  and  if  continued,  that it will generate the
amounts  anticipated.  Backlog  as  of September 30, 2003 was approximately $2.6
million.

Deferred  income  taxes  are  provided  for temporary differences in recognizing
certain  income and expense items for financial and tax reporting purposes.  The
deferred  tax  asset  of approximately $2,218,000 and $2,190,000 as of September
30,  2004 and December 31, 2003, respectively, consisted primarily of the income
tax  benefits  from  net  operating  loss  and   capital   loss   carryforwards,
amortization  of  goodwill  and  research  and development credits.  A valuation
allowance has been recorded to fully offset the deferred tax asset as it is more
likely  than  not that the assets will not be utilized.  The valuation allowance
increased approximately $828,000 in 2004 from $2,190,000 at December 31, 2003 to
$2,218,000  at  September  30,  2004.

At  September 30, 2004 and 2003, we had federal and state tax net operating loss
and  capital  loss carryforwards of approximately $6.9 million and $6.0 million,
respectively.  The  federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized.  The State of California has
suspended  the  utilization  of  net operating loss for 2002 and 2003, a partial
allowance  is  in  effect  in  2004.

                                     25
                                    PAGE

CRITICAL  ACCOUNTING  STANDARDS

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

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

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

CASH  POSITION  AND  REMOVAL  OF  GOING  CONCERN

As  of September 30, 2004, we believe that the opinion our auditors expressed in
their formal auditors' opinion dated February 11, 2004 (except for Note 11 as to
which  the  date  is April 2, 2004) is still accurate.  PKF stated that in their
opinion, based on their audit, our consolidated financial statements referred to
herein  present  fairly,  in  all  material respects, the consolidated financial
position  of  the  Company  and  its subsidiary as of December 31, 2003, and our
consolidated results of operations and cash flows for the year then ended are in
conformity with accounting principles generally accepted in the United States of
America.  Our ability to continue as a going concern depends upon our ability to
ultimately implement our plan, which includes (but is not limited to) generation
of  substantial new revenue from MDA, by successfully performing under the newly
awarded  contract  and  continuing  to  attract  and successfully complete other
government  and  commercial  contracts,  development  of  a  project  management
expertise  to  profitably execute on new business contracts and reduction of the
working  capital  deficit  by  raising  additional capital.  We are working with
Laurus,  our  revolving  credit  facility  provider,   and   investigating   the
possibility  of  raising additional capital to further support operations as new
contracts  and  business opportunities materialize.  The prospective funding, as
well  as  new  business  opportunities,  can  come  from  a  variety of sources,
including  public  or  private  equity  markets,  state  and  federal grants and
government  and  commercial  customer program funding.  However, there can be no
assurance that we will be able to obtain such funding or contracts as needed or,
if  such  funding  or  contracts are available, that we can obtain them on terms
favorable  to  us.  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  and  industry  in  which  we  operate.

                                     26
                                    PAGE

On  January  31,  2003,  we  closed escrow on the sale of our facility in Poway,
California  and  entered  into  a  ten-year leaseback.  The selling price of the
facility  was  $3.2  million.  The total debt repayment from the transaction was
approximately $2.4 million.  The net proceeds to us for working capital purposes
was  approximately  $636,000.

At  the  end  of  2002,  we  raised  $475,000  from certain of our directors and
officers by issuing 2.03% convertible notes.  The convertible notes 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 notes were
exercisable  into  common  shares  at a conversion price that equaled the 20-day
average asking price less 10%, which was established when the notes were issued,
or  the  initial  conversion  price.  Concurrent  with  the   issuance  of   the
convertible  notes, 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.

During  the  six-month  period  ending  June  30,  2003, we raised approximately
$426,000  from accredited investors by selling 861,267 units of our common stock
and common stock purchase warrants under in a private placement offering ("PPO")
made  under  Section  4(2)  of  the  Securities  Act  of  1933, and Rule 506, to
accredited  investors  only.  We  subsequently  closed  the  PPO.

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 for AFRL Phase II on March 28,
2003  and  MDA  on  March  31,  2004.  The  AFRL and MDA contracts are cost-plus
contracts,  which  have required us to incur certain costs in advance of regular
contract  reimbursements  from our customers.  Although we have needed a certain
amount of cash to fund advance payments on the contracts, 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,  in  part,  to  support  our  advance  payment needs.

On  March  31,  2004, we negotiated an amendment to our Secured Convertible Note
dated  June  3, 2003 with the Laurus Master Fund to add a fixed conversion price
at  $0.85  per  share for the next $500,000 converted under the revolving credit
facility,  after  the  initial  $1  million  conversion.  In  exchange  for  the
amendment,  Laurus  granted  us a six-month waiver to utilize the full revolving
credit  facility  in advance of eligible accounts.  At June 30, 2004, Laurus had
converted  1,403,182  shares  under  the  revolving   credit   facility,   which
represented  approximately  $772,000 of debt converted to equity.  And on August
25,  2004, we concluded a $2.5 million preferred stock financing with Laurus and
agreed  to  a  fixed conversion price of $1.00 per share for the next $1 million
converted  under  the  revolving credit facility, after the initial $1.5 million
conversion.

We recorded our fourth consecutive quarter of positive cash flow.  We realized a
small  positive  cash flow from operations during the fourth quarter of 2003 and
the  first  three quarters of 2004.  Our improving EBITDA is an indicator of our
financial  performance.  We  expect  to continue realizing positive cash flow as
well  as  net  losses  in  2004.  The  continued net losses are primarily due to
non-cash  interest  expense  and  other  fees  related  to  our revolving credit
facility  and  debt  related  warrant  conversion.  While  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 by using EBITDA as a
measure  of  performance,  we  can  illustrate the improving results of our core
business,  despite  the net losses derived from financing activities. Our EBITDA
was  approximately $149,000 for the nine-month period ending September 30, 2004,
compared to a negative EBITDA of approximately <$725,000> for the same period in
2003,  an  improvement  of  approximately  $874,000.

                                     27
                                    PAGE

We  recorded  our third consecutive quarter of profit from operation, which is a
significant indicator of our improving financial performance.  Operating results
are an important measure of the performance of our core business.  We recorded a
profit  from  operations  of approximately $49,000 in the third quarter of 2004,
compared  to  a loss from operations of <$150,000> in the third quarter of 2003.
We  recorded  a  profit  from  operations  of  approximately  $103,000  for  the
nine-months  ending  September  30,  2004, compared to a loss from operations of
<$878,000>  for  the same period in 2003.  Profits or losses from operations are
derived  from  all expenses excluding interest, taxes, non-cash expenses related
to  our  revolving  credit  facility  and  other  non-cash financing activities.

We  expect  to  continue  showing  a  positive  trend in cash flow and operating
profits  in 2004.  We anticipate that with the projected increase in revenue and
backorders  from  near  term  contracts,  combined with our fiscally responsible
budget  and project controls, borrowings under our revolving credit facility and
exercises  of  stock  options  and  warrants,  that  net positive cash flow from
operations  will  be sufficient to fund both operations and capital expenditures
in  2005.  There  is  no assurance, however, that we will achieve or sustain any
positive  cash  flow  or  profitability  now  or  in  the  future.

RECENT  ACCOUNTING  PRONOUNCEMENTS

There  were no recent Accounting Pronouncements that affected the Company during
the  third  quarter  of  2004.  For  past  pronouncements  please  refer  to the
Company's  10-KSB  filed  on  April  6,  2004.

FORWARD-LOOKING  STATEMENTS  AND  RISK  ANALYSIS

During the first nine-months of 2004, we submitted eight proposals and responses
to requests for information for government programs, continued our work with the
United  States  Congress  to  identify directed funding for our programs and are
Actively working to win several significant commercial programs. We believe that
we  will  win  some of these programs, which would enable us to continue to grow
and  broaden  our  business  base, although there can be no assurance that these
contracts  will  be  awarded  to  us.

To  date,  we  have  maintained a mix of government and commercial business.  In
2003,  we  had about 82% government or government-related work.  In 2002, we had
about  64% government and government-related work.  In 2004, we expect the ratio
to  be  about 90% government or government-related work.  We will continue to do
both  government  and  commercial  business and anticipate the mix of government
revenues  to  continue to be above 70% for the next several years as we increase
our  government  and commercial marketing efforts for both of our product lines.
Currently,  we  are  focusing  on  the domestic U.S. 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 ("ITAR"),
which  may  limit our ability to develop market opportunities outside the United
States  and  we have chosen to focus our effort on the United States marketplace
for  the  near  term.

While  we  do  not  expect  a  reduction  of government sales, a majority of our
government  work  is  contract  related  and  could be affected by political and
budget  changes.  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  eventually  from  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.

                                     28
                                    PAGE

We  believe that we will experience an accelerated growth in sales over the next
few  years.  At  this  time,  all  of  the  forecasted  sales for 2004 are under
contract.  There  is no guarantee and there can be no assurance that we will win
enough  new  business  to  achieve  our targeted growth projection in 2005 or to
maintain  our  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.  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 early in the future.  Finally,
we  do  not  believe  that  significant capital expenditures will be required to
achieve  an  increase  in sales; however, additional capital will be required to
support  and  sustain  our  growth.

During  the nine-month period ending September 30, 2004, we raised approximately
$5,258,000  through  a  combination  of:  1) conversions on our revolving credit
facility  (approximately $1,241,000); 2) exercises of warrants previously issued
(approximately  $316,000);  3)issuances  under  our employee stock purchase plan
(approximately  $13,000);  4)  exercises  of employee stock options, mainly from
Mr.  Lloyd,  our  former Chief Financial Officer (approximately $1,188,000); and
5)issuance  of  our  preferred  stock  to  the Laurus Master Fund (approximately
$2,500,000).  During  the  year ended December 31, 2003, we raised approximately
$654,000  through  a  combination  of  private sales of our stock (approximately
$426,000)  and  conversions  on  our  revolving  credit  facility (approximately
$228,000).  During  the  year  ended  December 31, 2002, we raised approximately
$475,000 from our convertible debt offering, of which $237,500 plus interest was
repaid  in  2003.  To  execute  our  strategy of growing our Company with small,
capable,  low-cost micro and nano satellites, hybrid propulsion products and new
commercial revenue sources, we may require additional funding and/or significant
government  and commercial programs.  We believe investor or customer funding of
$5  to  $15 million may be required in 2005, which could come from a combination
of  private  and/or  public  equity  placements  or  government  and  commercial
customers.

The amount of capital we need to raise is dependent upon many factors, e.g., the
need  for  additional  capital  will  be  greater  if  (i)  we do not enter into
agreements with our customers on the terms we anticipate; (ii) our net operating
deficit  increases because we incur significant unanticipated expenses; or (iii)
we  incur  additional  costs  from modifying our micro satellite 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.

Our ability to execute a public offering 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 be maintain operating profitability and positive cash flow,
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  shareholders,  which  could  have  a  material  adverse  effect  on us.

Our  business  partially depends on activities regulated by various agencies and
departments of the U.S. 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  U.S.  economy  in  general  is being adversely

                                     29
                                    PAGE

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.

                                     30
                                    PAGE

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 procedures regularly with our management and
Board  of  Directors.

                                     31
                                    PAGE

                          PART II -- OTHER INFORMATION

ITEM  1.     LEGAL  PROCEEDINGS
On  June  18,  2001,  we entered into a relationship with two individuals (doing
business  as  EMC  Holdings  Corporation  ("EMC")),  whereby  EMC was to provide
certain consulting and advisory services to us in exchange for our common stock.
EMC received the first installment of 500,000 shares of our common stock on June
26,  2001.  Total  expense  for the initial stock issuance through September 30,
2001 was valued at approximately $455,000.  Pursuant to a demand for arbitration
filed by us on November 7, 2001, we sought the return of all or a portion of the
shares  issued  to  EMC.  EMC  filed its own claim with the American Arbitration
Association  on  November  13, 2001, alleging that we owed EMC $118,000 in fees,
plus  damages.

A  three-day  arbitration  hearing was held in May and June 2002 with respect to
claims arising out of consulting and advisory service agreements between EMC and
us.  On  July  17, 2002, an interim award was issued in favor of us against EMC,
ordering  the  return  of  the initial installment of 500,000 shares and denying
EMC's claim for $118,000.  On October 22, 2002, a status conference was held and
a  tentative  final award was issued again in the favor of us.  Included in this
tentative  final  ruling  was  an award of approximately $83,000 in attorney and
arbitration  fees to us.  The tentative final ruling became effective on October
29,  2002, and was submitted to the Superior Court of California, Orange County,
for  entry  of  judgment.

Because collection of the attorney and arbitration fees award is not assured, we
expensed  all  of our fees related to this matter.  Any recovery of fees will be
recorded  as  income in the period they are received.  The return of the 500,000
shares,  as  provided in the interim award issued on July 17, 2002, was recorded
in  the  third  quarter  of 2002 as a reversal of the original expense recorded.
See  "Results  of  Operations."  In  June 2003, we ceased efforts to recover the
awarded  fees,  as it was determined that the cost to pursue collection exceeded
the  likelihood  of  collection.

ITEM  2.     CHANGES  IN  SECURITIES

On  August  25,  2004,  we  issued 250,000 shares of our Series C Non-Redeemable
Convertible  Cumulative Preferred Stock, with a stated value of $10.00 per share
(the  "Stated Value"), to the Laurus Master Fund Ltd. for a total purchase price
of  $2.5 million. The preferred stock is convertible into Common Stock at a rate
of  $1.54 per share at any time after the date of issuance. The preferred shares
is  redeemable by the Company in whole or in part at any time after issuance for
(a)  115%  of  the Stated Value if the average closing price of the Common Stock
for the 22 days immediately preceding the date of conversion does not exceed the
Conversion  Rate  or  (b)  the  Stated Value if the average closing price of the
Common  Stock  for  the  22  days  immediately  preceding the date of conversion
exceeds  the  Stated  Value.  The preferred stock was issued pursuant to Section
4(2)  of  the Securities Act and Rule 506 promulgated thereunder. As part of the
transaction, 1,845,779 shares of Common Stock underlying the preferred stock and
cumulative  dividends  are  being  registered  with  the Securities and Exchange
Commission  ("SEC")  for  resale.

On  August  25,  2004,  we  issued warrants to purchase 487,000 shares of common
stock  to  the  Laurus Master Fund Ltd.  The warrants were issued at an exercise
price  of  $1.77  per  share, were immediately vested and are exercisable over a
five  (5) year period.  The warrants were issued pursuant to Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder. As part of this transaction,
the  underlying  shares  are  being  registered with the Securities and Exchange
Commission  ("SEC")  for public resale.  Also on June 3, 2003, we entered into a
$1  million  revolving  credit  facility  with  the  Laurus  Master  Fund,  Ltd.

On August 25, 2004, we issued warrants to purchase 50,000 shares of common stock
to the Laurus Master Fund Ltd.  The warrants were issued at an exercise price of
$1.9250  per  share, were immediately vested and are exercisable over a five (5)
year  period.  The  warrants  were  issued  pursuant  to  Section  4(2)  of  the
Securities  Act.  As  part  of this transaction, the underlying shares are being
registered  with  the  Securities  and  Exchange  Commission  ("SEC") for public
resale.  Also  on  June  3,  2003, we entered into a $1 million revolving credit
facility  with  the  Laurus  Master  Fund,  Ltd.

                                     32
                                    PAGE

ITEM  3.     DEFAULTS  UPON  SENIOR  SECURITIES

None.

ITEM  4.     SUBMISSION  OF  MATTERS  TO  A  VOTE  OF  SECURITY  HOLDERS
The annual meeting of the shareholders of SpaceDev, Inc. was held at 13855 Stowe
Drive, Poway, California 92064, on August 5, 2004, at 11:00 A.M.  Out of a total
of  18,935,285  shares  outstanding on the date of record, 16,969,786 shares, or
approximately  90%,  were  voted in person or by proxy.  The following proposals
were  presented  and  passed  by  the  amounts  indicated  below:

PROPOSAL  1:  To  elect  seven  directors  to  hold office until the 2005 Annual
Meeting  of  Stockholders:

<TABLE>
<CAPTION>

<S>        <C>         <C>      <C>
ISSUE . .  FOR         AGAINST  ABSTAIN
---------  ----------  -------  -------
Benson. .  16,856,472        0  113,314
McClendon  16,963,905        0    5,881
Blake . .  16,963,805        0    5,981
Estes . .  16,964,405        0    5,381
Walker. .  16,964,085        0    5,701
Huntress.  16,965,405        0    4,381
Schaffer.  16,966,205        0    3,581

</TABLE>

PROPOSAL 2:  To approve the appointment of PKF, Certified Public Accountants, as
our independent public accountants for the fiscal year ending December 31, 2004:

<TABLE>
<CAPTION>

<S>           <C>         <C>      <C>
ISSUE . .     FOR         AGAINST  ABSTAIN
-----------   ----------  -------  -------
Accountants   16,959,063    2,523    8,200

</TABLE>

PROPOSAL  3:  To  approve  the  Company's  2004  Equity  Incentive  Plan:

<TABLE>
<CAPTION>

<S>                 <C>         <C>      <C>
ISSUE . .           FOR         AGAINST  ABSTAIN
-----------------   ----------  -------  ---------
Stock Option Plan   11,176,558  165,267  5,627,961

</TABLE>

ITEM  5.     OTHER  INFORMATION

None.

ITEM  6.     EXHIBITS  AND  REPORTS  ON  FORM  8-K

(a)     Exhibits

<TABLE>
<CAPTION>

<S>                                                                                               <C>

AFRL SBIR "mini-mo" contract extension with SpaceDev dated August 20, 2004, . . . . . . . .       10.1*
AFRL SBIR small satellite bus contract with SpaceDev dated September 28, 2004       . . . .       10.2
AFRL SBIR Phase II small launch vehicle contract with SpaceDev dated September 29, 2004 . .       10.3
MDA Second Task Order with SpaceDev dated October 20, 2004. . . . . . . . . . . . . . . . .       10.4*
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>

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

                                     33
                                    PAGE

(b)     Reports  on  Form  8-K

A Current Report on Form 8-K filed August 31, 2004 was filed with the Commission
under  Item 1.01 (Material Definitive Agreements), Item 3.02 (Unregistered Sales
of  Equity  Securities)  and  Item  9.01  (Financial  Statements  and  Exhibits)
regarding  the  preferred  stock  offering  with  the  Laurus  Master  Fund.

A  Current  Report  on  Form  8-K  filed  September  1,  2004 was filed with the
Commission  under  Item  1.01  (Material  Definitive  Agreements)  and Item 9.01
(Financial Statements and Exhibits) regarding the award of a small satellite bus
technology  SBIR  contract  from  the  Air  Force  Research  Laboratory.

A Current Report on Form 8-K filed October 5, 2004 was filed with the Commission
under  Item 1.01 (Material Definitive Agreements) regarding the award of a small
launch  vehicle  SBIR  contract  from  the  Air  Force  Research  Laboratory.

A  Current  Report  on  Form  8-K  filed  October  26,  2004  was filed with the
Commission under Item 1.01 (Material Definitive Agreements) regarding  the award
of  a  second  Task  Order  under  the  Company's IDIQ contract with the Missile
Defense  Agency.

                                     34
                                    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:  November  15,  2004                           /s/ James W. Benson
                                                      --------------------------
                                                      James  W.  Benson
                                                      Chief  Executive  Officer




Dated:  November  15,  2004                           /s/ Richard B. Slansky
                                                      --------------------------
                                                      Richard  B.  Slansky
                                                      Chief  Financial  Officer

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