U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[  X  ]     ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE
ACT  OF  1934

For  the  Fiscal  Year  Ended  December  31,  2005

[    ]     TRANSITION  REPORT  UNDER  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.
                 (Name of small business issuer in its charter)

               Colorado                                       84-1374613
  (State  or  other  jurisdiction                           I.R.S.  Employer
of  incorporation  or  organization)                     Identification  number)

  13855  Stowe  Drive,  Poway,  California                        92064
(Address  of  principal  executive  offices)                   (Zip  Code)

Issuer's  telephone  number,  including  area  code:     (858)  375-2030

Securities  registered  under  Section  12(b)  of  the  Act:

             Title of each class                  Name of each exchange on which
                                                      each class is registered

                     None.                                        None.

Securities  to  be  registered  under  Section  12(g)  of  the  Act:

                         Common Stock, $.0001 par value
                                (Title of Class)

Check  whether the issuer is not required to file reports pursuant to Section 13
or  15(d)  of  the  Securities  Exchange  Act  of  1934.

     Yes  [ ]          No  [X]

Check  whether  the Issuer (1) filed all reports required to be filed by Section
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  [ ]

Check  if there is no disclosure of delinquent filers in response to Item 405 of
Regulation  S-B  contained in this form, and no disclosure will be contained, to
the  best  of  registrant's  knowledge,  in  definitive  proxy  or   information
statements  incorporated  by  reference  in  Part III of this Form 10-KSB or any
amendment  to  this  Form  10-KSB.  [ ]

State  issuer's  revenues  for  its  most  recent  fiscal  year:  $9,005,011

The  aggregate  market value of the voting stock held by non affiliates computed
by  reference  to  the  price at which the stock was sold, (the closing price of
such stock, as reported by the NASD Over-the-Counter Bulletin Board) as of March
3,  2006  was  $19,018,271.

As  of  March  3,  2006,  Registrant had outstanding 28,689,416 shares of common
stock,  its  only  class  of  common  equity  outstanding.

Transitional Small Business Disclosure Format  (Check one):  Yes [ ]  No [X]


                                      PAGE


                                TABLE OF CONTENTS

TABLE  OF  CONTENTS                                                           II
PART  I                                                                        1
    ITEM  1. DESCRIPTION  OF  BUSINESS                                         1
        Forward  Looking  Statements                                           1
        General                                                                1
        Business  Strategy                                                     8
        Products  and  Services;  Market                                       9
        Components  and  Raw  Materials                                       11
        Competition                                                           12
        Regulation                                                            13
        Employees                                                             15
        Intellectual  Property                                                15
    ITEM  2. DESCRIPTION  OF  PROPERTY                                        16
    ITEM  3. LEGAL  PROCEEDINGS                                               16
    ITEM  4. SUBMISSION  OF  MATTERS  TO  A  VOTE  OF  SECURITY  HOLDERS      16
PART  II                                                                      17
    ITEM  5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTER, AND SMALL
    BUSINESS  ISSUER  PURCHASES  OF  EQUITY  SECURITIES                       17
        Market  Information                                                   17
    ITEM  6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION        18
        Selection  of  Significant  Contracts                                 20
        Liquidity  and  Capital  Resources                                    26
        Cash  Position                                                        27
        Risk  Factors                                                         30
    ITEM  7. FINANCIAL  STATEMENTS                                            44
    ITEM  8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL  DISCLOSURE                                                     44
    ITEM  8A.  CONTROLS  AND  PROCEDURES                                      44
    ITEM  8B.  OTHER  INFORMATION                                             44
PART  III                                                                     45
    ITEM  9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
    COMPLIANCE  WITH  SECTION  16(a)  OF  THE  EXCHANGE  ACT                  45
        Committees  Of  The  Board  Of  Directors                             48
        Section  16  Beneficial  Ownership  Reporting  Compliance             48
    ITEM  10. EXECUTIVE  COMPENSATION                                         49
        Executive  Officer  Compensation                                      49
        Director  Compensation                                                51
    ITEM  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    AND RELATED  STOCKHOLDER  MATTERS                                         54
        Equity  Compensation  Plan  Information                               56
    ITEM  12. CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS              56
    ITEM  13. EXHIBITS                                                        58
    ITEM  14. PRINCIPAL  ACCOUNTANT  FEES  AND  SERVICES                      63
CONSOLIDATED  FINANCIAL  STATEMENTS                                          F-1

                                      PAGE II

                                     PART I

ITEM  1.     DESCRIPTION  OF  BUSINESS

FORWARD  LOOKING  STATEMENTS

     The   following   discussion   should  be  read  in  conjunction  with  our
consolidated  financial statements and the notes thereto and the other financial
information  appearing  elsewhere  in  this document.  Readers are also urged to
carefully  review  and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without  limitation  the  disclosures  made  under  the   caption  "Management's
Discussion  and  Analysis  or Plan of Operation," in this Form 10-KSB and in our
other  SEC  reports.

     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.

     Actual  results  could  differ  materially  from  those anticipated by such
forward-looking  statements. 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.


GENERAL

     SpaceDev,  Inc. (the "Company," "SpaceDev," "we," "us" or "our") is engaged
in  the conception, design, development, manufacture, integration and operations
of  space  technology  subsystems,  systems,  products  and  services.   We  are
currently  focused  on  the  commercial  and  military  development  of low-cost
microsatellites,  nanosatellites  and  related  subsystems,  and  hybrid  rocket
propulsion for space and launch vehicles, as well as on providing the associated
engineering  technical  services  to  government, aerospace and other commercial
enterprises.  Our  products  and  solutions are sold directly to these customers
and  include sophisticated micro- and nanosatellites, hybrid rocket-based launch
vehicles,  orbital  Maneuvering  and  orbital  Transfer Vehicles as well as safe
sub-orbital  and  orbital  hybrid  rocket-based propulsion systems.  We are also
developing  commercial  hybrid  rocket  motors  for possible use in small launch
vehicles,  targets  and  sounding  rockets,  and  small  high  performance space
vehicles  and  subsystems.

     Starsys  Research  Corporation was acquired by SpaceDev on January 31, 2006
in  a  tax-free  forward  triangular merger, renamed Starsys, Inc., and is now a
wholly-owned  subsidiary  of  SpaceDev.  Starsys  is  engaged  in the design and
manufacture  of  mechanical  and electromechanical subsystems and components for
spacecraft.  Starsys'  subsystems  enable  critical spacecraft functions such as
pointing  solar arrays and communication antennas and restraining, deploying and
actuating  moving  spacecraft  components.  Starsys manufactures a wide range of
products  that include bi-axis gimbals, flat plate gimbals, solar array pointing
mechanisms,  deployable  booms,  separation systems, thermal louvers, actuators,
restraint  devices  and  cover  systems.  Starsys'  products  are  sold  both as
"off-the-shelf"  catalog  products, which represent previously qualified devices
with  spaceflight history, and as custom systems that are developed for specific


                                      PAGE 1


applications.  Starsys'  products  are  typically  sold  directly  to spacecraft
manufacturers.  Starsys'  customer base is segregated into three major segments:
(1)  domestic and international commercial spacecraft (communication and imaging
satellites), (2) civil spacecraft (NASA) that are primarily scientific in nature
and  (3) defense spacecraft that support the United States' military capability.
Starsys  also  offers  products  to  non-space  customers,  including aerospace,
maritime,  and  industrial  customers.

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

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

     Our  historic SpaceDev business approach is to provide smaller spacecraft -
generally  250  kg  (550  pounds)  mass  and  less  -  and cleaner, safer hybrid
propulsion  systems  to   commercial,   government,   university   and   limited
international  customers.  We are developing smaller spacecraft and miniaturized
subsystems  using proven, lower cost, high-quality off-the-shelf components. Our
space  products  are  modular  and  reproducible,  which  allows  us  to  create
affordable  space  solutions  for  our  customers.  By  utilizing our innovative
technology  and  experience,  and  space-qualifying commercial industry-standard
hardware, software and interfaces, we provide increased reliability with reduced
costs  and  risks.

     We  have  been  awarded,  have  successfully  concluded or are successfully
concluding  contracts  from  such esteemed government, university and commercial
customers  as  the  Air  Force Research Laboratory, Boeing, the California Space
Authority,  the Defense Advanced Research Projects Agency, NASA's Jet Propulsion
Laboratory,  Lockheed  Martin, Lunar Enterprise Corporation, Malin Space Science
Systems,  the  Missile  Defense  Agency (formerly the "Ballistic Missile Defense
Organization"),  the  National  Reconnaissance Office, Scaled Composites and the
University  of  California  at  Berkeley  via  NASA.

     We  were  incorporated  under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI").  SpaceDev, LLC of Colorado
was  originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed  on  August  22, 1997.  On October 22, 1997, PDGI issued 8,245,000 of its
$0.0001  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.  We  became  a  publicly  traded company in October 1997 and are
currently  trading  on   the  National   Association  of   Securities   Dealers'
Over-the-Counter  Bulletin  Board  ("OTCBB")  under  the  symbol  "SPDV."

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


                                      PAGE 2


     In  August  1998,  we  acquired  a  license to the patents and intellectual
property  produced  by  American  Rocket  Company.  The  acquisition provided us
access  to  a  large cache of hybrid rocket documents, designs and test results.
The  American  Rocket Company specialized in the design, development and testing
of hybrid rocket technology (solid fuel plus liquid oxidizer) for small sounding
rockets  and  launch  vehicles.

     In  late  1998,  we  bid  and  won  a  government-sponsored  research   and
development  contract,  which  was  directly related to our strategic commercial
space  interests. We competed with seven other industry teams and we were one of
five firms selected by NASA's Jet Propulsion Laboratory to perform a mission and
spacecraft   feasibility   assessment  study   for  the   proposed  200-kg  Mars
MicroMissions.  The  final report was delivered to the Jet Propulsion Laboratory
in  March  1999  and,  as  a  result,  we  now  offer  lunar and Mars commercial
deep-space  missions  based  on  this  and  subsequent  innovative  space system
designs.

     In mid-1999, we won an R&D contract from the National Reconnaissance Office
to  study  small  hybrid-based  "micro"  kick-motors for small-satellite orbital
transfer  applications.  During  the  contract,  we successfully developed three
Secondary  Payload  Orbital  Transfer  Vehicle design concepts.  We subsequently
created a prototype, which led to the development of our capability to apply the
Secondary Payload Orbital Transfer Vehicle concept to our subsequent Maneuvering
and  orbit  Transfer  Vehicle  development  programs.

     In  November  1999,  we  won  a  $4.9 million mission contract by the Space
Sciences  Laboratory  at  the  University  of  California  at Berkeley.  We were
competitively  selected  to  design, build, integrate, test and operate, for one
year,  a  small  NASA-sponsored  scientific,  Earth-orbiting  spacecraft  called
CHIPSat.  CHIPSat is the first and, to our knowledge, only successful mission of
NASA's  low-cost  University-Class  Explorer  series to date.  Due to additional
NASA  and  customer  reviews, additional work, schedule extensions and a fee for
one  year  of  satellite operations, the CHIPSat contract award was increased by
approximately  $2.5  million in 2001 and 2002, bringing the total contract value
for  design, build, launch and operations to approximately $7.4 million. CHIPSat
launched  as  a  secondary  payload  on  a  Delta-II rocket on January 12, 2003.
CHIPSat  is  the  world's  first  orbiting Internet node. The satellite achieved
3-axis  stabilization  with  all  individual components and systems successfully
operating  and  continues  to work well in orbit. After more than two years. The
CHIPSat  program  generated  approximately  $2.1  million,  $3.2  million,  $1.7
million,  $0.4 million and $0.1 million of revenue in 2000, 2001, 2002, 2003 and
2004,  respectively.

     On  March  22,  2000, the California Spaceport Authority and the California
Space and Technology Alliance awarded us a grant of approximately $100,000 to be
used  for  test firing our hybrid rocket motors. California's Western Commercial
Space  Center also awarded us approximately $200,000 to help build and equip its
satellite  and  space  vehicle manufacturing facilities. These capabilities were
used  to  expand  our  project  and  technology  base.

     In  July  2000,  the National Reconnaissance Office granted us two separate
follow-on  competitive  awards of approximately $400,000 each for further hybrid
rocket  engine  design,  test,  evaluation,  and  development.  Our work for the
National  Reconnaissance  Office  has  helped  fund two innovative hybrid rocket
motor  potential  products:

-    a  family  of  small versatile orbital Maneuver and orbit Transfer Vehicles
     using  clean,  safe  hybrid  rocket  propulsion  technology;  and,

-    a  protoflight  hybrid  propulsion module for a 50-kg class microsatellite.

Both  of  those  contracts  were  successfully  completed.


                                      PAGE 3


     In  September  2001,  Scaled  Composites  awarded  us  a  contract  for  a
proprietary  hybrid  propulsion development program for Scaled's "SpaceShipOne,"
valued in excess of $1 million.  The entire contract, awarded upon the submitted
designs,  was valued at approximately $2.2 million.  The contract was indicative
of  an  increased  demand  for  our hybrid motor technology and expertise in the
space  industry.  Work  on this project generated approximately $1.2 million and
$397,000  of  revenue  in  2002  and  2003, respectively.  In September of 2003,
SpaceDev  was  selected  by  Scaled  Composites  as  the sole supplier of hybrid
propulsions  systems,  and  was  awarded  the  follow-on SpaceShipOne propulsion
contract.  We  generated  approximately $115,000 of revenue in 2003 and $686,000
of  revenue  in  2004  from this contract and related engineering change orders,
with  approximately  $180,000  from  engineering change orders and approximately
$506,000  from  the  contract.

     On  December 17, 2003, which corresponded with the 100th anniversary of the
Wright  Brothers  flight,  our hybrid propulsion system, which we believe is the
world's  largest  of its kind, aboard SpaceShipOne, successfully powered a pilot
toward  space  on  its  historic  first  powered  supersonic flight. After being
released  by  the  White Knight, a carrier aircraft, the SpaceShipOne Test Pilot
flew  the  ship  to  a  stable,  0.55  mach  gliding flight condition, started a
pull-up,  and  fired  our  hybrid rocket motor. Nine seconds later, SpaceShipOne
broke  the  sound  barrier and continued its steep powered ascent. The climb was
very  aggressive,  accelerating forward at more than 3-g while pulling upward at
more  than 2.5-g. At motor shutdown, 15 seconds after ignition, SpaceShipOne was
climbing at a 60-degree angle and flying near 1.2 Mach (930 mph). The test pilot
then  continued  the  maneuver  to  a vertical climb, achieving zero speed at an
altitude  of  68,000  feet.

     On  June  21,  2004,  our  proprietary  hybrid  rocket   motor   technology
successfully  powered   SpaceShipOne   on   its   fourth   and   most  important
history-making flight to space. SpaceDev powered SpaceShipOne well beyond the 50
mile altitude required to be considered a space flight, and helped to create the
world's  first  private  sector  astronaut.  After  being  released by the White
Knight,  SpaceShipOne's  test pilot, Mike Melvill, fired the rocket motor at the
planned  altitude  and  the  rocket  motor  then  propelled SpaceShipOne to over
328,000  feet  in  approximately  80  seconds,  flying  near  Mach  5.0.

     On September 29, 2004 and October 4, 2004, our hybrid propulsion technology
helped  propel  Scaled  Composites/Paul  Allen's  SpaceShipOne into space flight
history  as the craft garnered the $10 Million Ansari X Prize, a contest created
to  stimulate the development of the private sector human space flight industry.
We provided several critical components and the hybrid rocket technology for the
craft's  motor,  including  igniter,  injector  and  main operating valve, which
successfully  performed  as  expected  and  powered SpaceShipOne on its historic
manned  flight. SpaceShipOne exceeded the altitude requirement on both scheduled
flights  as  required  by  the Ansari X Prize competition. The hybrid propulsion
system  burned  full  duration  and pilot Brian Binnie steered SpaceShipOne high
above  the  Mojave, California desert to a height of 367,442 feet altitude (69.5
miles),  which far exceeded the required 328,000 feet altitude - a sky-high goal
required  by  the  X  Prize  Foundation  of  St.  Louis,  Missouri.

     Although  we were not the recipient of the Ansari X Prize, it was a contest
designed  to  jumpstart the space tourism industry through competition among the
most  talented  entrepreneurs and rocket experts in the world.  SpaceShipOne was
built  and  launched  with private funds from Paul Allen.  The craft was able to
carry  equivalent  weight  of  three  people  to 100 kilometers (62.5 miles) and
return  safely to earth.  The competition followed in the footsteps of more than
100  aviation  incentive  prizes  offered  between  1905  and 1935 credited with
spawning  today's  multibillion-dollar  air  transport  industry.   By   helping
SpaceShipOne succeed, we were instrumental in moving the private space community
closer  to  realizing  its vision of creating safe, affordable, commercial human
space  flight.
                                      PAGE 4


     On  April  30,  2002,  we  were  awarded Phase I of a contract to develop a
Shuttle-compatible  propulsion  module for the Air Force Research Laboratory. We
received  an award for Phase II of the contract on March 28, 2003.  We are using
the  project  to  further  expand  our  Maneuvering and Orbital Transfer Vehicle
technology  and  product  line  to  satisfy   government   space  transportation
requirements.  The  first  two phases of the contract have an estimated value of
approximately $2.5 million, of which $100,000 was awarded for Phase I.  Phase II
of  the  contract  is  cost-plus  fixed  fee.  In order to complete Phase II, we
requested  and  were  granted  approximately  four months of additional time and
approximately  $240,000  of  additional  funding,  memorialized  by  a  contract
amendment  executed  on  July  7, 2004.  In addition to the Phase I and Phase II
awards,  there is an option worth approximately $800,000, which was initiated on
May 3, 2004.  The additional funding to complete AFRL Phase II came in part from
the  original  $1  million  option; thereby reducing the option to approximately
$800,000.  An  additional  effort  to  develop a miniaturized Shuttle-compatible
propulsion  module  has  been  added to this contract and is worth approximately
$150,000.

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

     Also,  on July 9, 2003, we were awarded a Phase I Small Business Innovation
Research  contract by Air Force Research Lab to design and effectively begin the
development of our small launch vehicle.  The SpaceDev Small Launch Vehicle will
be  designed to responsively and affordably lift up to 1,000 pounds to Low Earth
Orbit.  The  SpaceDev  Small  Launch  Vehicle  concept is based on a proprietary
combination  of  technologies to increase the performance of hybrid rocket motor
technology.  Hybrid  rocket  motors  are  a combination of solid fuel and liquid
oxidizer,  and  can  be relatively safe, clean, non-explosive, and storable, and
can  be  throttled,  shut  down  and  restarted.  This  contract  was  valued at
approximately  $100,000, and was a fixed price, milestone-based agreement, which
was completed in about one year.  The Phase II of this SBIR contract was awarded
on  September  29,  2004  and  is  worth approximately $1,557,000.  The contract
outlines  the  development  and test firing of our large Common Core Booster for
the  SpaceDev  Small Launch Vehicle.  Congress has awarded us approximately $3.0
million  in  additional funding for this project, which became available in late
2005.  We  believe  that  there  is additional interest by Congress in providing
further  funding  to expand and accelerate the scope of the work; however, there
can  be  no  assurance  that  such  work  will  be  awarded  to  us.

     Also,  on July 9, 2003, we were awarded a Phase I contract to develop micro
and  nanosatellite bus and subsystem designs. This Air Force Research Laboratory
Small  Business  Innovation Research contract, valued at approximately $100,000,
has  enabled  us  to  explore  the  further  miniaturization  of  our unique and
innovative microsatellite subsystems.  It has also enabled us to explore ways to
reduce  the  time  and   cost   to   build   small  satellites  through  further
standardization  in order to help define de facto standards for payload hardware
and  software  interfaces.  The contract is fixed price, milestone-based and was
completed  in  about one year.  On August 23, 2004, we were awarded the Phase II
of  this  Small  Business  Innovation Research grant, which was later amended on
September  8,  2004  to  shorten  the  length  of  the  overall  contract, worth
approximately  $739,000  for  carry-forward  work.

     On  July  24,  2003,  we  were  awarded  a  contract by Lunar Enterprise of
California  for  a  first phase project to begin developing a conceptual mission
and  spacecraft design for a lunar lander program. The unmanned mission is being


                                      PAGE 5


designed  to put a small dish antenna near the south pole of the Moon. From that
location  it  will  be in near-constant sunlight for solar power generation, and
should  be  able  to perform multi-wavelength astronomy while communicating with
ground  stations  on Earth. The contract value was $100,000 and was completed by
November  2003.  We  were  awarded  a  follow-on phase to further analyze launch
opportunities,  spacecraft  design,  trajectory possibilities, potential landing
areas,  available  technologies  for  a  small   radio   astronomy  system,  and
communications  and data handling requirements on July 20, 2004 in the amount of
$150,000.  The  contract  has  been  completed.

     On  December  18,  2003, we were awarded a contract by the Defense Advanced
Research  Projects  Agency  for the study of Novel Satcom Microsat Constellation
Deployment.  The contract was a milestone-based, fixed price contract with total
consideration  of  approximately  $200,000.  On  August  6,  2004, an additional
$39,849  was  added  to  the  contract  for  increased scope, bringing the total
contract  value  on  this  fixed  price  effort  to  approximately $240,000. The
contract  has  been  completed.

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

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

STARSYS  -  CUSTOMERS

     Starsys'  business is focused on mechanical and electro-mechanical systems,
sub-systems and components that support assembly of spacecraft by its customers.
Those  customers,  primarily  the  Prime  Contractors  in  the aerospace market,
support the government and commercial end users by integrating its products into
higher  level  assemblies  and  spacecraft.  Lockheed  Martin  Companies, Boeing


                                      PAGE 6


Company,  Northrop  Grumman  Space  Technologies,  ITT  Industries,  and  Swales
Aerospace  are  prime  contract  customers, which have each accounted for 10% or
more  of  Starsys'  consolidated revenues in recent years.  Starsys has multiple
contracts with each of these customers and we do not believe any single customer
contract  is  material  to  Starsys.  The remainder of Starsys' business is with
multiple  customers  that  support  the  Department of Defense through the prime
contractors,  and the commercial spacecraft market, the civil spacecraft market,
and NASA, including through Small Business Innovative Research (SBIR) grants and
Long  Term  Agreements  (LTA's)  with  the  prime  contractors.

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

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

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

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

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

     All of Starsys' U.S. government contracts and, in general, its subcontracts
with  other U.S. government prime contractors provide that such contracts may be
terminated  for  convenience  by  the  U.S.  government or the prime contractor,


                                      PAGE 7


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

BUSINESS  STRATEGY

     Our  strategy  is  based  on  the  belief  that  innovative advancements in
technology and the application of standard business processes and practices will
make  access  to  space  much  more  practical  and affordable. We believe these
factors will cause growth in certain areas of space commerce and will create new
space  markets  and  increased  demand  for  our  proprietary  products.

     Our  business  strategy  for  our  historical  SpaceDev  operations  is to:

-    Introduce  commercial  business  practices  into  the   space   arena,  use
     off-the-shelf  technology  in  innovative ways and standardize hardware and
     software  to  reduce  costs  and  to  increase  reliability  and  profits;

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

-    Bid,  win  and  leverage  government  programs  to  fund  our  Research and
     Development  and  product  development  efforts;

-    Integrate  our  smaller,  low  cost  commercial spacecraft and hybrid space
     transportation  systems  to  provide  one-stop  turnkey payload and/or data
     delivery  services  to  target  customers;

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

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

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

-    Establish a team to build a safe, affordable orbital passenger vehicle as a
     potential  shuttle  replacement.

     We  believe  that  our  business  model,  emphasizing  smaller  satellites,
commercial  approaches,  technological  simplicity,  architectural and interface
standardization and horizontal integration (i.e., "whole product"), provides the
following  advantages:

-    Enables small-space customers to contract for end-to-end mission solutions,
     reducing  the  need  for  and  complexity  of finding other contractors for
     different  project  tasks;

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

-    Tends  to  create  barriers  to  entry by and competition from competitors.


                                      PAGE 8


PRODUCTS  AND  SERVICES;  MARKET

     We currently have two primary lines of space products and services on which
we  believe  a  sound foundation and profitable, cash generating business can be
built:

-    Our  Spacecraft  Products  and Services - Microsatellites & Nanosatellites,
     BD-II Spacecraft Buses, and Maneuvering and orbital Transfer Vehicles; and,

-    Our Propulsion Products and Services - Hybrid Propulsion and Launch Vehicle
     Systems.

     These  products  and  services  are  being  marketed and sold directly into
primarily  domestic  government, university, military and commercial markets. We
consider  ourselves  a  project  company  rather  than  a product company today,
although products are generated from projects.  Our long term goal and vision is
to  migrate  from  a  project company to a product company.  Our business is not
seasonal  to  any  significant  extent;  however,  our  business  follows normal
industry  trends  such  as  increased demand during bullish economic periods, or
slow-downs  in  demand  during  periods  of  recession.

     In  addition,  we are working with potential partners to create new markets
that  can  generate  new  space-related  service,  media, tourism and commercial
revenue  streams.  While  we believe that certain space market opportunities are
still  several  years  away,  we  are  currently  working  with industry-leading
potential  partners  to  develop  unique enabling technology for the potentially
very  large  sub-orbital  manned space plane tourism market; and, creating a new
unmanned  Beyond  Earth Orbit commercial market with spacecraft derived from our
NASA  JPL  Mars  MicroMission and Boeing Lunar Orbiter mission design contracts.

OUR  SPACECRAFT  PRODUCTS  AND  SERVICES

     Microsatellites  &  Nanosatellites  -  We  design  and  build  micro -  and
nanosatellites.  The  primary benefit of micro- and nanosatellites is lower cost
and  weight.  Since we can dramatically reduce manufacturing costs and the costs
to  launch  the satellites to earth-orbit and deep space, we can pass those cost
savings  on  to  our  customers.  Small,  inexpensive  satellites  were once the
exclusive  domain  of scientific and amateur groups; however, smaller satellites
are  now  a  viable  alternative to larger, more expensive ones, as they provide
cost-effective  solutions to traditional problems. We design and build low cost,
high-performance  space-mission  solutions  involving microsatellites (generally
less  than  100 kg) and even smaller satellites (less than 50 kg).  Our approach
is to provide smaller spacecraft and compatible low cost, safe hybrid propulsion
space  systems  to  a  growing  market of commercial, government and potentially
international  customers.

     BD-II  (Boeing  Delta-II compatible) spacecraft buses - We have a qualified
microsatellite  bus  available  to  sell  as  a standard, fixed-price product to
government  and  commercial  customers needing an affordable satellite for small
payloads.  We  began  developing  this product in 1999, when we were selected as
the  mission  designer, spacecraft bus provider, integrator and mission operator
of  the  University of California at Berkeley Space Sciences Laboratory's Cosmic
Hot Interstellar Plasma Spectrometer ("CHIPS") mission.  CHIPSat was launched on
January  12,  2003.  The  satellite  achieved  3-axis  stabilization   with  all
individual  components  and systems successfully operating and continues to work
well  in  orbit.

     Maneuvering  and  orbital  Transfer  Vehicle  - Our Maneuvering and orbital
Transfer  Vehicle  system  is  a  family of small, throttleable, and restartable
propulsion  and  integrated  satellite  products.  Our  Maneuvering  and orbital
Transfer  Vehicle  can  be  used  as a standard propulsion module to transport a


                                      PAGE 9


customer's  payload  to  different  orbits. The Maneuvering and orbital Transfer
Vehicle  provides the change in velocity and maneuvering capabilities to support
a  wide  variety of applications for on-orbit maneuvering, proximity operations,
rendezvous,  inspection,  docking, surveillance, protection, inclination changes
and  orbital  transfers.

     Spacecraft  and  Subsystem Design - We also provide access to space through
innovative  solutions  currently  lacking in the marketplace. Our approach is to
provide  smaller  spacecraft  -  generally 250 kg mass and less - and compatible
hybrid  propulsion  space  systems  to  commercial,  university  and  government
customers.  The  small  spacecraft  market  is  supported  by  the evolution and
enabling  of  microelectronics,  common hardware & software interface standards,
and  smaller  launch  vehicles.  Reduction  of  the size and mass of traditional
spacecraft electronics has reduced the overall spacecraft size, mass, and volume
over the past 10 to 15 years. For example, our miniature flight computer is only
24  cubic  inches and provides 300 million instructions per second of processing
power  versus  a competitor's more "traditional" solution that requires about 63
cubic  inches  and  only  provides  10  MIPS.

     Microsatellite & Nanosatellite Launches - To support the growth in customer
demand  within  the  small  satellite  market,  we work with launch providers to
identify  and  market  affordable  launch opportunities and to provide customers
with  a complete on-orbit data delivery service that combines our spacecraft and
hybrid propulsion products. These innovative, low-cost, turnkey launch solutions
will  allow  us  to  provide  one-stop shopping for launch services, spacecraft,
payload  accommodation,  total  flight  system  integration and test and mission
operations.  The  customer  only  needs  to provide the payload, and we have the
capacity  to perform all the tasks required for the customer to get to orbit and
to  begin  collecting  their  data.

     Mission Control and Operations - Our mission control and operations center,
located  in  our  headquarters building near San Diego, coupled with our mission
control  and  operations package, is Internet-based and allows for the operation
and  control  of  missions  from  anywhere  in  the world that has access to the
Internet.  CHIPSat  was  the  first  U.S.  mission  to  use end-to-end satellite
operations  with  TCP/IP  and  FTP.  While  this  concept  has been analyzed and
demonstrated  by  the  NASA  OMNI  team,  CHIPSat  is the first to implement the
concept  as  the  only  means  of  satellite  communication.  A formation-flying
cluster or constellation of TCP/IP-based microsatellites, similar to the cluster
of  microsats  we are developing for the Missile Defense Agency, can be designed
to  communicate  directly  with  each other, as in a wide area network in space.
Provided  any  one  satellite/node  in this network is in line-of-sight with any
ground station at any given time, the entire constellation could always maintain
ground  station connectivity, thus creating a network on-orbit and on the web, a
direct  extension  of  CHIPSat's  elegantly  simple  TCP/IP  mission  operations
architecture.

OUR  PROPULSION  PRODUCTS  AND  SERVICES

     Hybrid  Rocket  Propulsion  and  Launch Vehicle Systems - We provide a wide
variety  of  hybrid  propulsion  systems  to  safely  and  inexpensively  enable
satellites and on-orbit delivery systems to rendezvous and maneuver on-orbit and
deliver  payloads  to  sub-orbital altitudes. Hybrid rocket propulsion is a safe
and  low-cost  technology  that  has  tremendous benefits for current and future
space  missions.  Our  hybrid  rocket  propulsion  technology  features a simple
design,  is  restartable,  is  throttleable and is easy to transport, handle and
store.

     Hybrid  Orbital  Vehicle  -  we  have begun designing a reuseable, piloted,
sub-orbital  space ship that could be scaled to transport passengers to and from
Low  Earth  Orbit,  including  the  International Space Station. The name of the
vehicle  is  the  SpaceDev  Dream Chaser(TM).  We signed a non-binding Space Act
Memorandum  of  Understanding with NASA Ames Research Center, which confirms our
intention  to  explore  novel,  hybrid propulsion based hypersonic test beds for
routine human space access. We will explore with NASA collaborative partnerships


                                      PAGE 10


to  investigate  the  potential  of using our proven hybrid propulsion and other
technologies,  and  a  low  cost, private space program development approach, to
establish and design new piloted small launch vehicles and flight test platforms
to  enable  near-term,  low-cost  routine  space  access for NASA and the United
States.  Unlike  the  more  complex  SpaceShipOne,  for  which SpaceDev provided
critical proprietary hybrid rocket motor propulsion technologies and components,
the  SpaceDev  Dream Chaser(TM) would be crewed and launch vertically, like most
launch  vehicles,  and  would glide back for a normal horizontal runway landing.
The  sub-orbital  SpaceDev  Dream  Chaser(TM)  would  have  an  altitude goal of
approximately  160  km  (about 100 miles) and would be powered by a single, high
performance  hybrid  rocket  motor,  under  parallel  development  by us for the
SpaceDev  Streaker(TM),  a family of small, expendable launch vehicles, designed
to  affordably  deliver  small satellites to Low Earth Orbit. The SpaceDev Dream
Chaser(TM) motor would produce approximately 100,000 pounds of thrust, about six
times the thrust of the SpaceShipOne motor, but less than one-half the thrust of
the  250,000 pounds of thrust produced by hybrid rocket motors developed several
years  ago  by  the  American  Rocket  Company.  Our non-explosive hybrid rocket
motors  use  synthetic rubber as the fuel, and nitrous oxide for the oxidizer to
make  the  rubber  burn.  Traditional  rocket motors use two liquids, or a solid
propellant  that combines the fuel and oxidizer, but both types of rocket motors
are explosive, and all solid motors produce copious quantities of toxic exhaust.
Our  hybrid rocket motors are non-toxic and do not detonate like solid or liquid
rocket  motors.

     Mission  Analysis and Design - We can provide end-to-end mission design and
analysis,  including  the  design  of  the  mission and its science, commerce or
technology  demonstration  goals,  the  design  of  an appropriate space vehicle
(satellite  or  spacecraft),  prototype development, construction and testing of
the spacecraft, integration of one or more payloads (instruments, experiments or
technologies) into the spacecraft, integration of the spacecraft onto the launch
vehicle  (rocket),  the launch and the mission control and operations during the
life  of  the  mission.

STARSYS  -  PRODUCT  MIX

     Starsys  targets   two   distinct   markets,   mechanical   subsystems  and
electromechanical subsystems.  The mechanical subsystems market includes hinges,
latches,  release  mechanisms,   and   deployable  structures  and  systems  for
spacecraft  and  payloads.  The  electromechanical  subsystems  market  includes
antenna  pointing  mechanisms,  gimbals,  solar   array   deployment  actuators,
instrument  mechanisms and actuators, and deployment and aperture mechanisms for
spacecraft  and payloads.  For 2004, Starsys' product mix was 69% mechanical and
31%  electromechanical by program count and approximately 30% mechanical and 70%
electromechanical  by  program  value.  For  2005,  Starsys' product mix was 72%
mechanical  and  28%  electromechanical  by  program count and approximately 32%
mechanical  and  approximately  68  %  electromechanical  by  program  value.

COMPONENTS  AND  RAW  MATERIALS

     Although  our  historic  SpaceDev  business  may  experience  a shortage of
certain  parts  and components related to our products, we have many alternative
suppliers  and  distributors and are not dependent on any individual supplier or
distributor.  Furthermore,  we have not experienced difficulty in our ability to
obtain our parts or component materials, nor do we expect this to be an issue in
the  future.

     Starsys  purchases  a  significant  percentage  of  its product components,
structural  assemblies and certain key satellite components and instruments from
third parties.  Starsys also occasionally obtains from the U.S. government parts
and  equipment  that  are  used  in  the  production  of  its products or in the
provision  of  its  services.  Generally,  Starsys  has not experienced material
difficulty in obtaining product components or necessary parts and equipment, and


                                      PAGE 11


believes  that  alternatives  to  its  existing sources of supply are available,
although  increased  costs  and  possible  delays  could be incurred in securing
alternative  sources  of  supply.  Starsys relies upon sole source suppliers for
potentiometers, slip ring assemblies, specialized impellers, specialized heaters
and  paraffin  material.  While  alternative  sources  would  be  available, the
inability  of any such supplier to provide Starsys with these items to qualified
specifications  would  result  in  an  adverse  effect  on  Starsys'  ability to
manufacture  its  products.

COMPETITION

     We  compete  for  sales  of  our  products  and  services  based  on price,
performance,   technical    features,    contracting    approach,   reliability,
availability,  customization,  and,  in  some situations, geography. Our primary
competition for low-cost propulsion systems using hybrid rocket motor technology
comes  from  Cesaroni  Technology  Incorporated  in Canada and their affiliates.
While Lockheed Martin has demonstrated large-scale hybrid rocket capability, and
there  are  a  number  of   smaller   enterprises,   especially   academic-based
organizations, in the domestic market currently investigating various aspects of
hybrid  rocket  technology,  to-date  we have seen limited competitive pressures
arising  from  these  organizations.

     The  primary    domestic    competition    for    unmanned   earth-orbiting
microsatellites,  unmanned  deep  space  micro-spacecraft   and   microsatellite
subsystems  as well as software systems comes from other small companies such as
AeroAstro,  Orbital  Sciences  and  Spectrum  Astro.    The   most   established
international  competitors are Surrey Satellite Technology Limited in the United
Kingdom,  OHB Systems in Germany, an OHB Technology AG Company, and EADS Astrium
with  locations  throughout  Western  Europe.  Swedish Space Corporation is also
able  to  compete  in  the  small-satellite  arena, particularly in the European
market.  In  addition  to  private  companies,  there  are  a  limited number of
universities in the United States that have the capability to produce reasonably
simple  microsatellites;  these include, Weber State in Ogden, Utah and Colorado
University  in  Boulder,  Colorado.

     While  we  believe  that  our  product and service offerings provide a wide
breadth  of  solutions  for our customers and prospective customers, some of our
competitors  compete  across  many of our product lines.  Several of our current
and  potential  competitors  have  greater  resources,  including  technical and
engineering  resources.  We  are  not  aware  of any established large companies
(e.g.,  Northrop  Grumman,  Lockheed  Martin,  Boeing),  which   have  expressed
corporate  goals to design and build inexpensive micro-spacecraft for a mission,
which  would be our direct competition. However, they have resources, expertise,
and contracts that would make them formidable competitors if they chose to enter
our  markets.

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

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

     Mechanical  subsystems range from customized hinges and latching devices to
cover  systems  and  integrated structures for payloads, typically not requiring
customized,  or Starsys-supplied, electromagnetic devices. Competition includes:
Alliance  Spacesystems  Inc.  and  Swales Aerospace. Starsys provides clamp band
systems  for  small  satellite separations and deployable structures. We believe


                                      PAGE 12


Starsys'  primary  competitor  in  the  small  satellite  separations  market is
Planetary Systems Inc. We believe that the primary competitors in the deployable
structures  market  are  ATK Space Systems (formerly AEC Able Engineering), NGST
Astro  (formerly  SPAR  Astro  Aerospace)  and  Harris  Corporation.

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

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

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


REGULATION


     Our  business  activities are regulated by various agencies and departments
of  the  U.S. government and, in certain circumstances, the governments of other
countries. Several government agencies, including NASA and the United States Air
Force,  maintain  Export  Control  Offices  to  ensure  that  any  disclosure of
scientific  and  technical  information  complies with the Export Administration
Regulations  and the International Traffic in Arms Regulations ("ITAR"). Exports
of  the Company's products, services and technical data require either Technical
Assistance  Agreements  or  licenses from the United States Department of State,
depending  on  the level of technology being transferred. This includes recently
published  regulations  restricting the ability of United States-based companies
to  complete  offshore  launches,  or to export certain satellite components and
technical  data  to  any  country  outside  the  United  States.  The  export of
information  with  respect  to  ground-based   sensors,   detectors,  high-speed
computers,  and national security and missile technology items are controlled by
the  Department  of  Commerce.  The  government  is  very strict with respect to
compliance and has served notice that failure to comply with the ITAR and/or the
Commerce  Department regulations may subject guilty parties to fines of up to $1
million  and/or  up  to  10 years imprisonment per violation. The failure of the
Company  to  comply  with  any  of  the foregoing regulations could have serious
adverse  effects.  Also,  our  ability  to  successfully  market  and  sell into
international  markets  may  be  severely hampered due to ITAR requirements. Our
conservative  position  is  to  consider  any material beyond standard marketing
material  to  be  regulated  by  ITAR.

     In  addition  to  the  standard  local,  state   and   national  government
regulations  that all businesses must adhere to, the space industry has specific
regulations.  In  the United States, command and telemetry frequency assignments
for  space  missions  are  primarily  regulated  by  the  Federal Communications
Commission  for  our  domestic  commercial products.  Our products geared toward
domestic  government  customers are regulated by the National Telecommunications
Information  Agency  and  any  of our products sold internationally, if any, are
regulated  by  the  International Telecommunications Union.  All launch vehicles
that  are  launched  from  a  launch site in the United States must pass certain
launch  range  safety regulations that are administered by the United States Air
Force.  In addition, all commercial space launches that we might perform require
a  license  from the Department of Transportation.  Satellites that are launched


                                      PAGE 13


must  obtain approvals for command and frequency assignments.  For international
approvals, the Federal Communications Commission and National Telecommunications
and  Information  Administration  obtain  these approvals from the International
Telecommunication  Union.

     We  are also required to obtain permits, licenses, and other authorizations
under  federal,  state, local and foreign statutes, laws or regulations or other
governmental  restrictions  relating  to  the   environment   or  to  emissions,
discharges  or  releases  of  pollutants,  contaminants,  petroleum or petroleum
products,  chemicals or industrial, toxic or hazardous substances or wastes into
the  environment  including,  without  limitation,  ambient  air, surface water,
ground  water,  or  land,  or otherwise relating to the manufacture, processing,
distribution,  use,  treatment,  storage,  disposal,  transport  or  handling of
pollutants,  contaminants,  petroleum  or  petroleum   products,   chemicals  or
industrial,  toxic  or  hazardous  substances or wastes or the clean-up or other
remediation  thereof.  Presently,  we  do  not  have a requirement to obtain any
special  environmental  licenses  or  permits.

     We  may need to utilize the Deep Space Network on some of our missions. The
Deep  Space  Network  is  a  United States funded network of large antennas that
supports  interplanetary  spacecraft  missions  and  radio  and  radar astronomy
observations  for  the  exploration  of  the solar system and the universe.  The
network  also  supports  selected  Earth-orbiting  missions.  The  network  is a
facility  of  NASA,  and  is managed and operated for NASA by the Jet Propulsion
Laboratory.  The  Telecommunications  and Mission Operations Directorate manages
the  program  within the Jet Propulsion Laboratory.  Coordination for the use of
this  facility  is  arranged  with the Telecommunications and Mission Operations
Command.

     Also,  as  some  of our projects with the Department of Defense proceed, we
may  need  special clearances to continue working on and advancing our projects.
Classified programs generally will require that we comply with various Executive
Orders, Federal laws and regulations and customer security requirements that may
include  specialized  facilities  and  restrictions  on  how  we develop, store,
protect  and share information.  Laboratories, manufacturing and assembly areas,
meeting  spaces, office areas, storage areas, computers systems and networks and
telecommunications  systems  may require modification or replacement in order to
comply  with  customer  requirements.   Classified   programs  may  require  our
employees  to  obtain government clearances and restrict our ability to have key
employees  work  on  these programs until these clearances are received from the
appropriate United States government agencies.  In order to staff these programs
we  may  need  to  recruit personnel with the appropriate professional training,
experience  and  security  clearances.  There  are  a  very  limited  number  of
individuals  with  all  of the requirements that we seek.  There is no assurance
that  we can locate and recruit these individuals in a timely and cost-effective
manner.  We  may  be  required  to modify existing facilities and to develop new
facilities  and  capabilities  that  will  only  be utilized by these classified
programs.  We  may  be  required  to  install  computer networks, communications
systems  and monitoring systems that are dedicated to these classified programs.
Some or all of these requirements may entail substantial additional expense.  It
is  uncertain  whether  we  will  be  able  to recover any of the costs of these
systems  from our customers.  Many of these classified programs are regulated by
Executive  Orders,   various   Federal   laws  and   regulations  and   customer
requirements.  The  failure  of  the Company to comply with any of the foregoing
Executive  Orders,  Federal laws and regulations and customer requirements could
have serious adverse effects.  Also, our ability to successfully market and sell
into the Department of Defense markets may be severely hampered if we are unable
to  meet classified program requirements.  There is no assurance that we will be
able  to  successfully  pass  the criteria required in order to win a classified
program  or  to  maintain  current contracts, such as our Missile Defense Agency
contract  (which  may become classified), and there is no assurance that we will
maintain  that  status once it has been obtained.  We received certification for
classified  computer  system  processing  in  early 2005, which was subsequently
renewed  in  early  2006.

                                      PAGE 14


EMPLOYEES

     At December 31, 2005, we employed approximately fifty (50) persons full and
part-time,  most  of  whom  are  spacecraft, propulsion, systems, mechanical and
electrical  engineers.  At  March  1,  2006,  after  the Starsys acquisition, we
employed  a total of approximately 200 people full and part-time. In addition to
its  manufacturing  operations,  Starsys  has  a  team  of experienced engineers
focused  on advanced engineering of mechanical and electromechanical subsystems.
The  engineering  group includes mechanical and aerospace engineers, engineering
technicians  and  designers.   Areas   of   expertise  include   mechanical  and
electromechanical  subsystem  design, analysis, test, and program management. We
do  not  have  any  collective  bargaining agreements with our employees, and we
believe  our  employee  relations  are  good.

INTELLECTUAL  PROPERTY

     We  rely,  in  part,  on patents, trade secrets and know-how to develop and
maintain  our  competitive  position  and  technological   advantage.   We  have
protected  and intend to continue to protect our intellectual property through a
combination  of  patents,  license   agreements,   trademarks,   service  marks,
copyrights,  trade  secrets  and  other  methods  of  restricting disclosure and
transferring  title.  In this regard, we have filed patent applications relating
to  our  hybrid  propulsion and satellite technology.  There can be no assurance
that  such  applications  will be granted.  Starsys relies, in part, on patents,
trade  secrets and know-how to develop and maintain its competitive position and
technological  advantage,  particularly  with  respect to its launch vehicle and
satellite  products.  Starsys holds U.S. and foreign patents relating to release
devices,  deployable truss structures and battery cell shorting mechanisms.  The
majority  of  Starsys'  U.S.  patents  relating to the noted technologies expire
between  2019  and  2022.  We  have  and  intend  to   continue   entering  into
confidentiality  agreements  with  our employees, consultants and vendors; enter
into  license  agreements  with  third  parties; and, generally, seek to control
access  to  and  distribution  of  our  intellectual  property.

     In  August  1998,  we  acquired  rights to intellectual property (including
three  patents  and trade secrets) from an individual who had acquired them from
the  former  American  Rocket  Company,  which  specialized  in   hybrid  rocket
technology.  We are obligated to issue warrants to this individual to purchase a
minimum  of  100,000  and a maximum of 3,000,000 shares of our common stock over
ten  years  beginning at the inception of the agreement, depending on our annual
revenues  directly related to sales of hybrid technology-based products from the
original  technology acquisition. To date, we have issued warrants to purchase a
total  of 100,000 shares of our common stock under the agreement, of which, none
of  the warrants have been exercised and 50,000 warrants expired unexercised. We
acquired some of our expertise in hybrid propulsion technology from the American
Rocket  Company;  however,  we  are  using  our  own  technology  to develop the
responsive,  affordable  SpaceDev Streaker(TM) small launch vehicle under an Air
Force  contract.  [See  Note  3  to  our  consolidated  financial statements for
additional  information.]


STARSYS  -  QUALITY  ASSURANCE  AND  TESTING

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

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


                                      PAGE 15


STARSYS  -  RESEARCH  AND  DEVELOPMENT

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

ITEM  2.     DESCRIPTION  OF  PROPERTY

     In  January 2003, we entered into a sale and leaseback of our 25,000 square
foot  facility  in  Poway, California.  Our facility includes a small Spacecraft
Assembly  and  Test facility with an 1,800 square foot Class 100,000 clean room,
avionics  development  lab,  machine  shop with rocket motor casting capability,
mechanical assembly lab, and mission control and operations center.  Key uses of
our  California  facility  are  program  and  project  conferences and meetings,
engineering design, engineering analysis, spacecraft assembly, avionics labs and
software  labs  and  media  outreach.  We  also  have  an Internet-based Mission
Control  and  Operations  Center  in  our  building.  Our  facility  allows  for
efficient  design,  assembly  and  test for our projects and of our products and
technologies.

     We  originally  purchased our headquarter facility in December 1998, and as
noted  above  we  sold the facility and entered into a sale-leaseback in January
2003.  The  rent  is  approximately  $26,000 per month with a 3.5% COLA increase
annually.  We  are  responsible  for property tax and liability insurance on the
facility.  We were required to make an advance payment in the form of a security
deposit  of  approximately  $25,700,  which  we carry as an asset on our balance
sheet.  Our  Chief  Technology Officer, Mr. Benson, provided a guarantee for the
leaseback.  [See  Notes  2 and 9(c) to our consolidated financial statements for
additional  information.]

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

ITEM  3.     LEGAL  PROCEEDINGS

     None.

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

None.
                                      PAGE 16


                                     PART II

ITEM  5.     MARKET  FOR  COMMON  EQUITY,  RELATED STOCKHOLDER MATTER, AND SMALL
BUSINESS  ISSUER  PURCHASES  OF  EQUITY  SECURITIES

MARKET  INFORMATION

     SpaceDev  common  stock  has  been  traded on the Over-the-Counter Bulletin
Board  ("OTCBB")  since  August  1998 under the symbol "SPDV" or "SPDV.OB."  The
following  table  sets forth the trading history of SpaceDev common stock on the
OTCBB  for  each  quarter  from fiscal 2004 through March 3, 2006 as reported by
Yahoo!  Finance  Historical  Prices   (www.finance.yahoo.com).  The   quotations
reflect  inter-dealer prices, without retail mark-up, markdown or commission and
may  not  represent  actual  transactions.

<TABLE>
<CAPTION>

<S>            <C>         <C>
               QUARTERLY   QUARTERLY
QUARTER ENDED  HIGH        LOW
3/31/2004 . .  $     1.85  $     0.92
-------------  ----------  ----------
6/30/2004 . .  $     2.38  $     1.04
9/30/2004 . .  $     2.46  $     1.43
12/31/2004. .  $     2.42  $     1.51
3/31/2005 . .  $     1.97  $     1.55
6/30/2005 . .  $     1.75  $     1.51
9/30/2005 . .  $     1.70  $     1.43
12/31/2005. .  $     1.65  $     1.36
3/3/2006* . .  $     1.52  $     1.40

*March  3,  2006  high  and  low  from  01/01/2006  to  03/3/2006.

</TABLE>


HOLDERS  OF  RECORD

     As  of  March  3,  2006,  there were approximately 600 holders of record of
SpaceDev  common  stock.

DIVIDENDS

     SpaceDev  has  never  paid a cash dividend on its common stock.  Payment of
common  stock  dividends  is  at  the discretion of the board of directors.  The
board of directors plans to retain earnings, if any, for operations and does not
intend  to  pay  common  stock  dividends  in  the  foreseeable  future.

     SpaceDev accrued dividends on its Series C Cumulative Convertible Preferred
Stock  from  August  25, 2004 through December 31, 2004 of approximately $61,000
and  approximately  $171,000 for the year ended December 31, 2005.  The original
accrued  dividends  of $61,000 became payable in January 2005 and were converted
into  shares  of  SpaceDev common stock at a conversion rate of $1.54 per share.


                                      PAGE 17


Approximately  $114,000  of  the  2005  accrued  dividends  was satisfied by the
issuance  of  the Company's common stock during the twelve-months ended December
31,  2005.  Payment  of  future  dividends  on  SpaceDev's  Series  C Cumulative
Convertible  Preferred  Stock may be in cash or shares of common stock, provided
that  the  payment  of  cash  dividends  on  the Series C Cumulative Convertible
Preferred  Stock  is  prohibited  in  the  event  of  our noncompliance with our
obligations  under  the  certificate  of designations for any series of Series D
Preferred  Stock.

     SpaceDev  has  not paid dividends on its Series D Preferred Stock as of the
date  of this Form 10-KSB.  Shares of Series D Preferred Stock were first issued
by  SpaceDev  on  January  13, 2006, and the first dividend payment date for the
Series  D  Preferred  Stock  will  be  April  1,  2006.


ITEM  6.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OR  PLAN  OF  OPERATION

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

OVERVIEW

Historic  SpaceDev  Business

     We  are  engaged  in  the  conception,  design,  development,  manufacture,
integration  and  operation  of space technology systems, products and services.
We  are currently focused on the commercial and military development of low-cost
microsatellites, nanosatellites and related subsystems, hybrid rocket propulsion
for  space,  launch  and human flight vehicles as well as associated engineering
and  technical services which are provided primarily to government agencies, and
specifically  the  Department  of  Defense. Our products and solutions are sold,
mainly on a project-basis, directly to these customers and include sophisticated
micro-  and nanosatellites, hybrid rocket-based launch vehicles, maneuvering and
orbital  transfer  vehicles and safe sub-orbital and orbital hybrid rocket-based
propulsion  systems.  Although  we believe there will be a commercial market for
our  microsatellite  and  nanosatellite  products  and  services  in the future,
virtually all of our current work is for branches of the United States military.
We  are  also developing commercial hybrid rocket motors for use in small launch
vehicles,  targets  and  sounding  rockets,  and  small,  high-performance space
vehicles  and  subsystems  for  commercial  customers.

     During  2005, approximately 91% of our net sales were generated from direct
government  contracts,  approximately  7% were generated from government-related
work through subcontracts with others, while the remaining 2% was generated from
commercial  contracts.  In  2004,  approximately  90%  of  our  net  sales  were
generated  by  government  or government-related work.  We will continue to seek
both  government  and  commercial  business  and  anticipate that net sales from
government  sources  will continue to represent in excess of 70% of our historic
SpaceDev  business'  net  sales  for  the  next  several  years  as  we increase
government  and commercial marketing efforts for both our technology and product
areas.  Currently,  we  are  focusing  on  the domestic United States government
market,  which we believe is only about one-half of the global government market
for  our  technology,  products  and  services.  Although  we  are interested in
exploring international revenue and contract opportunities, we are restricted by


                                      PAGE 18


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

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

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

     STARSYS

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

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

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

     FINANCING

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

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


                                      PAGE 19


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

SELECTION  OF  SIGNIFICANT  CONTRACTS

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

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

     On  October  2,  2003,  we were awarded an exclusive, follow-on contract to
provide  the  hybrid  rocket  motor systems and components for SpaceShipOne.  We
provided  our  facilities,  resources  and  a  team of launch vehicle and hybrid
propulsion  engineers  and  technical  personnel  to  support  the  SpaceShipOne
program.  The  contract  called  for  us  to use our best efforts to satisfy the
requirements of the SpaceShipOne program, based on our experience with the prior
phases.  We  provided  re-usable  flight  test  hardware,  including a bulkhead,
commonly known as the SpaceDev bulkhead, machined in the flight configuration, a
main oxidizer valve of the current design and associated interfaces and plumbing
to  the  SpaceDev  bulkhead,  a motor control system, igniter housings, pressure
transducers,  and  thermocouples  as  required  for  input  to the motor control
system.  In  addition,  we produced and assembled test motors, including but not


                                      PAGE 20


limited to, all expendable or semi-reusable materials as defined by our baseline
design  motor.  We  also provided on-site engineering test support and post-test
analysis.  Provisions  were made in the contract for minimum monthly payments in
the  event of customer schedule slippage as well as additional levels of support
via  engineering  change  orders,  if  required.  The  total  contract value was
originally  estimated  at  $615,000.  Approximately  $686,000  of  revenue   was
realized  in  the year ended December 31, 2004, with approximately $180,000 from
engineering  change  orders  and the remaining $506,000 from the contract. There
were  no  revenues  generated  from  SpaceShipOne  in  2005.

     On  July  9,  2003,  we  were  awarded  a Phase I Small Business Innovation
Research  contract by Air Force Research Lab to design and effectively begin the
development of our small launch vehicle.  The SpaceDev Small Launch Vehicle will
be  designed to responsively and affordably lift up to 1,000 pounds to Low Earth
Orbit.  The  concept  is  based  on a proprietary combination of technologies to
increase  the  performance  of  hybrid  rocket  motor technology.  Hybrid rocket
motors  are  a  combination  of  solid  fuel  and  liquid  oxidizer,  and can be
relatively  safe, clean, non-explosive, and storable, and can be throttled, shut
down and restarted.  This contract was valued at approximately $100,000, and was
a fixed price, milestone-based agreement, which was completed in about one year.
Phase  II  of  this  Small  Business  Innovation  Research  grant was awarded on
September  29,  2004  and  is  worth  approximately  $1.6 million.  The contract
outlines  the  development  and test firing of our large Common Core Booster for
the  SpaceDev  Small Launch Vehicle.  Congress has awarded us approximately $3.0
million  in  additional funding for this project, which became available in late
2005.  We  believe  that  there  is additional interest by Congress in providing
further  funding  to expand and accelerate the scope of the work; however, there
can  be  no  assurance  that such work will be awarded to us.  Revenue from this
project  for  the  year  ended  December 31, 2005 was approximately $750,000 for
Phase  II.  Revenue  from  this project for the year ended December 31, 2004 was
approximately  $58,000  for  Phase  I  and  approximately $161,000 for Phase II.

     On  April  30,  2002,  we  were  awarded Phase I of a contract to develop a
Shuttle-compatible  propulsion module for the Air Force Research Laboratory.  We
received  an  award for Phase II of the contract on March 28, 2003, and used the
project  to further expand our product line to satisfy commercial and government
space  transportation  requirements.  The  first  two  phases  of  the  contract
(including  an  additional add-on option) were worth approximately $2.5 million,
of  which  $100,000  was awarded for Phase I, and approximately $1.4 million was
awarded  for Phase II.  Phase II is a cost-plus fixed fee contract.  In order to
complete  Phase  II,  we requested and were granted approximately four months of
additional  time  and approximately $240,000 of additional funding, memorialized
by  a  contract  amendment executed on July 7, 2004.  In addition to the Phase I
and Phase II awards, there was an option worth approximately $800,000, which was
initiated  on  May  3,  2004, of which approximately $565,000 was funded and the
balance to complete Phase II remains unfunded.  Part of the funding for Phase II
came  from  the  original  $1  million  option;  thereby  reducing the option to
approximately  $800,000.   An  additional   effort  to  develop  a  miniaturized
Shuttle-compatible  propulsion  module  has  been  added  to this contract worth
approximately  $150,000.  Revenue  for  the  year  ended  December  31, 2004 was
approximately  $1.2  million  for  Phase II, including the exercised option, and
approximately  $159,000  for  the  new  add  on contract.   There was no revenue
generated  from  this  program  in  2005.

RESULTS  OF  OPERATIONS

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

Net  Sales

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


                                      PAGE 21


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

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

Cost  of  Sales

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

Operating  Expenses

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

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

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

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


                                      PAGE 22


Non-Operating  Expense  (Income)

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

-    We  expensed  approximately  $3,000  and  $52,000 in interest for the years
     ended  December  31, 2005 and 2004, respectively. The decrease was due to a
     reduction  in  debt  with  fewer notes payable. We continue to pay interest
     expense  on  certain  capital  leases  and  settlement  notes, although the
     balances  continue  to  decline.

-    We recognized approximately $106,000 and $19,500 in interest income in 2005
     and 2004, respectively. The increase is due to an increase in cash balances
     from  various  financing  activities.

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

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

Net  Income  and  EBITDA

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


                                      PAGE 23


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

<TABLE>
<CAPTION>

<S>                             <C>                  <C>
FOR THE YEAR ENDING. . . . . .  DECEMBER 31, 2005    December 31, 2004

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

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



EBITDA  is  a  non-GAAP  financial  measure  and  should not be considered as an
alternative  to  net  income (as an indicator of operating performance) or as an
alternative  to  cash flow (as a measure of liquidity or ability to service debt
obligations).  We  believe  that  EBITDA   provides  an   important   additional
perspective  on  our  operating  results,  our  ability to service our long-term
obligations,  our ability to fund continuing growth, and our ability to continue
as  a  going  concern.  Our management regularly evaluates our progress based on
EBITDA.   Beginning  in 2003 through the year ended December 31, 2005, we showed
continued  improvement  in  net  sales  as  well  as  in  EBITDA.



                               [GRAPHIC  OMITED]



                               [GRAPHIC  OMITED]



                               [GRAPHIC  OMITED]



<TABLE>
<CAPTION>

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

</TABLE>


LIQUIDITY  AND  CAPITAL  RESOURCES

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

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

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

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

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

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


                                      PAGE 26


delivery,  indefinite  quantity  contract  which  can be re-funded up to the $43
million  ceiling  with  other  microsatellites  or  new business without further
signature  authority  for  the  five  year period of the contract.  Although the
Missile  Defense  Agency  contract  was awarded to us, there can be no assurance
that  the contract will be continued through all phases, and, if continued, that
it  will  generate  the  amounts  anticipated.

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

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


CASH  POSITION

     Although we were cash flow positive in 2005, we also raised over $3 million
in cash during the year, mainly through the sale of our common stock through the
exercise  of  stock  options  and  warrants  as  well as the securities purchase
agreement  we  entered  into  in  October  2005.  Our  ability  to increase cash
generation  from  operations and thereby continue as a going concern without the
need  to  raise  equity capital depends upon our ability to ultimately implement
our business plan, which includes (but is not limited to) generating substantial
new revenue from the Missile Defense Agency by successfully performing under our
$43  million  contract and continuing to attract and successfully complete other
government  and  commercial  contracts.  The  Missile Defense Agency contract is
staged,  and  we  cannot guarantee that all subsequent phases will be awarded at
all,  or  if  awarded,  will  be  awarded  to us.  Recent budget cuts may affect
government  spending  on  these  space-based  contracts.

     In  order to perform the Missile Defense Agency contract on schedule and to
successfully  execute  other  existing  and  new business opportunities, we have
substantially  increased  our  staff  and  hired  new   engineers   as  well  as
subcontracted  the work to third parties.  Although we continue to actively seek
to hire spacecraft and propulsion engineers to fulfill existing and new business
demand,  there  can  be  no  assurance  that  we  will  be  able to attract such
engineering  resources  or  if  we  are  able to attract them, that they will be
available  in  the  timeframe  needed  or  for  a  reasonable  cost.

     In addition, we need to continue developing project management expertise to
profitably execute on new business contracts and effectively and efficiently bid
on  and  win  new  business.  We have no current need to draw any funds from our
revolving  credit  facility  and  we  will  only  investigate the possibility of
raising  additional  capital  if  we  have  a compelling need to do so or as new
contracts  and  business  opportunities  materialize.

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


                                      PAGE 27


The warrant is exercisable from October 31, 2005 until October 31, 2010.  During
the  year  ended  December  31, 2004, we raised approximately $6,375,000 in cash
from accredited investors who converted debt into 2,991,417 shares of our common
stock,  through the exercise of options and warrants for 1,748,983 shares of our
common  stock  and by selling 250,000 shares of our preferred stock, which could
be  converted  into  1,623,377 shares of our common stock at a purchase price of
$1.54  per  share.

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

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


CRITICAL  ACCOUNTING  STANDARDS

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

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

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


                                      PAGE 28


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

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

RECENT  ACCOUNTING  PRONOUNCEMENTS

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

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

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

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


                                      PAGE 29


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

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


RISK  FACTORS

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

RISKS  RELATED  TO  OUR  COMPANY

     EACH  OF  SPACEDEV  AND  STARSYS  HAS EXPERIENCED LOSSES FROM OPERATIONS IN
PRIOR  PERIODS  AND  HAS  BEEN  REQUIRED TO SEEK ADDITIONAL FINANCING TO SUPPORT
THEIR  BUSINESSES.

In prior years, both SpaceDev and Starsys have experienced operating losses and,
in some periods, revenues from operations have not been sufficient to fund their
respective  operations.  On  a  pro forma basis, the combined company would have
had  a  net  loss  from operations of $4,962,858 for the year ended December 31,
2004  and  $2,914,960  for the year ended December 31, 2005, assuming the merger
had occurred on January 1, 2004.  The success of the combined company's business
depends upon our ability to generate revenue from existing contracts, to execute
programs  cost-effectively,  to  attract  and  complete  successfully additional
government  and  commercial  contracts,  and to obtain additional financing. The
likelihood  of  our  success  must  be  considered  in  light  of  the expenses,
difficulties  and  delays  frequently  encountered in connection with developing
businesses,  those   historically   encountered   by  us,  and  the  competitive
environment  in  which  we  operate.


                                      PAGE 30


     IF  WE ARE UNABLE TO RAISE CAPITAL, WE MAY BE UNABLE TO FUND OPERATING CASH
SHORTFALLS.

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

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

Some  of our government contracts are phased contracts in which the customer may
determine to terminate the contract between phases for any reason.  Accordingly,
the  entire  contract  amount may not be realized by us.  For example, recently,
SpaceDev  was  informed  by  the  Missile  Defense  Agency  that it would not be
exercising  its  option  for a second cluster of three microsats under the March
31,  2004  Missile  Defense Agency contract.  SpaceDev estimates that the second
cluster  represented  approximately  $10  million  of  the  $43 million of total
potential  payments  under  the contract. In the event that subsequent phases of
some  of  our  government  contracts,  including  but not limited to the Missile
Defense Agency contract, are not awarded to us, it could have a material adverse
effect  on  our  financial  position  and  results  of  operations.

     IF SPACEDEV AND STARSYS FAIL TO INTEGRATE THEIR OPERATIONS EFFECTIVELY, THE
COMBINED  COMPANY  WILL  NOT REALIZE ALL THE POTENTIAL BENEFITS OF THE MERGE AND
MAY  BE  COUNTER  PRODUCTIVE.

     The  integration  of  SpaceDev  and  Starsys  is  ongoing  and  may be time
consuming  and expensive and may disrupt the combined company's operations if it
is not completed in a timely and efficient manner. If this integration effort is
not  successful,  the  combined company's results of operations could be harmed,
employee morale could decline, key employees could leave, customers could cancel
existing  orders  or choose not to place new ones and the combined company could
have  difficulty  entering  into new contracts with customers and complying with
regulatory  requirements.  In  addition,  the  combined  company may not achieve
anticipated  synergies or other benefits of the merger. The combined company may
encounter  difficulties,  costs  and  delays  involved  in  integrating  their
operations,  including  the  following:

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

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

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

-    potential  incompatibility  of  business  cultures;

-    challenges  encountered  in  managing larger, more geographically dispersed
     operation a particular challenge given that SpaceDev's operations have been
     at  a  single  location;

-    the  loss  of  key  employees;


                                      PAGE 31



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

-    potential  incompatibilities  of  processes,  technologies and systems; and

-    potential  difficulties  integrating  and  harmonizing  financial reporting
     systems.

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

     If  the  anticipated benefits of the merger are not realized or do not meet
the expectations of financial or industry analysts, the market price of SpaceDev
common  stock  may  decline.  This  could  occur  if,  among  other  reasons:

-    the  integration  of  the  two  companies  is  unsuccessful;

-    the  combined  company does not achieve the expected benefits of the merger
     as  quickly  as  anticipated  or  the  costs of or operational difficulties
     arising  from  the  merger  are  greater  than  anticipated;

-    the  combined  company's  financial  results  after  the   merger  are  not
     consistent  with  the  expectations  of management or financial or industry
     analysts;

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

-    the  combined  company  experiences  the  loss  of significant customers or
     employees  as  a  result  of  the  merger.

     IF WE FAIL TO INTEGRATE STARSYS, INC., OUR NEW WHOLLY OWNED SUBSIDIARY, OUR
CASH  FLOW  AND  OPERATING  RESULTS  COULD  BE  ADVERSELY  AFFECTED.

     We  recently acquired Starsys, Inc., as a subsidiary of SpaceDev, which was
insolvent  at  the  time of the merger and we have begun making post-acquisition
cash  investments  into  Starsys.  As  stated  previously,  each of SpaceDev and
Starsys  has experienced losses from operations in prior periods, requiring that
we  seek  additional  financing  to support our businesses.  Our operating plans
assume  revenue  and cash growth from SpaceDev and Starsys.  If we are unable to
effectively integrate our new subsidiary, or if we are unable to create positive
cash  flow within SpaceDev or Starsys, our cash flow and operating results could
be  adversely  affected.

     WE  RELY  ON  A  SMALL  NUMBER  OF  CUSTOMERS  FOR SUBSTANTIALLY ALL OF OUR
REVENUES AND THE LOSS OF ONE OR MORE OF THESE CUSTOMERS WOULD SERIOUSLY HARM OUR
BUSINESS.

     For  the  2004  and  2005  fiscal  years,  two   customers   accounted  for
approximately  76%  and  90%  of  SpaceDev's  net  sales.  We  expect  that  our
dependence  on  a small number of government agency customers will continue into
the  foreseeable  future.  Many  of  our  contracts  are   staged,   or  contain
termination  rights  in  favor  of  the  customer.  In  the  event we experience
terminations  or  are not awarded future stages of our contracts, or fall out of
favor  with  one  or  more  of these government agency customers, our results of
operations  could  be  materially  adversely  affected.


                                      PAGE 32


     A  SUBSTANTIAL  PORTION  OF  OUR  NET  SALES  ARE GENERATED FROM GOVERNMENT
CONTRACTS,  WHICH  MAKES  US  SUSCEPTIBLE  TO  THE UNCERTAINTIES INHERENT IN THE
GOVERNMENT  BUDGETING  PROCESS.  IN  ADDITION,  MANY  OF  OUR  CONTRACTS  CAN BE
TERMINATED  BY  THE  CUSTOMER.

     Our  concentration  of  government  work makes us susceptible to government
budget  cuts  and policy changes, which may impact the award of new contracts or
future phases of existing contracts.  Government budgets (both in general and as
to  space and defense projects) are subject to the prevailing political climate,
which  is  subject to change at any time.  Additionally, awarded contracts could
be  altered  or terminated prior to the time we recognize our projected revenue.
Many  contracts  are awarded in phases where future phases are not guaranteed to
us.  In  addition, obtaining contracts and subcontracts from government agencies
is  challenging, and contracts often include provisions that are not standard in
private  commercial  transactions.  For  example,  government  contracts  may:

-    include  provisions  that  allow  the  government  agency  to terminate the
     contract  without  penalty  under  some  circumstances;

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

-    contain  onerous  procurement  procedures;  and,

-    be  subject  to  cancellation  if  government  funding becomes unavailable.

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

     SPACEDEV  COMMON  SHAREHOLDERS  WILL  EXPERIENCE  DILUTION IF OUR PREFERRED
STOCK  IS  CONVERTED  OR  OUR  OUTSTANDING  WARRANTS  AND OPTIONS ARE EXERCISED.

     As  of  March  3,  2006, SpaceDev is obligated to issue 9,776,177 shares of
SpaceDev  common  stock  if all of SpaceDev's outstanding warrants are exercised
and  shares  of  preferred  stock  converted.  In addition, as of March 3, 2006,
SpaceDev  has  outstanding  stock options to purchase an aggregate of 11,162,560
shares  of SpaceDev common stock, of which 10,462,560 are currently vested.  The
total number of shares, issuable upon the exercise of currently vested warrants,
options  and preferred stock (20,238,737 shares) represents approximately 71% of
SpaceDev's  issued  and  outstanding shares of common stock as of March 3, 2006.

     SPACEDEV'S  LIMITED  OPERATING HISTORY AND LACK OF EXPERIENCE IN OUR NEW OR
PROPOSED  LINES  OF  BUSINESS  MAKES  IT  DIFFICULT TO PREDICT SPACEDEV'S FUTURE
PROSPECTS.

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


                                      PAGE 33


     WE  MAY  NOT  SUCCESSFULLY  OR  TIMELY  DEVELOP  PRODUCTS.

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

     WE PROVIDE OUR PRODUCTS AND SERVICES PRIMARILY THROUGH FIXED-PRICE AND COST
PLUS  FIXED  FEE  CONTRACTS.  STARSYS  HAS  EXPERIENCED  SIGNIFICANT  LOSSES  ON
FIXED-PRICE  CONTRACTS.  COST  OVERRUNS  MAY  RESULT  IN  FURTHER LOSSES AND, IF
SIGNIFICANT,  COULD  IMPAIR  OUR  LIQUIDITY  POSITION.

     Under  fixed-price  contracts,  our customers pay us for work performed and
products  shipped  without  adjustment  for  the  costs we incur in the process.
Therefore,  we generally bear all or a significant portion of the risk of losses
as  a  result  of  increased  costs on these contracts.  Starsys has experienced
significant  cost  overruns  on  development  projects  under  its   fixed-price
contracts,  resulting  in  estimated  losses  on  uncompleted  contracts of $2.7
million  for Starsys' fiscal 2004, and an additional $2.5 million for the twelve
months  ended  December  31,  2005.  As  of December 31, 2005, based on a formal
evaluation  process,  Starsys  reserved  $879,351  for  potential risks on these
remaining  development  projects.  Fixed-price contracts may provide for sharing
of unexpected costs incurred or savings realized within specified limits and may
provide  for adjustments in price depending on actual contract performance other
than  costs.  We  bear  the  entire  risk  of  cost  overruns  in  excess of the
negotiated  maximum  amount  of  unexpected  costs to be shared. Any significant
overruns  in  the  future  could materially impair our liquidity and operations.

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

     THE  MARKETPLACE  FOR  OUR  TECHNOLOGY  AND  PRODUCTS  IS  UNCERTAIN.

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


                                      PAGE 34


     WE  EXPECT  OUR  OPERATING  RESULTS  TO FLUCTUATE ON A QUARTERLY AND ANNUAL
BASIS,  WHICH  COULD  CAUSE  OUR  STOCK  PRICE  TO  FLUCTUATE  OR  DECLINE.

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

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

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

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

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

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

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

-    delays  or  failures  to  satisfy  our obligations under our contracts on a
     timely  basis;

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

-    the  uncertain  market  for  our  technology  and  products;

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

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

     As a result of these factors, period-to-period comparisons of our operating
results  may not be meaningful, and you should not rely on them as an indication
of our future performance. In addition, our operating results may fall below the
expectations  of  public  market analysts or investors. In this event, our stock
price  could  decline  significantly.

     WE  FACE  SIGNIFICANT  COMPETITION AND MANY OF OUR COMPETITORS HAVE GREATER
RESOURCES  THAN  WE  DO.

     We  face  significant  competition  for  our   government   and  commercial
contracts.  Many of our competitors have greater resources than we do and may be
able  to  devote  greater  resources  than  us  to  research and development and
marketing.  Given  the  sophistication  inherent  in  our   operations,   larger
competitors may have a significant advantage and may be able to more efficiently
adapt and implement technological advances.  In addition, larger and financially
stronger  corporations  have  advantages  over us in obtaining space and defense
contracts  due  to  their  superior  marketing   (lobbying)  resources  and  the
perception  that  they  are  a  better   choice  than   smaller   companies  for
mission-critical  projects  because  of  the higher likelihood that they will be
able  to  continue in business for the necessary future period.  Furthermore, it
is  possible  that other domestic or foreign companies or governments, some with
greater  experience  in  the  space  industry  and  many  with greater financial
resources  than  we  possess,  could  seek  to produce products or services that
compete  with  our   products  or   services,   including   new  mechanisms  and
electromechanical  subsystems  using  new  technology  which  could  render  our


                                      PAGE 35


products  less  viable.  Some of our foreign competitors currently benefit from,
and  others  may  benefit in the future from, subsidies from or other protective
measures  implemented  by  their  home  countries.

     OUR  PRODUCTS  AND SERVICES MAY NOT FUNCTION WELL UNDER CERTAIN CONDITIONS.

     Most of our products are technologically advanced and tested, but sometimes
are  not  space  qualified for performance under demanding operating conditions.
Our  products  may  not  be  successfully  launched  or  operated, or perform as
intended. Like most organizations that have launched satellite programs, we have
experienced  and  in  the future will likely experience some product and service
failures,  cost overruns, schedule delays, and other problems in connection with
our  products.  Our products and services are and will continue to be subject to
significant  technological  change  and  innovation.  Our success will generally
depend  on  our  ability to continue to conceive, design, manufacture and market
new  products  and  services on a cost-effective and timely basis. We anticipate
that  we  will  incur significant expenses in the design and initial manufacture
and  marketing  of  new  products  and  services.

     LAUNCH  FAILURES  OR  DELAYS  COULD  HAVE  SERIOUS  ADVERSE  EFFECTS ON OUR
BUSINESS.

     A  single  launch  failure of one of our microsatellites could have serious
adverse  effects  on  our  business.  Microsatellite  launches  are  subject  to
significant  risks,  the  realization  of which can cause disabling damage to or
total loss of a microsatellite, as well as damage to our reputation among actual
and  potential  customers.  Delays in the launch could also adversely affect our
net  sales.  Delays  could  be  caused  by  a  number  of  factors,  including:

-    designing,  constructing,  integrating,  or  testing   the  microsatellite,
     microsatellite  components,  or  related  ground  systems;

-    delays  in  receiving  the  license necessary to operate the microsatellite
     systems;

-    delays  in  obtaining  the  customer's  payload;

-    delays  related  to  the  launch  vehicle;

-    weather;  and

-    other  events  beyond  our  control.

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

     OUR  U.S. GOVERNMENT CONTRACTS ARE SUBJECT TO AUDITS THAT COULD RESULT IN A
MATERIAL  ADVERSE AFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS IF
A  MATERIAL  ADJUSTMENT  IS  REQUIRED.

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


                                      PAGE 36


     OUR  SUCCESS  DEPENDS  ON  OUR  ABILITY  TO  RETAIN  OUR KEY PERSONNEL. THE
DECEMBER  2005 ACCELERATION OF VESTING ALL OUTSTANDING STOCK OPTIONS REDUCED THE
EFFECTIVENESS  OF  THE  STOCK  OPTIONS  AS  A  RETENTION  DEVICE.

     Our  success  will  be  dependent  upon  the  efforts of key members of our
management  and  engineering  team,  including our chairman and chief technology
officer, James W. Benson, our chief executive officer and vice-chairman, Mark N.
Sirangelo,  our  president  and chief financial officer, Richard B. Slansky, our
vice president of engineering, Frank Macklin, our vice president of programs and
new  business  development,  Randall  K. Simpson, the chief executive officer of
Starsys,  Scott  Tibbitts,  the  president of Starsys, Robert Vacek, and certain
other  SpaceDev  and  Starsys  personnel.  The  loss of any of these persons, or
other  key  employees, including personnel with security clearances required for
classified  work  and  highly  skilled  technicians  and engineers, could have a
material  adverse  effect  on  us.  Our  future  success  is  likely  to  depend
substantially  on  our  continued ability to attract and retain highly qualified
personnel.  The  competition for such personnel is intense, and our inability to
attract and retain such personnel could have a material adverse effect on us. At
this time we do not maintain key man life insurance on any of our key personnel.

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

     OUR GROWTH MAY NOT BE MANAGEABLE AND OUR BUSINESS COULD SUFFER AS A RESULT.

     Even  if we are successful in obtaining new business, failure to manage the
growth could adversely affect our operations. We may experience extended periods
of  very rapid growth, which could place a significant strain on our management,
operating,  financial and other resources. Our future performance will depend in
part  on  our  ability  to manage growth effectively. We must develop management
information  systems,  including  operating,  financial, and accounting systems,
improve  project  management systems and processes and expand, train, and manage
our  workforce  to  keep  pace  with  growth.  Our  inability  to  manage growth
effectively  could  negatively  affect  results of operations and the ability to
meet  obligations  as  they  come  due.

     WE MAY NOT ADDRESS SUCCESSFULLY THE PROBLEMS ENCOUNTERED IN CONNECTION WITH
POTENTIAL  FUTURE  ACQUISITIONS.

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

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

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

-    unanticipated  costs  associated  with  the  acquisition;

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

                                      PAGE 37


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

-    incompatibility  of  business  cultures;

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

-    potential  loss  of  key  employees  of  acquired  businesses;  and

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

     IF  OUR  KEY  SUPPLIERS  FAIL TO PERFORM AS EXPECTED, OUR REPUTATION MAY BE
DAMAGED.  WE  MAY  EXPERIENCE  DELAYS, LOSE CUSTOMERS AND EXPERIENCE DECLINES IN
REVENUES,  PROFITABILITY,  AND  CASH  FLOW.

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

     OUR  LIMITED  INSURANCE MAY NOT COVER ALL RISKS INHERENT IN OUR OPERATIONS.

     We  may  find  it  difficult  to  insure  certain  risks  involved  in  our
operations,  including  our  launch vehicle and satellite operations, accidental
damage  to  high  value  customer  hardware during the manufacturing process and
damages  to  customer  spacecraft  caused  by  our  products   not   working  to
specification.  Insurance market conditions or factors outside of our control at
the  time insurance is purchased could cause premiums to be significantly higher
than current estimates. Additionally, the U.S. Department of State has published
regulations  which  could  significantly  affect  the  ability  of  brokers  and
underwriters  to  insure certain launches. These factors could cause other terms
to be significantly less favorable than those currently available, may result in
limits  on  amounts  of  coverage  that  we  can  obtain, or may prevent us from
obtaining  insurance  at  all.  Furthermore,  proceeds from insurance may not be
sufficient  to  cover  losses.

     SEVERAL  YEARS  OF  LOW DEMAND AND OVERCAPACITY IN THE COMMERCIAL SATELLITE
MARKET  HAVE  RESULTED  IN  SLOW  GROWTH  IN  DEMAND  FOR  SPACE  PRODUCTS.

     The  commercial  satellite  market has experienced pricing pressures due to
excess  capacity in the telecommunications industry and weakened demand over the
past  several years.  Satellite demand, and thus subsystem and component orders,
have  also  been  impacted  by  the  business  difficulties  encountered  by the
commercial satellite services industry.  This has resulted in a reduction in the
total  market  size  in  the near term.  While the market appears to be making a
recovery,  growth  in  the  demand  for  our  products  may  be  limited.


                                      PAGE 38


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

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

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

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

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

     CLAIMS  BY  OTHER COMPANIES THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY
OR  THAT  PATENTS  ON  WHICH  WE  RELY  ARE  INVALID  COULD ADVERSELY AFFECT OUR
BUSINESS.

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

     Other  companies or entities also may commence actions seeking to establish
the  invalidity of our patents. In the event that one or more of our patents are
challenged,  a  court  may invalidate the patent or determine that the patent is
not  enforceable,  which  could harm our competitive position. If any of our key
patents  are  invalidated, or if the scope of the claims in any of these patents
is  limited  by  court  decision,  we  could  be  prevented  from  licensing the


                                      PAGE 39


invalidated  or limited portion of such patents. Even if such a patent challenge
is  not  successful, it could be expensive and time consuming to address, divert
management  attention  from  our  business  and  harm  our  reputation.

     WE  ARE  SUBJECT  TO  SUBSTANTIAL  REGULATION.  ANY  FAILURE TO COMPLY WITH
EXISTING  REGULATIONS,  OR INCREASED LEVELS OF REGULATION, COULD HAVE A MATERIAL
ADVERSE  EFFECT  ON  US.

     Our  business  activities  are subject to substantial regulation by various
agencies  and  departments  of  the  United  States  government  and, in certain
circumstances,  the governments of other countries. Several government agencies,
including NASA and the U.S. Air Force, maintain Export Control Offices to ensure
that  any  disclosure  of scientific and technical information complies with the
Export  Administration  Regulations  and  the  International  Traffic  in   Arms
Regulations,  or  "ITAR."  Exports  of  our  products,  services  and  technical
information  require  either  Technical  Assistance  Agreements,   manufacturing
license  agreements  or  licenses from the U.S. Department of State depending on
the  level  of  technology  being  transferred. This includes recently published
regulations restricting the ability of U.S.-based companies to complete offshore
launches,  or  to  export certain satellite components and technical data to any
country  outside  the  United  States. The export of information with respect to
ground-based sensors, detectors, high-speed computers, and national security and
missile  technology  items are controlled by the Department of Commerce. Failure
to  comply  with the ITAR and/or the Commerce Department regulations may subject
guilty  parties  to fines of up to $1 million and/or up to 10 years imprisonment
per  violation.

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

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

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

     SPACEDEV'S  STOCK  PRICE  HAS  BEEN  AND MAY CONTINUE TO BE VOLATILE, WHICH
COULD  RESULT  IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF SPACEDEV
COMMON  STOCK.

     The  market  prices  of  securities of technology-based companies like ours
particularly  in industries (also like ours) where substantial value is ascribed
to  a hope for future increase in the size of the total market, are often highly
volatile. The market price of SpaceDev common stock has fluctuated significantly
in  the  past. Our market price may continue to exhibit significant fluctuations


                                      PAGE 40


in  response  to  a  variety  of  factors, many of which are beyond our control,
including:

-    deviations  in  our  results  of  operations  from  estimates;

-    changes  in  estimates  of  our  financial  performance;

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

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

-    changes  in  technology;

-    potential  loss  of  key  personnel;

-    short  selling;

-    changes  in  market valuations of similar companies and stock market price;

-    the  Starsys  merger;  and

-    volume  fluctuations  generally,  including  resale's  by  former   Starsys
     stockholders  or  by  Laurus.

     CHANGES  IN STOCK OPTION ACCOUNTING RULES MAY ADVERSELY AFFECT OUR REPORTED
OPERATING  RESULTS  PREPARED  IN  ACCORDANCE  WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES,  OUR STOCK PRICE AND OUR EFFORTS IN RECRUITING ADDITIONAL EMPLOYEES.

     Technology  companies,  in  general,  and our company in particular, depend
upon and use broad based employee stock option programs to hire, incentivize and
retain  employees  in a competitive marketplace. Through fiscal 2005, we did not
recognize  compensation  expense  for  stock  options  issued  to  employees  or
directors, except in limited cases involving modifications of stock options, and
we  instead disclosed in the notes to our financial statements information about
what such charges would be if they were expensed. An accounting standard setting
body  has  adopted  a  new  accounting  standard  that will require us to record
equity-based  compensation expense for stock options and employee stock purchase
plan  rights  granted  to  employees  based  on  the  fair  value  of the equity
instrument  at  the  time of grant. We will be required to record these expenses
beginning  with  the  first quarter of 2006. The change in accounting rules will
lead  to  a  decrease in reported earnings, if we have earnings, or an increased
loss,  if  we  do not have earnings. This may negatively impact our future stock
price.  In addition, this change in accounting rules could impact our ability to
utilize broad based employee stock plans to reward employees and could result in
a  competitive  disadvantage  to  us  in  the  employee  marketplace.


     THE  CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK GIVES A FEW INDIVIDUALS
SIGNIFICANT  CONTROL  OVER IMPORTANT POLICY DECISIONS AND COULD DELAY OR PREVENT
CHANGES  IN  CONTROL.

     As  of  March  3,  2006,  our  executive  officers  and  directors together
beneficially  owned approximately 50.48% of the issued and outstanding shares of
our  common  stock.  As  a result, these persons could have the ability to exert
significant  influence  over  matters  concerning  us, including the election of
directors,  changes  in  the size and composition of the board of directors, and


                                      PAGE 41


mergers  and  other  business  combinations  involving  us. In addition, through
control  of  the board of directors and voting power, our officers and directors
may  be  able  to  control  certain decisions, including decisions regarding the
qualification  and  appointment  of officers, dividend policy, access to capital
(including  borrowing  from  third-party  lenders and the issuance of additional
equity  securities),  and  the  acquisition  or  disposition  of  our assets. In
addition,  the  concentration  of voting power in the hands of those individuals
could  have  the  effect  of  delaying  or preventing a change in control of our
company,  even  if  the  change  in  control  would  benefit our shareholders. A
perception  in  the  investment community of an anti-takeover environment at our
company  could  cause  investors to value our stock lower than in the absence of
such  a  perception.

     SPACEDEV  HAS  NOT  PAID DIVIDENDS ON ITS COMMON STOCK IN THE PAST AND DOES
NOT  ANTICIPATE  PAYING DIVIDENDS ON ITS COMMON STOCK IN THE FORESEEABLE FUTURE.

     SpaceDev  has  not paid common stock dividends since its inception and does
not  anticipate paying dividends in the foreseeable future. Our current business
plan  provides  for  the  reinvestment  of  earnings  in  an  effort to complete
development  of our technologies and products, with the goal of increasing sales
and  long-term  profitability  and  value.  In  addition,  the  revolving credit
facility  with  Laurus  Master  Fund  Ltd.  and the terms of our preferred stock
currently  restrict,  and any other credit or borrowing arrangements that we may
enter  into may in the future restrict or limit, our ability to pay common stock
dividends  to  our  shareholders.

     OUR  EXPANSION  INTO  OTHER  NEW  LINES OF BUSINESS MAY DIVERT MANAGEMENT'S
ATTENTION  FROM  OUR  EXISTING  OPERATIONS  AND  PROVE  TO  BE  TOO  COSTLY.

     Our  current  business  plan  contemplates  the  migration  of   SpaceDev's
technology  from  projects  into  products for microsatellites and hybrid rocket
motors  over the next several years. In the meantime, we are investigating other
applications  of  our  technology  and  other  markets  for our technologies and
prospective  products. Our expansion into new lines of business may be difficult
for  us  to  manage  because  they may involve different disciplines and require
different  expertise  than  our  core business. Consequently, this expansion may
divert  management's  time and attention away from our core business, and we may
need  to  incur  significant  expenses  in  order  to develop the expertise, and
reputation  we  desire.  Any revenues generated by new lines of business may not
be  significant  enough  to  offset  the  expenditures  required  to  enter such
business,  or  provide  the  anticipated  return  on  investment.

     FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS THE PRICE OF THE COMMON STOCK.

     Sales by SpaceDev's current and future shareholders of a substantial number
of  shares, including sales by the Starsys shareholders following the merger, or
the expectation that such sales may occur, could significantly reduce the market
price  of  our  common stock.  As described in a preceding risk factor, SpaceDev
has  a  significant  number of shares that are issuable upon exercise of options
and  warrants  or  upon  conversion  of shares of preferred stock.  All of these
shares  are  either  registered with the SEC and may be sold without restriction
(except  for  volume  limitations  applicable  to  our  officers,  directors and
significant  shareholders  with  respect to their option shares, and contractual
lockup  restrictions  obtained  from  some  of the Starsys shareholders) or have
registration  rights requiring us to register these shares with the SEC.  In the
future,  we may issue additional shares of common stock, convertible securities,
options  and  warrants.

     WE  ARE  SUBJECT TO NEW CORPORATE GOVERNANCE AND INTERNAL CONTROL REPORTING
REQUIREMENTS, AND OUR COSTS RELATED TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY
WITH  EXISTING  AND  FUTURE  REQUIREMENTS  COULD  ADVERSELY AFFECT OUR BUSINESS.

     We  face new corporate governance requirements under the Sarbanes-Oxley Act
of  2002,  as well as new rules and regulations subsequently adopted by the SEC,
the  Public  Company  Accounting Oversight Board and any stock exchange on which
our  stock  may  be  listed  in  the  future.  These laws, rules and regulations
continue  to  evolve  and  may  become  increasingly stringent in the future. In


                                      PAGE 42


particular, we will be required to include management and independent registered
public accounting firm reports on internal controls as part of our annual report
for  the  year  ended  December  31,  2007  pursuant  to  Section  404   of  the
Sarbanes-Oxley  Act.  We  are in the process of evaluating our control structure
and  processes to help ensure that we will be able to comply with Section 404 of
the  Sarbanes-Oxley  Act.  We  cannot  assure  you that we will be able to fully
comply with these laws, rules and regulations that address corporate governance,
internal  control  reporting  and similar matters.  Failure to comply with these
laws,  rules  and  regulations could materially adversely affect our reputation,
financial  condition  and  the  value  of  our  securities.

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

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

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

     Transactions  in  SpaceDev common stock are currently subject to the "penny
stock"  rules promulgated under the Securities Exchange Act of 1934. Under these
rules,  broker-dealers  who  recommend SpaceDev securities to persons other than
institutional  accredited  investors  must:

-    make  a  special  written  suitability  determination  for  the  purchaser;

-    receive  the  purchaser's written agreement to a transaction prior to sale;

-    provide the purchaser with risk disclosure documents which identify certain
     risks  associated  with  investing in "penny stocks" and which describe the
     market  for  these  "penny stocks" as well as a purchaser's legal remedies;
     and

-    obtain  a  signed and dated acknowledgment from the purchaser demonstrating
     that  the  purchaser  has  actually  received  the required risk disclosure
     document  before  a  transaction  in  a  "penny  stock"  can  be completed.

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


                                      PAGE 43


ITEM  7.     FINANCIAL  STATEMENTS

     Please see our audited financial statements for the year ended December 31,
2005  as  compared  to  the  year  ended  December  31,  2004  attached  hereto.

ITEM  8.     CHANGES  IN  AND  DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL  DISCLOSURE

     None.

ITEM  8A.       CONTROLS  AND  PROCEDURES

     Mark N. Sirangelo, our chief executive officer, and Richard B. Slansky, our
chief  financial  officer,  after evaluating the effectiveness of our disclosure
controls  and  procedures (as defined in Securities Exchange Act Rule 13a-15(e))
have  concluded  that,  as  of  December  31,  2005, our disclosure controls and
procedures  are  effective.

ITEM  8B.       OTHER  INFORMATION

None.


                                      PAGE 44


                                    PART III

ITEM  9.  DIRECTORS,  EXECUTIVE  OFFICERS,   PROMOTERS   AND   CONTROL  PERSONS;
COMPLIANCE  WITH  SECTION  16(A)  OF  THE  EXCHANGE  ACT

     The  following are the current directors and executive officers of SpaceDev
and  their  background  and  ages  as  of  March  3,  2006.
<TABLE>
<CAPTION>




<S>                                            <C>  <C>
NAME. . . . . . . . . . . . . . . . . . . . .  AGE  TITLE
James W. Benson . . . . . . . . . . . . . . .   60  Chairman of the Board and Chief Technology Officer
Mark N. Sirangelo . . . . . . . . . . . . . .   45  Vice Chairman of the Board and Chief Executive Officer
Richard B. Slansky. . . . . . . . . . . . . .   48  President, Chief Financial Officer, Corporate Secretary and Director
Scott Tibbitts. . . . . . . . . . . . . . . .   48  Managing Director and Director
Robert Vacek. . . . . . . . . . . . . . . . .   44  President of Starsys, Inc.
Frank Macklin . . . . . . . . . . . . . . . .   48  Vice President, Engineering
Randall K. Simpson. . . . . . . . . . . . . .   59  Vice President, New Business Development & Project Management
Stuart Schaffer . . . . . . . . . . . . . . .   46  Director
Wesley T. Huntress *. . . . . . . . . . . . .   63  Director
Curt Dean Blake * . . . . . . . . . . . . . .   48  Director
General Howell M. Estes, III (USAF Retired) *   64  Director
Robert S. Walker *. . . . . . . . . . . . . .   63  Director
Scott McClendon * . . . . . . . . . . . . . .   66  Director
Susan Benson. . . . . . . . . . . . . . . . .   60  Director

*  Denotes  Independent  Director

</TABLE>

     James W. Benson is SpaceDev's founder and has served as SpaceDev's chairman
of  the  board  since  October  1997.  Mr. Benson also served as chief executive
officer  of SpaceDev from October 1997 until December 2005, at which time he was
succeeded  by  Mark  N.  Sirangelo  in such position and became SpaceDev's chief
technology  officer.  In 1984, Mr. Benson founded Compusearch Corporation (later
renamed  Compusearch Software Systems) in McLean, Virginia, which was engaged in
the  development  of software algorithms and applications for personal computers
and  networked  servers  to  create  full text indexes of government procurement
regulations  and  to  provide instant full text searches for any word or phrase.
In  1989, Mr. Benson started the award-winning ImageFast Software Systems, which
later  merged  with  Compusearch.  In  1995,  Mr.  Benson  sold  Compusearch and
ImageFast,  and  retired  at  age  fifty.  Mr.  Benson started SpaceDev, Inc., a
Nevada  corporation,  which was acquired by Pegasus Development Corp, a Colorado
corporation,  in October of 1997. Mr. Benson acquired a controlling ownership in
Pegasus  and  later  changed  its  name  to  SpaceDev, Inc.   Mr. Benson holds a
bachelor's  degree  in  Geology from the University of Missouri.  He founded the
non-profit  Space  Development Institute, and introduced the $5,000 Benson Prize
for  Amateur  Discovery  of  Near  Earth  Objects.  He is also vice chairman and
private  sector  representative on NASA's national Space Grant Review Panel, and
is  a  member  of  the  American Society of Civil Engineers subcommittee on Near
Earth  Object Impact Prevention and Mitigation.  Mr. Benson and Susan Benson are
married  but  separated.

     Mark  N.  Sirangelo  was a member of QS Advisors, LLC, and also a member of
The  QuanStar  Group  LLC, strategic and business advisors to SpaceDev, until he
was  appointed vice chairman and chief executive officer of SpaceDev in December


                                      PAGE 45


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

     Richard  B.  Slansky  is  currently  SpaceDev's  president, chief financial
officer,  director  and corporate secretary.  He joined SpaceDev on February 10,
2003  as  chief financial officer and corporate secretary. In November 2004, Mr.
Slansky  was appointed as president and director.  Mr. Slansky served as interim
chief executive officer, interim chief financial officer, and director for Quick
Strike  Resources, Inc., an IT training, services and consulting firm, from July
2002  to February 2003.  From May 2000 to July 2002, Mr. Slansky served as chief
financial  officer, vice president of finance, administration and operations and
corporate  secretary  for  Path  1  Network Technologies, Inc., a public company
focused on merging broadcast and cable quality video transport with IP networks.
Mr.  Slansky  is  currently serving on the Board of Directors of several private
companies.  Mr. Slansky earned a bachelor's degree in economics and science from
the  University  of  Pennsylvania's  Wharton  School  of Business and a master's
degree  in business administration in finance and accounting from the University
of  Arizona.

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

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

     Frank  Macklin was appointed as SpaceDev's vice president of Engineering in
2004.  Mr.  Macklin  has  been  SpaceDev's  chief  engineer of hybrid propulsion
systems  and  the  technical  leader  for  SpaceDev's   National  Reconnaissance
Office-funded SPOTV Hybrid System Definition study, and is acting chief engineer
for  SpaceDev's  Maneuvering  and  Orbital  Transfer  Vehicle  Hybrid Technology
Development  and  X-Motor  Development.  Mr. Macklin was a founder of Integrated
Space  Systems,  Inc.,  which was acquired by SpaceDev in 1998. Mr. Macklin is a
California  State  registered professional electrical engineer with more than 20
years  of experience with launch vehicles, ground launch control systems, launch
sites and launch teams. Mr. Macklin received his bachelor's degree in electrical
engineering  from San Diego State University and is a California Board Certified
Professional  Engineer.


                                      PAGE 46


     Randall K. Simpson is SpaceDev's vice president of new business development
and  project management, having joined SpaceDev in January 2004. Mr. Simpson has
over  30  years  of  diversified  experience  in  business  development, product
definition,  engineering  development  and support for aerospace, commercial and
international  customers.  From October 2000 to January 2004, Mr. Simpson served
as  assistant  vice  president  of program management for Alvarion, Inc., a high
technology  commercial  communications  firm.  Mr.  Simpson  received  both  his
bachelor's  and  master's degrees in electrical engineering from San Diego State
University.

     Stuart Schaffer was appointed to SpaceDev's Board of Directors in May 2002.
Mr.  Schaffer  is currently the president of vendor affairs for Sicommnet, Inc.,
an  internet  marketplace  company, where both Messrs. McClendon and Slansky are
members  of  the Sicommnet Board of Directors. From August 2003 to January 2005,
Mr.  Schaffer  was  the  vice  president  of  marketing for Overture Performance
Marketing  --  a  business  unit  of Overture Services, which is a subsidiary of
Yahoo!  From May 2002 to August 2003, Mr. Schaffer was SpaceDev's vice president
of  product development/marketing. From 1998 to 2001, Mr. Schaffer acted as vice
president  of marketing for Infocus Corporation. Mr. Schaffer has  a bachelor's
degree  in  physics from Harvey Mudd College and a master's degree from Harvard.

     Wesley  T.  Huntress  was appointed  to SpaceDev's Board of Directors as an
independent director in June 1999, and is a member of SpaceDev's Audit Committee
and  Nominating/Corporate  Governance  Committee.  Dr.  Huntress  is   currently
director of the Geophysical Laboratory at the Carnegie Institution of Washington
in  Washington,  DC,  where he leads an interdisciplinary group of scientists in
the   fields   of   high-pressure   science,    astrobiology,    petrology   and
biogeochemistry. From October 1993 to September 1998, Dr. Huntress served as the
associate  administrator  for Space Science at NASA where he was responsible for
NASA's  programs  in astrophysics, planetary exploration, and space physics. Dr.
Huntress  received his bachelor's degree in chemistry from Brown University, and
his  doctorate in chemical physics from Stanford. He became a permanent research
scientist  at  Jet  Propulsion  Laboratory, or JPL, in 1969. At JPL Dr. Huntress
served as co-investigator for the ion mass spectrometer experiment in the Giotto
Halley's  Comet  mission,  and  as  an interdisciplinary scientist for the Upper
Atmosphere  Research Satellite and Cassini missions. He also assumed a number of
line  and research program management assignments while at JPL, and spent a year
as a visiting professor in the Department of Planetary Science and Geophysics at
Caltech.

     Curt  Dean  Blake  was  appointed  to  SpaceDev's  Board of Directors as an
independent  director  in  September 2000. He serves as chairman of the SpaceDev
Audit  Committee and is a member of SpaceDev's Compensation Committee. Mr. Blake
is  the  chief  executive  officer  of  GotVoice, Inc., a startup company in the
voicemail  consolidation  and  messaging  business. From 1999 to 2002, Mr. Blake
provided  consulting  services  to  various technology companies, including Apex
Digital,  Inc.  and  SceneIt.com.  Mr.  Blake  has  a  master's degree and juris
doctorate  from  the  University  of  Washington.

     General  Howell  M.  Estes,  III (USAF Retired) was appointed to SpaceDev's
Board  of  Directors  as  an  independent director in April 2001, is chairman of
SpaceDev's  Nominating/Corporate  Governance  Committee  and  is  a   member  of
SpaceDev's  Compensation Committee. General Estes retired from the United States
Air  Force  in  1998  after  serving  for  33  years.  At  that  time he was the
Commander-in-Chief  of  the  North  American  Aerospace  Defense Command and the
United  States  Space  Command, and the Commander of the Air Force Space Command
headquartered at Peterson Air Force Base, Colorado. In addition to a bachelor of
science  degree  from the Air Force Academy, he holds a master of arts degree in
public  administration  from  Auburn University and is a graduate of the Program
for  Senior  Managers  in  Government  at Harvard's J.F.K. School of Government.
General  Estes is the president of Howell Estes & Associates, Inc., a consulting
firm  to  chief executive officers, presidents and general managers of aerospace
and  telecommunications  companies  worldwide. He serves as vice chairman of the
Board of Trustees at The Aerospace Corporation. He served as a consultant to the


                                      PAGE 47


Defense  Science  Board  Task  Force on Space Superiority and more recently as a
commissioner  on  the  U.S.  Congressional  Commission  to  Assess United States
National  Security Space Management and Organization, also known as the Rumsfeld
Commission.

     Robert  S.  Walker  was  appointed  to  SpaceDev's Board of Directors as an
independent  director  in  April  2001.  He  is currently a member of SpaceDev's
Nominating/  Corporate Governance Committee. Mr. Walker has acted as chairman of
Wexler & Walker Public Policy Associates in Washington, D.C. since January 1997.
Mr.  Walker  was  a  member of the U.S. House of Representatives from 1977-1997,
during  which  time  he  served as chairman of the House Science Committee, vice
chairman  of  the  Budget  Committee,  and  participated  in  House   Republican
leadership activities. Mr. Walker was the first sitting member of the U.S. House
of Representatives to be awarded NASA's highest honor, the Distinguished Service
Medal.  Mr.  Walker was on the Board of Directors of Aerospace Corporation, from
March  1997  to November 2005. Mr. Walker is currently on the Board of Directors
of  the  Zero  Gravity  Company,  and  became chairman of the board of the Space
Foundation  in  January  2006.

     Scott  McClendon  was  appointed  to  SpaceDev's  Board  of Directors as an
independent  director in July 2002. He is currently a member of SpaceDev's Audit
Committee  and  chairman  of  SpaceDev's  Compensation  Committee. Mr. McClendon
currently  sits  on  the Board of Directors for Overland Storage, Inc., a public
data  storage  company,  where  he  is  the chairman of the Board. He became the
chairman  of  the  Board  after serving as president and chief executive officer
from  October  1991 to March 2001. In addition to SpaceDev and Overland Storage,
Mr.  McClendon  is  currently  serving  on  the  Board  of  Directors of Procera
Networks,  Inc., a public-company. Mr. McClendon received a bachelor's degree in
electrical  engineering,  and  a  master's degree in electrical engineering from
Stanford  University  School  of  Engineering.

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

COMMITTEES  OF  THE  BOARD  OF  DIRECTORS

     We  have  a  standing audit committee comprised of Messrs. Blake, McClendon
and  Dr.  Huntress.  We  do  not  maintain  any  pension,  retirement  or  other
arrangements  other  than as disclosed in the tables listed within this document
as it pertains to members of the board for compensation.  Our Board of Directors
took  action  sixteen  (16) times during the last fiscal year, with fifteen (15)
being at regular or special meetings attended by the members of the Board either
personally  or  telephonically.  There  was one (1) unanimous written consent in
2005.  Our  Audit  Committee took separate action four (4) times during the last
fiscal  year,  each time at a regular or special meeting attended by a quorum of
the  members  of  the  committee  either  personally  or  telephonically.


SECTION  16  BENEFICIAL  OWNERSHIP  REPORTING  COMPLIANCE

     Based  upon a review of the Forms 3 and 4 furnished to us during 2005, each
of  the Directors and/or Executive Officers timely filed his or her initial Form
3  and  Form  4  under  Section 16(a) of the Securities and Exchange Act of 1934
during  2005 with the following exceptions:   James W. Benson on April 17, 2005,
May  31,  2005,  and  December  23,  2005;  and Susan C. Benson on May 31, 2005.


                                      PAGE 48


CODE  OF  ETHICS  DISCLOSURE

     Our  Board  of  Directors  adopted  a  Code  of Ethics and Business Conduct
applicable  to  the  members  of  the  Board  of  Directors  and the officers of
SpaceDev.  Our chief executive officer, chief financial officer and other senior
officers,  specifically  are  subject  to  the  Code.  A copy of the Code may be
obtained,  at no cost, by contacting Richard B. Slansky, Corporate Secretary.  A
copy  of  the  Code of Ethics is also attached as exhibit 10.15 to the Company's
10-KSB  dated  March  28,  2003.

ITEM  10.     EXECUTIVE  COMPENSATION

EXECUTIVE  OFFICER  COMPENSATION

     Total  compensation  paid  to  our  "named executive officers" for the past
three  fiscal  years is set forth below: The named executive officers consist of
each  person  who  was  our  CEO  at  any  time in 2005 and our four most highly
compensated  officers  other  than  the  CEO(s)  who  were  serving as executive
officers  on  December  31,  2005.


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

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

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


</TABLE>

                                      PAGE 49


     The  following  table  shows  all  stock options granted during 2005 to the
SpaceDev  executive  officers named in the Summary Compensation Table.  No stock
appreciation  rights  were  granted  during  fiscal  year  2005.

OPTION  GRANTS  IN  LAST  FISCAL  YEAR
Individual  Grants

<TABLE>
<CAPTION>

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

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

</TABLE>


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

     The  following  table  reflects  information  for the executive officers of
SpaceDev,  named in the Summary Compensation Table, effective December 31, 2005:


<TABLE>
<CAPTION>

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

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

</TABLE>


LONG-TERM  INCENTIVE  AWARDS

     SpaceDev  did  not  have  any long-term incentive plan awards during fiscal
year  2005.


                                      PAGE 50

DIRECTOR  COMPENSATION

     Our  non-employee  directors received options for attending meetings of the
Board as follows:  each director received an option to purchase 6,000 shares for
each  telephonic  meeting  attended  and an option to purchase 12,000 shares for
each  meeting  attended  in  person,  with a cap of options on 36,000 shares per
year.  Our  non-employee  directors  also  received  compensation  for attending
committee  meetings  as  follows:  each  director received an option to purchase
5,000  shares  for  each  Audit  Committee meeting attended, each director shall
receive  an  option  to  purchase  2,500  shares for each Compensation Committee
meeting  attended  and each director received an option to purchase 2,500 shares
for  each  Nominating/Governance Committee meeting attended,  which options were
not  subject to a cap.  In addition to the above, non-employee directors receive
options  for  5,000  shares  on  the  date  of election or appointment. All such
options  were issued pursuant to the 1999 Stock Option Plan at fair market value
as  of the date of the meeting attended, vest 50% on  the first anniversary date
of the date of grant and 50% on the second anniversary date of grant, and expire
on  the  three-year  anniversary  of  the  grant  date.

     The  following  table  sets  forth  the  remuneration paid to our directors
during  the  fiscal  year  ended  December 31, 2005, including options issued to
directors  for projected service in 2006. We issued 2006 compensation in advance
to  our  December  2005 directors in order to reduce earnings charges for future
director  consideration  as  a  result  of FAS No. 123R.  The Board will address
non-employee  director  compensation  for 2007 and beyond in 2006. We do not pay
directors who are also officers of the Company additional compensation for their
service  as  directors.


<TABLE>
<CAPTION>
                                      Cash Compensation                   Security Grants
                               ---------------------------------     ------------------------
<S>                            <C>          <C>       <C>            <C>         <C>

                               Annual       Meeting   Consulting     Number of   Number of
                               Retainer     Fees      Fees/Other     Shares      Securities
                               Fees                   Fees                       Underlying
                                                                                 Options/SARs
-----------------------------  --------     -------   ----------     ---------   ------------
Name
-----------------------------  --------     -------   ----------     ---------   ------------
Mark N. Sirangelo                     -           -            -             -              -
-----------------------------  --------     -------   ----------     ---------   ------------
James W. Benson                       -           -            -             -              -
-----------------------------  --------     -------   ----------     ---------   ------------
Richard B. Slansky                    -           -            -             -              -
-----------------------------  --------     -------   ----------     ---------   ------------
Susan C. Benson                       -           -            -             -              -
-----------------------------  --------     -------   ----------     ---------   ------------
Curt Dean Blake                       -           -            -             -        177,000
-----------------------------  --------     -------   ----------     ---------   ------------
General Howell M. Estes, III          -           -            -             -        103,000
-----------------------------  --------     -------   ----------     ---------   ------------
Wesley T. Huntress                    -           -            -             -        108,000
-----------------------------  --------     -------   ----------     ---------   ------------
Scott McClendon                       -           -            -             -        152,000
-----------------------------  --------     -------   ----------     ---------   ------------
Stuart Schaffer                       -           -            -             -         72,000
-----------------------------  --------     -------   ----------     ---------   ------------
Robert S. Walker                      -           -            -             -         77,000
-----------------------------  --------     -------   ----------     ---------   ------------
-----------------------------  --------     -------   ----------     ---------   ------------
</TABLE>


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

EMPLOYMENT  AGREEMENTS  AND TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE OF
CONTROL  AGREEMENTS
     On  January  31,  2006,  SpaceDev  entered  into  a  three  year  executive
employment  agreement  with  Scott  Tibbitts,  pursuant to which Mr. Tibbitts is
employed  as  managing  director of SpaceDev.  Under the agreement, Mr. Tibbitts
earns  an  annual  base  salary  of  $150,000 and will be eligible for quarterly
performance  bonuses,  as  determined  by  SpaceDev's  board  of   directors  or
compensation  committee,  up  to  an  annual aggregate amount of 50% of his base
salary.  Bonus  milestones  will  be  mutually  agreed upon in good faith by Mr.
Tibbitts  and  by  SpaceDev's  Board  of  Directors  or  Compensation Committee.


                                      PAGE 51


SpaceDev  will  pay severance to Mr. Tibbitts if his employment is terminated by
SpaceDev  without  cause  or  by  Mr.  Tibbitts  for good reason.  The severance
payment  is  equal to: (1) if Mr. Tibbitts' employment is terminated by SpaceDev
without  cause,  his then-current base salary per month multiplied by the number
of  months  remaining in the term of the agreement (prorated with respect to any
partial  month);  or,  (2)  if  Mr.  Tibbitts'  employment  is terminated by Mr.
Tibbitts  for  good reason, his then-current base salary per month multiplied by
the  lesser  of  twelve months and the number of months remaining in the term of
the agreement.  Under the agreement, SpaceDev will indemnify Mr. Tibbitts to the
extent  provided in SpaceDev's articles of incorporation, as may be amended from
time to time, and pursuant to SpaceDev's standard indemnification agreement with
its  officers  and  directors, provided that SpaceDev will have no obligation to
indemnify or defend Mr. Tibbitts for any action, suit or other proceeding to the
extent  based on acts, omissions, events or circumstances occurring prior to the
Starsys  merger.

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

     On  December  20,  2005,  SpaceDev  entered  into  an  executive employment
agreement with Mark N. Sirangelo pursuant to which Mr. Sirangelo was employed as
SpaceDev's  chief  executive  officer  and  vice  chairman. The agreement has an
initial  term  of  two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Sirangelo provides written notice of an intent not
to renew.  Under the agreement, Mr. Sirangelo is entitled to receive; (1) a base
salary  of $22,500 per month, subject to adjustment up to $27,500 per month upon
the  happening  of  certain  events  or  by  the sixteenth month of service; (2)
performance-based  cash  bonuses  based on the achievement of specific goals set
forth  in the agreement (including a bonus of $25,000 upon the completion of the
merger with Starsys); and, (3) a fully-vested option to purchase up to 1,900,000
shares  of  SpaceDev  common  stock under the terms and conditions of a non-plan
stock  option  agreement  between SpaceDev and Mr. Sirangelo.  The option has an
exercise  price  equal  to  $1.40  per  share,  which was the closing sale price
reported on the OTCBB on the date of grant, and will expire five years after the
date  of  grant.  Some  of  the shares subject to the option are subject to sale
restrictions  that expire upon the achievement of certain specific milestones or
four  years  from  the date of grant, whichever comes first.  Subject to certain
limitations, the option may be exercised by means of a net exercise provision by
surrendering  shares  with  a fair market value equal to the exercise price upon
exercise.  SpaceDev  will  pay  severance  to Mr. Sirangelo if his employment is


                                      PAGE 52


terminated  by  SpaceDev without cause or by Mr. Sirangelo for good reason.  The
severance  payment  is equal to: (1) if Mr. Sirangelo's employment is terminated
by  SpaceDev without cause, his then-current base salary per month multiplied by
the  greater  of (A) 12 months or (B) the number of months remaining in the term
of  the  agreement  (prorated  with respect to any partial month); or (2) if Mr.
Sirangelo's  employment  is  terminated  by  Mr.  Sirangelo for good reason, his
then-current  base salary per month multiplied by the lesser of (A) 12 months or
(B)  the  number  of months remaining in the term of the agreement provided that
such  number  of  months  will  not  be  deemed  to  be  less  than  six months.

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

     On  December  20,  2005,  SpaceDev  entered  into  an  executive employment
agreement  with  James  W.  Benson  pursuant  to which Mr. Benson is employed as
SpaceDev's  chairman and chief technology officer.  The agreement supersedes all
prior  employment agreements between SpaceDev and Mr. Benson.  The agreement has
an initial term of two years, and will be automatically renewed for a third year
unless either SpaceDev or Mr. Benson provides written notice of an intent not to
renew.  Under  the  agreement,  Mr.  Benson  is  entitled to receive: (1) a base
salary  of $14,000 per month, subject to adjustment up to $17,000 per month upon
the  happening  of  certain  events  or  by  the sixteenth month of service; (2)
performance-based  cash  bonuses  based on the achievement of specific goals set
forth  in the agreement (including a bonus of $22,500 upon the completion of the
merger  with  Starsys); and, (3) a fully-vested option to purchase up to 950,000
shares  of  SpaceDev  common  stock under the terms and conditions of a non-plan
stock  option  agreement  between  SpaceDev  and  Mr. Benson.  The option has an
exercise  price  equal  to$1.40  per  share,  which  was  the closing sale price
reported on the OTCBB on the date of grant, and will expire five years after the
date  of  grant.  Some  of the shares subject to the options are subject to sale
restrictions  that expire upon the achievement of certain specific milestones or
four  years  from  the date of grant, whichever comes first.  Subject to certain
limitations, the option may be exercised by means of a net exercise provision by
surrendering  shares  with  a fair market value equal to the exercise price upon
exercise.  SpaceDev  will  pay  severance  to  Mr.  Benson  if his employment is


                                      PAGE 53


terminated  by  SpaceDev  without  cause  or by Mr. Benson for good reason.  The
severance  payment  is equal to: (1) if Mr. Benson's employment is terminated by
SpaceDev without cause, his then-current base salary per month multiplied by the
greater  of  (A)  12 months or (B) the number of months remaining in the term of
the  agreement  (prorated  with  respect  to  any  partial month); or (2) if Mr.
Benson's  employment  is  terminated  by  Mr.  Benson  for  good   reason,   his
then-current  base salary per month multiplied by the lesser of (A) 12 months or
(B)  the  number  of months remaining in the term of the agreement provided that
such  number  of  months  will  not  be  deemed  to  be  less  than  six months.

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


ITEM  11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED  STOCKHOLDER  MATTERS

     The following table provides information as of March 3, 2006 concerning the
beneficial  ownership  of  the Company's common stock by (i) each director, (ii)
each  named  executive  officer,  (iii)  each  stockholder known by us to be the
beneficial  owner of more than 5% of the Company's outstanding Common Stock, and
(iv)  the  directors  and  executive  officers  as a group.  Except as otherwise
indicated,  the  persons named in the table have sole voting and investing power
with  respect  to  all  shares  of  Common  Stock  owned  by  them.


<TABLE>
<CAPTION>

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

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

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

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

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

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

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

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

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

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

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

</TABLE>

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

                                      PAGE 54


(1)  Where  persons  listed  on  this  table have the right to obtain additional
     shares  of  Common  Stock  through  the  exercise of outstanding options or
     warrants  or  the  conversion of convertible securities within 60 days from
     March 3, 2006, these additional shares are deemed to be outstanding for the
     purpose  of computing the percentage of common stock owned by such persons,
     but  are not deemed outstanding for the purpose of computing the percentage
     owned  by  any  other  person.  Percentages  are based on total outstanding
     shares  of  28,414,531  on  March  3,  2006.

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

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

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

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

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

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

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

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

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

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

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


                                      PAGE 55


EQUITY  COMPENSATION  PLAN  INFORMATION

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


<TABLE>
<CAPTION>

<S>                                <C>                         <C>                            <C>
-------------------------------    -------------------------   ----------------------------   -----------------------------
                                   (a)                         (b)                            (c)
-------------------------------    -------------------------   ----------------------------   -----------------------------
Plan Category                      Number of Securities        Weighted-average exercise      Number of Securities
                                   to be issued upon exercise  price of outstanding options,  remaining available for
                                   of outstanding options,     warrants, and rights           future issuance under equity
                                   warrants, and rights                                       compensation plans (excluding
                                                                                              securities reflected in
                                                                                              column (a))
-------------------------------    -------------------------   ----------------------------   -----------------------------
Equity Compensation Plans
Approved by Security Holders                       5,447,560                          $1.19                       1,458,103
-------------------------------    -------------------------   ----------------------------   -----------------------------
Equity Compensation Plans
Not Approved by Security Holders                   4,900,000                          $1.36                               -
-------------------------------    -------------------------   ----------------------------   -----------------------------
Total                                             10,347,560                          $1.27                       1,458,103
-------------------------------    -------------------------   ----------------------------   -----------------------------
-------------------------------    -------------------------   ----------------------------   -----------------------------

</TABLE>

     The  options granted to our executives, under the equity compensation plans
not  approved  by security holders, are fully vested and exercisable on the date
of  grant,  have  an  exercise  price of $1.00 to $1.40 per share, which was the
closing  sale price, reported on the OTCBB on the date of grant, and will expire
five  to  ten  years  after the date of grant. Some of the shares subject to the
options  are  subject  to  sale restrictions that expire upon the achievement of
certain  milestones or four years from the date of grant, whichever comes first.
Subject to certain limitations, these options may be exercised by means of a net
exercise  provision by surrendering shares with a fair market value equal to the
exercise  price  upon  exercise.

ITEM  12.     CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

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


                                      PAGE 56


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

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


                                      PAGE 57

ITEM  13.     EXHIBITS


<TABLE>
<CAPTION>

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


                                    PAGE 58


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


                                    PAGE 59


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


                                    PAGE 60


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


                                    PAGE 61


-----------------------------------------------------------------------------------------------------------
Exhibit No.             Description              Filed     Incorporated  Form      Date Filed with  Exhibit
                                                 Herewith  by Reference            SEC              No.
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
10.54 . . .  Executive Employment
             Agreement with Scott Tibbitts
             Dated January 31, 2006                             X             8-K    Feb. 6, 2006      99.1
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
10.55 . . .  Executive Employment
             Agreement with Robert Vacek
             Dated January 31, 2006                             X             8-K    Feb. 6, 2006      99.2
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
10.56 . . .  Non-Competition Agreement
             with Scott Tibbitts dated January
             31, 2006                                           X             8-K    Feb. 6, 2006      99.3
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
10.57 . . .  Form of Standstill and Lock-up
             Agreement                                          X             8-K    Feb. 6, 2006      99.4
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
10.58 . . .  Amendment No. 2 to the
             SpaceDev 2004 Equity Incentive
             Plan                                               X             8-K    Feb. 6, 2006      99.5
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
99.1  . . .  Audited Financial Statements of
             Starsys Research Corporation for
             the years ended December 31,
             2004 and 2003                                      X             8-K    Feb. 6, 2006      99.6
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
99.2  . . .  Audited Financial Statements of
             Starsys Research Corporation for
             the nine-month period ended
             September 30, 2005                                 X             8-K    Feb. 6, 2006      99.7
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
99.3  . . .  Unaudited Pro Forma Combined
             Consolidated Financial
             Statements of SpaceDev, Inc.
             and Starsys Research Corporation
             for the nine-month period ended
             September 30, 2005 and for the
             Year ended December 31, 2004                       X             8-K    Feb. 6, 2006      99.8
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
21.1. . . .  List of Subsidiaries                   X
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
23.1. . . .  Consent of PKF                         X
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
31.1. . . .  Rule 13a-14(s) certification of
             chief executive officer                X
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
31.2. . . .  Rule 13a-14(s) certification of
             chief financial officer                X
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
32.1. . . .  Section 1350/Rule 13a-14(b)
             Certifications                         X
-----------  ----------------------------------  --------  ------------  --------  ---------------  -------
-----------------------------------------------------------------------------------------------------------
</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.


                                      PAGE 62


ITEM  14.     PRINCIPAL  ACCOUNTANT  FEES  AND  SERVICES

     The  following  are the fees billed us by our auditors, PKF, a professional
corporation,  respectively,  for services rendered thereby during 2005 and 2004:


<TABLE>
<CAPTION>

<S>                 <C>      <C>
                       2005     2004
                    -------  -------
Audit Fees . . . .  $46,380  $44,000
------------------  -------  -------
Audit Related Fees  $     -  $     -
------------------  -------  -------
Tax Fees . . . . .  $ 7,500  $ 7,800
------------------  -------  -------
All Other Fees . .  $ 3,196  $28,522
------------------  -------  -------
Total. . . . . . .  $96,155  $80,322
------------------  -------  -------
------------------  -------  -------
</TABLE>



Audit  Fees  consist  of  the  aggregate  fees  billed for professional services
rendered for the audit of our annual financial statements and the reviews of the
financial  statements  included  in  our Forms 10-QSB and for any other services
that  were  normally  provided  by  PKF  in  connection  with  our statutory and
regulatory  filings  or  engagements.

Audit  Related  Fees  consist  of  the  aggregate  fees  billed for professional
services  rendered  for  assurance  and  related  services  that were reasonably
related  to  the  performance of the audit or review of our financial statements
and  were  not  otherwise  included  in  Audit  Fees.

Tax Fees consist of the aggregate fees billed for professional services rendered
for tax compliance, tax advice and tax planning.  Included in such Tax Fees were
fees  for preparation of our tax returns and consultancy and advice on other tax
planning  matters.

All  Other  Fees  consist of the aggregate fees billed for products and services
provided  by PKF and not otherwise included in Audit Fees, Audit Related Fees or
Tax Fees.  Included in such Other Fees were fees for services rendered by PKF in
connection  with our private and public offerings conducted during such periods.

Our  Audit  Committee  has  considered  whether  the  provision of the non-audit
services  described  above is compatible with maintaining PKF's independence and
determined  that  such  services  are  appropriate.

Before  the auditors are engaged to provide us audit or non-audit services, such
engagement  is  (without  exception,  required  to  be)  approved  by  the Audit
Committee  of  our  Board  of  Directors.


                                      PAGE 63


                                   SIGNATURES

     In  accordance with section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                         SPACEDEV,  INC.

Date:  March  28,  2006  By:  /s/ Mark N. Sirangelo
                             ---------------------------------------------------
                            Mark N. Sirangelo, CEO (Principal Executive Officer)


Date:  March  28,  2006  By:  /s/ Richard B. Slansky
                             ---------------------------------------------------
                             Richard B. Slansky, President and CFO (Principal
                                             Financial and Accounting Officer)

     In  accordance  with the Exchange Act, this report has been signed below by
the  following  persons on behalf of the Registrant and in the capacities and on
the  dates  indicated.


Date:  March  28,  2006  By:  /s/ James W. Benson
                             ---------------------------------------------------
                             James W. Benson, Chairman of the Board of Directors


Date:  March  28,  2006  By:  /s/ Mark N. Sirangelo
                             ---------------------------------------------------
                             Mark N. Sirangelo, Vice Chairman of the Board of
                                                                    Directors


Date:  March  28,  2006  By:  /s/ Richard B. Slansky
                             ---------------------------------------------------
                             Richard B. Slansky,  Director


Date:  March  28,  2006  By:  /s/ Susan C. Benson
                             ---------------------------------------------------
                             Susan C. Benson,  Director


Date:  March  28,  2006  By:  /s/ Curt D. Blake
                             ---------------------------------------------------
                             Curt D. Blake,  Director


Date:  March  28,  2006  By:  /s/ Howell M. Estes, III
                             ---------------------------------------------------
                             Gen. Howell M. Estes, III,  Director


Date:  March  28,  2006  By:  /s/ Wesley T. Huntress
                             ---------------------------------------------------
                             Wesley T. Huntress,  Director


Date:  March  28,  2006  By:  /s/ Scott McClendon
                             ---------------------------------------------------
                             Scott McClendon,  Director


                                      PAGE 64


Date:  March  28,  2006  By:  /s/ Stuart E. Schaffer
                             ---------------------------------------------------
                             Stuart E. Schaffer,  Director


Date:  March  28,  2006  By:  /s/  Scott Tibbitts
                             ---------------------------------------------------
                             Scott Tibbitts,  Director


Date:  March  28,  2006  By:  /s/  Robert S. Walker
                             ---------------------------------------------------
                             Robert S. Walker,  Director



                                      PAGE 65



                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

                                     CONTENTS


                        CONSOLIDATED FINANCIAL STATEMENTS



REPORT  OF  INDEPENDENT  REGISTERED  PUBLIC  ACCOUNTING  FIRM     F-2

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



                                      PAGE F-1


Report  of  Independent  Registered  Public  Accounting  Firm


Board  of  Directors  and  Stockholders
SPACEDEV,  INC.

We  have  audited the accompanying consolidated balance sheets of SPACEDEV, INC.
AND SUBSIDIARIES as of December 31, 2005 and 2004, respectively, and the related
consolidated  statements  of operations, stockholders' equity and cash flows for
the  years  then  ended.  These  consolidated  financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on  these  consolidated  financial  statements  based  on  our  audits.

We  conducted  our audits in accordance with the standards of the Public Company
Accounting  Oversight  Board  (United  States).  Those standards require that we
plan  and  perform  the  audits to obtain reasonable assurance about whether the
consolidated  financial  statements are free of material misstatement.  An audit
includes  examining,  on  a  test  basis,  evidence  supporting  the amounts and
disclosures  in  the  consolidated financial statements.  An audit also includes
assessing  the  accounting  principles  used  and  significant estimates made by
management,  as  well as evaluating the overall consolidated financial statement
presentation.  We  believe  that  our  audits provide a reasonable basis for our
opinion.

In  our opinion, the consolidated financial statements referred to above present
fairly,  in  all  material  respects,  the  consolidated  financial  position of
SPACEDEV,  INC.  AND  SUBSIDIARIES  as  of  December  31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States  of  America.


                                           /s/  PKF
San  Diego,  California                         PKF
February  3,  2006                         Certified  Public  Accountants
                                           A  Professional  Corporation


                                      PAGE F-2


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES


                            CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

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

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

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

</TABLE>

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


                                      PAGE F-3


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

                             CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

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

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

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

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

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

 COMMITMENTS AND CONTINGENCIES (NOTE 9)

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

</TABLE>

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

                                      PAGE F-4


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

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

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

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

</TABLE>

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

                                      PAGE F-5


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

<S>                                                                            <C>         <C>      <C>          <C>
                                                                                 Preferred Stock        Common Stock
                                                                               ------------------   --------------------
                                                                               Shares      Amount   Shares       Amount
-----------------------------------------------------------------------------  ----------  ------   -----------  -------
BALANCE AT JANUARY 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . .          -   $    -    16,413,260  $ 1,641
Preferred stock issued for cash (Note 8(a))       . . . . . . . . . . . . . .    250,000      250             -        -
Common stock issued for cash from employee stock purchase plan (Note 7(b)). .          -        -        14,010        1
Common stock issued from notes on revolving credit facility (Note 4(c)) . . .          -        -     2,991,417      299
Common stock issued from employee stock options (Notes 7(b) and 8(d)) . . . .          -        -     1,005,035      100
Common stock issued from private placement memorandum warrants (Note 8(b)). .          -        -       115,085       12
Common stock issued from convertible debt program warrants (Notes 5 and 8(c))          -        -       614,853       61
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          -        -             -        -

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

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

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


                                      PAGE F-6


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

<S>                                                                            <C>          <C>              <C>
                                                                                            Additional
                                                                               Additional   Paid-In
                                                                               Paid-in      Capital -        Deferred
                                                                               Capital      Stock Options    Compensation
-----------------------------------------------------------------------------  -----------  --------------   -------------
BALANCE AT JANUARY 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . .  $ 9,243,507  $      750,000   $    (250,000)
Preferred stock issued for cash (Note 8(a))       . . . . . . . . . . . . . .    2,366,250               -               -
Common stock issued for cash from employee stock purchase plan (Note 7(b)). .       12,626               -               -
Common stock issued from notes on revolving credit facility (Note 4(c)) . . .    4,752,079               -               -
Common stock issued from employee stock options (Notes 7(b) and 8(d)) . . . .    1,264,649               -               -
Common stock issued from private placement memorandum warrants (Note 8(b)). .       88,738               -               -
Common stock issued from convertible debt program warrants (Notes 5 and 8(c))    1,011,241               -               -
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            -               -               -

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

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

</TABLE>

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


                                      PAGE F-7


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

<S>                                                                            <C>            <C>
                                                                               Accumulated
                                                                               Deficit        Total
-----------------------------------------------------------------------------  -------------  ------------
BALANCE AT JANUARY 1, 2004. . . . . . . . . . . . . . . . . . . . . . . . . .  $(11,817,776)  $(2,072,628)
Preferred stock issued for cash (Note 8(a))       . . . . . . . . . . . . . .             -     2,366,500
Common stock issued for cash from employee stock purchase plan (Note 7(b)). .             -        12,627
Common stock issued from notes on revolving credit facility (Note 4(c)) . . .             -     4,752,378
Common stock issued from employee stock options (Notes 7(b) and 8(d)) . . . .             -     1,264,749
Common stock issued from private placement memorandum warrants (Note 8(b)). .             -        88,750
Common stock issued from convertible debt program warrants (Notes 5 and 8(c))             -     1,011,302
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (60,967)      (60,967)
  Net Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (3,027,054)   (3,027,054)
-----------------------------------------------------------------------------  -------------  ------------
BALANCE AT DECEMBER 31, 2004. . . . . . . . . . . . . . . . . . . . . . . . .   (14,905,797)    4,335,657
Preferred stock issued for cash (Note 8(a))       . . . . . . . . . . . . . .             -             -
Common stock issued for cash from employee stock purchase plan (Note 7(b)). .             -        38,326
Common stock issued from conversion of preferred stock (Note 8(a)). . . . . .             -             -
Common stock issued from employee stock options (Notes 7(b) and 8(d)) . . . .             -       241,045
Common stock issued from private placement memorandum warrants (Note 8(b)). .             -       500,941
Common stock issued from convertible debt program warrants (Notes 5 and 8(c))             -        28,876
Common stock issued from securities purchase agreement (Note 8(b)). . . . . .             -     2,319,084
Common stock issued from conversion of declared dividends (Note 8(a)) . . . .             -       174,976
Stock option forfeiture (Notes 7(b) and 8(d)) . . . . . . . . . . . . . . . .             -             -
Declared dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (170,956)     (170,956)
  Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       501,264       501,264
-----------------------------------------------------------------------------  -------------  ------------
BALANCE AT DECEMBER 31, 2005. . . . . . . . . . . . . . . . . . . . . . . . .  $(14,575,489)  $ 7,969,213
-----------------------------------------------------------------------------  -------------  ------------
-----------------------------------------------------------------------------  -------------  ------------

</TABLE>

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


                                      PAGE F-8


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

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

</TABLE>

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


                                      PAGE F-9


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

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

 NONCASH INVESTING AND FINANCING ACTIVITIES:

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

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

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

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

During  the  year ending December 31, 2004, the Company issued 614,853 shares of
     its common stock to the participants in its  prior convertible debt program
     from  conversions  of  warrants,  thereby  receiving  cash in the amount of
     $237,500.  The  Company  recorded additional non-cash loan fees of $773,802
     and  charged  these  fees  to  expense.

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

</TABLE>

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

                                      PAGE F-10


                                   SPACEDEV, INC.
                                  AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES

A  summary  of  the  Company's  significant  accounting  policies applied in the
preparation  of  the  accompanying  consolidated  financial  statements follows.

(a)     Nature  of  operations

SPACEDEV,  INC.  (the  "Company")  is  engaged  in   the   conception,   design,
development,  manufacture,  integration  and  operations  of   SPACE  TECHNOLOGY
SYSTEMS,  subsystems, products and services. The Company is currently focused on
the  development  of  low-cost  microsatellites,   nanosatellites   and  related
subsystems,  and  hybrid rocket propulsion as well as associated engineering and
technical  services,  primarily  to government agencies, and specifically to the
United  States  Department  of Defense. The Company's products and solutions are
sold,  mainly  on  a  project-basis,  directly  to  these customers, and include
sophisticated micro- and nanosatellites, hybrid rocket-based orbital maneuvering
and  orbital  transfer  vehicles  as well as safe sub-orbital and orbital hybrid
rocket-based propulsion systems.  The Company believes there will be an evolving
and  developing  commercial  market  for its space technology systems (e.g., its
microsatellite  and  nanosatellite  products and services) in the long-term.  In
the short-term, the early adopters of this technology appear to be in the United
States  Department  of Defense and the Company's "products" are considered to be
the  outcome of specific projects.  The Company is also designing and developing
commercial  hybrid  rocket  motors and small high performance space vehicles and
subsystems  for  commercial  and  military  customers.

The Company was incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI").  SpaceDev, LLC of Colorado
was  originally formed in 1997 for commercial space exploration and was the sole
owner  of  shares  of common stock of SpaceDev (a Nevada corporation) ("SpaceDev
Nevada"), formed on August 22, 1997.  On October 22, 1997, PDGI issued 8,245,000
of  its  $0.0001  par  value  common stock for 100 percent (1,000,000 shares) of
SpaceDev  Nevada's common stock owned by SpaceDev, LLC.  Upon the acquisition of
the SpaceDev Nevada stock, SpaceDev Nevada was merged into PDGI and, on December
17,  1997,  PDGI changed its name to SPACEDEV, INC.  After the merger, SpaceDev,
LLC,  changed  its  name  to  SD  Holdings,  LLC.  For  accounting purposes, the
transaction  was  accounted  for  as  a  reverse  merger with the Company as the
acquirer.  Since  SpaceDev  Nevada  had  minimal assets prior to the merger, the
transaction  was accounted for as the sale of the Company's common stock for net
assets  of  $1,232.  The  Company  became publicly traded in October 1997 and is
currently  trading  on  the  Over-the-Counter Bulletin Board ("OTCBB") under the
symbol  "SPDV."

In February 1998, the Company's operations were expanded with the acquisition of
Integrated  Space Systems, Inc. ("ISS"), a provider of engineering and technical
services  related  to space-based systems.  The ISS employee base, acquired upon
acquisition,  largely  consisted  of former Atlas and General Dynamics personnel
and  enlarged the Company's then current employee base to 20 employees.  ISS was
purchased  for  approximately  $3.6  million,  paid  in  Company  common  stock.

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

(b)     Principles  of  consolidation

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


                                      PAGE F-11

(c)     Use  of  estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted  in  the  United  States requires management to make certain
estimates and assumptions, including estimates of anticipated contract costs and
revenues  utilized in the earnings recognition process, that affect the reported
amounts in the consolidated financial statements and accompanying notes.  Actual
results  could  differ  from  those  estimates.

(d)      Accounts  Receivable  and  Allowances  for  Uncollectible  Accounts

Accounts  receivable  are  stated  at  the  historical  carrying  amount  net of
write-offs and allowances for uncollectible accounts. The Company establishes an
allowance  for  uncollectible  accounts  based  on historical experience and any
specific  customer  collection  issues  that   the   Company   has   identified.
Uncollectible  accounts  receivable are written-off when a settlement is reached
for  an amount that is less than the outstanding balance or when the Company has
determined  that  balance will not be collected.  At December 31, 2005 and 2004,
the  allowance  for uncollectible accounts was $32,281 and $32,637 respectively.

(e)     Revenue  recognition

The  Company's  revenues  in  2005  and  2004 were derived primarily from United
States  government  cost  plus  fixed  fee  ("CPFF")  contracts  compared  to  a
predominance  of  fixed  price  contracts prior to 2003.  Revenues from the CPFF
contracts  during  2005  and  2004  were  recognized  as expenses were incurred.
Estimated  contract  profits  were taken into earnings in proportion to expenses
recorded.  Revenues under certain long-term fixed price contracts, which provide
for  the  delivery  of  minimal  quantities  or  require  significant amounts of
development  effort  in relation to total contract value, would be recorded upon
achievement  of  performance  milestones  or  using  the  cost-to-cost method of
accounting  where  revenues  and profits would be recorded based on the ratio of
costs  incurred  to  estimated  total  costs at completion.  Losses on contracts
would  be  recognized  when  estimated costs were reasonably determined.  Actual
results of contracts may differ from management's estimates and such differences
could  be  material to the consolidated financial statements.  Professional fees
are  billed to customers on a time and materials basis, a fixed price basis or a
per-transaction  basis  depending  on  the  terms and conditions of the specific
contract.  Time  and  material revenues are recognized as services are performed
and  costs  are  incurred.

Deferred  revenue  represents  amounts  collected  from  customers for projects,
products  or  services  to  be  provided  at  a  future  date.

(f)     Depreciation  and  amortization

Fixed  assets  are  depreciated  over  their  estimated  useful  lives of Three-
to-fifteen  years  using  the  straight-line  method  of  accounting.

In  December  2002, the Company entered an agreement to sell its interest in its
only  facility,  which  sale  closed  in  January  2003.  The escrow transaction
included  the  sale  of  the  land  and building at 13855 Stowe Drive, Poway, CA
92064.  In conjunction with this sale, the Company entered into a non-cancelable
operating  lease with the buyer to lease-back its facilities for ten years.  The
base  rent  is  increased  by  3.5%  per  year  (see  Note  2).

(g)     Research  and  development

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


                                      PAGE F-12


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

(h)     Income  taxes

Deferred income taxes are recognized for the tax consequences in future years of
the  differences  between  the  tax  basis  of  assets and liabilities and their
financial  reporting  amounts  at  each  year-end  based on enacted tax laws and
statutory  tax  rates  applicable  to  the  years  in  which the differences are
expected  to  affect  taxable income.  Valuation allowances are established when
necessary  to  reduce deferred tax assets to the amount expected to be realized.
Income  tax  expense  is the combination of the tax payable for the year and the
change  during  the  year  in  deferred  tax  assets  and  liabilities.

(i)     Stock-based  compensation

The  Company has elected to account for its stock-based compensation plans under
APB Opinion No. 25.  However, the Company has computed, for pro forma disclosure
purposes,  the  value of all options granted during the years ended December 31,
2005  and  2004 using the minimum value method as prescribed by SFAS No. 123 and
amended  by  SFAS  No.  148.  Under  this method, the Company used the risk-free
interest  rate  at  the  date  of  grant,  the expected volatility, the expected
dividend  yield and the expected life of the options to determine the fair value
of  options  granted.  The  risk-free  interest  rates ranged from 6.0% to 6.5%,
expected  volatility was 73% to 117%, the dividend yield was assumed to be zero,
and the expected life of the options was assumed to be three to five years based
on  the  average  vesting  period  of  options  granted.

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

<TABLE>
<CAPTION>

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

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

</TABLE>

                                      PAGE F-13

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

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

(j)     Net  profit  (loss)  per  common  share

Net loss per common share has been computed on the basis of the weighted average
number  of  shares outstanding, according to the rules of SFAS No. 128, Earnings
per  Share.  Diluted  net  loss  per  share  was  not  computed  in 2004, as the
computation  would  result  in  anti-dilution.


<TABLE>
<CAPTION>

<S>                                                      <C>                           <C>
                                                                         YEAR ENDED DECEMBER31,
                                                         -------------------------------------------------

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

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

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


                                      PAGE F-14


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

<TABLE>
<CAPTION>

<S>                                           <C>                      <C>
                                                  YEAR ENDED DECEMBER31,
                                              -----------------------------

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

(k)     Financial  instruments

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

(l)      Segment  reporting

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

(m)     New  accounting  standards

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

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


                                      PAGE F-15


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

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

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

(n)     Other  Assets

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


                                      PAGE F-16

<TABLE>
<CAPTION>

<S>                                                                <C>        <C>

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



(o)     Cash  and  Cash  Equivalents

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

(p)     Advertising  Costs

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

2.     FIXED  ASSETS

In  January  2003,  the Company sold the land and building at 13855 Stowe Drive,
Poway,  CA 92064. In conjunction with the sale, the Company entered into a lease
agreement  with the buyer to lease-back this facility (see Note 9(c)).  The gain
on  the  sale  of  the  facility  was  deferred  and is being amortized over the
remaining  term  of  the  lease.  This amortization is included in the Company's
non-operating  income  and  expense.

The  gain  of  $1,172,720  on the sale of the facility was deferred and is being
amortized  on  a straight-line basis over the ten (10) year term of the lease at
the  rate  of $117,272 per year.  As of December 31, 2005 and 2004, the deferred
gain  was $830,677 and $947,949, respectively.  This amortization is included in
the  Company's non-operating income and expense and totaled $117,272 in 2005 and
2004.


                                      PAGE F-17


Deferred  Gain  consisted  of  the  following:

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

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



Fixed assets consisted of the following:

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


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

3.     ACQUISITIONS

All acquisitions have been accounted for using the purchase method of accounting
and  intangible  assets  were amortized using the straight-line method.  Initial
purchase  price  included  stock  issued  at  the  date  of  acquisition, direct
acquisition  costs  and  any  guaranteed  future  consideration.

On August 14, 1998, the Company entered an Agreement for License and Purchase of
Technology from American Rocket Company (AMROC) with an unrelated individual who
had obtained ownership of such technology from AMROC.  The intellectual property
acquired  was hybrid rocket technology that has been modified and may be used in
the  future  operations  of  the  Company.  Upon execution of the Agreement, the
Company  issued  the  seller  a  warrant to purchase 25,000 shares of restricted
common  stock  at  a strike price equal to 50% of the market price of the common
stock  on  the  issuance  date.  This  warrant  expired  in  2003   having  been
unexercised.

For  each of the three years following the Agreement date, the licensor received
warrants  to  purchase  25,000 shares of restricted common stock.  In the fourth
through  tenth  year  following  the  Agreement date, the licensor may receive a


                                      PAGE F-18


warrant  to  purchase  a  number  of  shares,  if  revenue is generated from the
acquired  technology.  All  revenue  based  warrants are earned at a rate of one
share  per  $125  of  revenue generated from the technology acquired.  Under the
terms of the Agreement, the minimum number of shares to be issued is 100,000 and
the maximum consideration shall not exceed warrants to purchase 3,000,000 shares
of  common stock or $6,000,000 in recognized value.  Recognized value is the sum
of  (a)  the  cumulative difference between the market price of the common stock
and  the strike price and (b) the cumulative difference between the market price
on  the  date  of  exercise  and  the  strike  price for each warrant previously
exercised.  To  date, no revenue has been generated from the acquired technology
and  25,000  additional  warrants  expired  on  March  19,  2005.

The  Company  valued  the  warrants using the fair value method as prescribed by
SFAS  No.  123.  Under this method, the Company used the risk-free interest rate
at  the  date  of  grant,  the  expected  volatility  of the stock, the expected
dividend  yield  on the stock and the expected life of the warrants to determine
the  fair  value  of the warrants.  The risk-free rate of interest used to value
the  initial issuance was 5.4%, a 0% dividend yield was assumed and the expected
life of the warrants was five years from the date of issuance.  This calculation
resulted  in a fair value of $24,500 and was used as the value of the intangible
assets  acquired.  All  warrants  are immediately exercisable after issuance and
expire  on  the  fifth  anniversary  of  their  issuance.

4.     NOTES  PAYABLE

(a)     Building  and  settlement  notes

In  January  2003,  the company sold the land and building at 13855 Stowe Drive,
Poway,  CA 92064. In conjunction with the sale, the Company entered into a lease
agreement  with  the  buyer  to  leaseback  this facility. Net fixed assets were
reduced  by  approximately  $1.9  million  and  notes  payable  were  reduced by
approximately  $2.4  million,  while  a  deferred  gain  was  recorded.

In  2001, the Company entered into three settlement loan agreements with various
vendors.  The  total  of $171,402 for all three loans called for payment between
24  and 50 months with interest that ranged from 0% to 8%.  At December 31, 2005
and  2004, the outstanding balances on these notes were $9,457 and $46,127, with
interest  expense  of  $1,474  and  $3,258,  respectively.

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

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

(c)     Revolving  Credit  Facility.

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


                                      PAGE F-19


collateral  management  payment  of  0.55%  of the average aggregate outstanding
balance  during  the  month  plus  an  unused  line  payment of 0.20% per annum.
Approximately $19,500 in interest and approximately $5,000 in fees were expensed
under  the  revolving credit facility in 2004.  There was no outstanding balance
on  the  revolving  credit  facility  at  December  31,  2005  and  2004.

The  Convertible  Note includes a right of conversion in favor of Laurus. Laurus
exercised  its  conversion  rights  from  time  to  time  in 2004 on outstanding
balances.  The  Convertible  Note  is  convertible  into shares of the Company's
common  stock  at  a  fixed  conversion  price, subject to adjustments for stock
splits,  combinations  and  dividends  and for shares of common stock issued for
less  than  the  fixed  conversion  price  (unless  exempted  pursuant  to   the
agreements).  The  Agreement  was  modified  on  March 31, 2004 to provide for a
six-month  waiver of the accounts receivable restrictions and a fixed conversion
price  to  Laurus  of  $0.85  per share on the first $500,000 after the first $1
million.  The agreement was further modified on August 25, 2004 to provide for a
fixed  conversion  price  to  Laurus  of $1.00 per share on the next $1 million.
Thereafter, the fixed conversion price will be adjusted to 103% of the then fair
market  value of the Company's common stock ("Adjusted Fixed Conversion Price").

Laurus converted 2,991,417 shares to reduce the Company's debt by $2,271,750 for
the  year  ended  December  31,  2004. For the year ended December 31, 2004, the
Company  expensed  $2,480,628 for the non-cash loan fee based on the fair market
value  of  the  stock when Laurus converted. The fair market value of the common
stock  used  in  2004  was  established  using  the closing price on the date of
conversion.

Availability  of  funds  under  the  revolving  credit  facility is based on the
Company's accounts receivable, except as waivers provided by Laurus.  An initial
three  month waiver was offered by Laurus, under which Laurus permitted a credit
advance  up  to  $300,000,  which  amount would have otherwise exceeded eligible
accounts receivable.  Laurus subsequently extended the waiver for two additional
six-month  periods  in 2004, under which Laurus permitted a credit advance up to
$1  million,  which  amount  would  have  otherwise  exceeded  eligible accounts
receivable.

In  conjunction  with  this transaction, Laurus was paid a fee of $10,000, which
was  recorded  as  additional  interest  expense  in  2004.  The  Company paid a
continuation fee of $10,000 for 2005.  In addition, Laurus received a warrant to
purchase  200,000  shares  of  the Company's common stock.  The warrant exercise
price was computed as follows: $0.63 per share for the purchase of up to 125,000
shares;  $0.69  per  share for the purchase of an additional 50,000 shares; and,
$0.80  per  share  for the purchase of an additional 25,000 shares.  The warrant
exercise  price may be paid in cash, in shares of the Company's common stock, or
by  a  combination of both.  The warrant may be exercised for the balance of the
shares  at  any  time  or  from  time  to  time  until  June  3,  2008.

In  addition  to  the  initial  warrant,  the  Company was obligated to issue an
additional  five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten  dollars  ($10)  in  principal of the Convertible Note converted into common
stock  if  and  when  over  $1  million was converted under the revolving credit
facility.  On  June  18,  2004,  the  Company  issued  an  additional warrant to
purchase  50,000 shares at an exercise price of $1.0625 per share in relation to
the  March  31,  2004 credit facility modification.  This additional warrant was
exercised by Laurus in April 2005 and resulted in a non-cash interest expense of
$28,875  for  the year ended December 31, 2005.  Since no more than an aggregate
100,000  shares  of  the  Company's  common  stock were authorized as additional
warrants  under the Laurus Agreements, on August 25, 2004, the Company issued an


                                      PAGE F-20


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

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

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

5.     CONVERTIBLE  DEBENTURES

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

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

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

As  of December 31, 2004, all of the warrants under the convertible debt program
had  been  converted to equity and the Company received approximately $50,000 in
cash,  recorded  a  reduction  of  $187,500  in  related party debt and expensed
$773,802  in  non-cash  loan  fees.


                                      PAGE F-21

6.     INCOME  TAXES

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

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

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

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

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


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

<TABLE>
<CAPTION>

<S>                                          <C>       <C>

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


                                      PAGE F-22


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

<TABLE>
<CAPTION>

<S>                                    <C>           <C>

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


As  of December 31, 2005, the Company recorded a valuation allowance of $218,000
related  to  deferred  tax  assets created by the exercise and/or disposition of
employee  stock  options  in  recent periods. The deferred tax asset originating
from  deductions  for  the  exercise and/or disposition of stock options and the
related  valuation  allowance  have  been  recorded  against  additional paid-in
capital  and  did  not  affect the net earnings for the period. Any tax benefits
realized  from  the  reduction  of  this valuation allowance will be recorded to
additional  paid-in  capital.

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

7.     EMPLOYEE  BENEFIT  PLAN

(a)     Profit  sharing  401(k)  plan

During  2004,  the  Company  amended its previous 401(k) retirement savings plan
from  1997 for its employees, which allows each eligible employee to voluntarily
make  pre-tax  salary contributions up to 93% of their compensation or statutory
limits  per year, whichever is lower, for the year ended December 31, 2005.  The
Company  has  elected to begin making a matching contribution of 10% of employee
contributions,  which  matching  portion  vests over 5 years as specified in the
plan  amendment.    During  2005  and  2004, the Company contributed $18,235 and
$2,705  to  the  Plan,  respectively.

(b)     Incentive  stock  option  and  employee  stock  purchase  plans

In  1999,  the  Company  adopted  a  stock  option plan under which its Board of
Directors  had  the  ability  to  grant  its employees, directors and affiliates
Incentive  Stock  Options,  non-statutory  stock  options  and  other  forms  of
stock-based compensation, including bonuses or stock purchase rights.  Incentive
Stock  Options,  which  provided  for  preferential  tax  treatment,  were  only
available  to  employees, including officers and affiliates, and were not issued
to non-employee directors.  The exercise price of the Incentive Stock Options is
100% of the fair market value of the stock on the date the options were granted.
Pursuant to the plan, the exercise price for the non-statutory stock options was
to  be  not  less than 95% of the fair market value of the stock on the date the
option  was  granted.

In  2000,  the Company amended the 1999 Stock Option Plan, increasing the number
of  shares  eligible  for issuance under the Plan to 30% of the then outstanding
common  stock  to  4,184,698  and allowing the Board of Directors to make annual
adjustments  to  the Plan to maintain a 30% ratio to outstanding common stock at
each  annual meeting of the Board of Directors.  The Board has not made any such
adjustment  since.


                                      PAGE F-23


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

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

In  1999,  the  Company  adopted  the  1999  Employee  Stock  Purchase Plan with
1,000,000  shares  reserved under the plan and authorized the Board of Directors
to make twelve consecutive offerings of common stock to its employees. The first
shares  of  common  stock  were  issued  under  the  Plan in February 2004.  The
exercise price for the Stock Purchase Plan will not be less than 95% of the fair
market  value  of the stock on the date the stock is purchased.  During 2005 and
2004  employees  contributed  $58,369 and $16,464 to the Employee Stock Purchase
Plan, and 27,540 and 14,010 shares were issued under the plan as of December 31,
2005  and  2004,  respectively.  The  1999  Employee  Stock Purchase Plan was to
expire  in  June  2005;  however,  the  Board of Directors extended the plan for
another  year  at  their  Board  meeting  in  November  2004.

8.     STOCKHOLDERS'  EQUITY

(a)     Convertible  preferred  stock

In  August  2004,  the Company entered into a Securities Purchase Agreement with
Laurus,  whereby  the  Company issued 250,000 shares of its Series C Convertible
Preferred Stock, par value $0.001 per share, to Laurus for an aggregate purchase
price  of  $2,500,000  or  $10.00 per share (the "Stated Value").  The preferred
shares  are  convertible  into shares of the Company's common stock at a rate of
$1.54  per  share  at  any  time after the date of issuance, and are entitled to
quarterly, cumulative dividends at a rate of 6.85% beginning on January 1, 2005.
For  the  year  ended  December  31,  2005  and 2004, approximately $170,000 and
$61,000  has  been  accrued for dividends earned in 2005 and 2004, respectively.
Approximately $175,000 of accrued dividends was satisfied by the issuance of the
Company's  common  stock during the year ended December 31, 2005.  Dividends are
payable  in  cash or shares of the Company's common stock at the holder's option
with the exception that dividends must be paid in shares of the Company's common
stock  for  up  to 25% of the aggregate dollar trading volume if the fair market
value  of  the  Company's  common stock for the 20-days preceding the conversion
date  exceeds  $1.85  per  share.  In  January  2005, $60,967 was converted into
39,589 shares of the Company's common stock from previous dividend accruals.  In
May 2005, $56,300 was converted into 36,559 shares of the Company's common stock
from  dividends  accrued  from January through April 2005 and in September 2005,
$57,708  was  converted  into  37,473  shares of the Company's common stock from
dividends  accrued  from  May  through  August  2005.  The  preferred shares are
redeemable  by  the  Company in whole or in part at any time after issuance for:
(a)  115%  of  the Stated Value if the average closing price of the common stock
for the 22 days immediately preceding the date of conversion does not exceed the
conversion  rate;  or,  (b) the Stated Value if the average closing price of the
common  stock  for the 22 days immediately preceding the date of preferred stock
conversion  exceeds  the  Stated  Value. The preferred shares have a liquidation
preference equal to the Stated Value upon the Company's dissolution, liquidation
or  winding-up.  The preferred shares have no voting rights.  As of December 31,
2005,  1,540  preferred  shares  had  been  converted  into 10,000 shares of the
Company's  common  stock

In  conjunction  with the preferred stock, the Company issued a five-year common
stock  purchase  warrant  to  Laurus  for  the purchase of 487,000 shares of the
Company's  common  stock  at  an  exercise  price  of  $1.77  per  share.


                                      PAGE F-24

(b)     Common  stock

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

(c)     Warrants

Concurrent  with  the  issuance  of the convertible debentures from October 2002
through November 2002, the Company issued to subscribers warrants to purchase up
to  1,229,705  shares  of the Company's common stock.  On September 5, 2003, the
Company  repaid  one-half  of the convertible notes, with the condition that the
note  holders  would  convert  the  other  half.  As  a condition of the partial
repayment,  the  note  holders  were  required  to  relinquish  one-half  of the
previously  issued  warrants  reducing  the  total  warrants  issued  under  the
convertible  debt  program to 614,853.  These warrants are exercisable for three
(3)  years  from  the  date  of issuance at the initial exercise price, which is
equal  to  the  20-day  average asking price less 10% established when the notes
were  issued.  Upon  issuance  the  warrants were valued using the Black-Scholes
pricing  model  based  on  the expected fair value at issuance and the estimated
fair  value was also recorded as debt discount.  As of December 31, 2004, all of
the  warrants  under  the  convertible  debt  program had been converted and the
Company  received  $237,500 in cash and expensed $773,802 in non-cash loan fees.

As  of  December  31, 2005, the Company had other warrants outstanding issued as
part  of  its  private  placement  and  other equity raising ventures as well as
services  that  allow  the  holders to purchase up to 1,755,750 shares of common
stock  at  prices  between  $0.435  and  $2.79  per  share.  The warrants may be
exercised  any  time  within  three  (3)  and  five  (5)  years  of  issuance.

(d)     Stock  options and employment agreements

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

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

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


                                      PAGE F-25


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

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

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

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

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


                                      PAGE F-26


<TABLE>
<CAPTION>

<S>                           <C>           <C>
                                            Weighted
                              Options       Average
                              Outstanding   Exercise Prices
----------------------------  ------------  -----------------
Balance at January 1, 2004 .    5,624,807   $           1.39
Granted. . . . . . . . . . .    2,218,500               1.23
Exercised. . . . . . . . . .   (1,005,035)             (1.26)
Expired. . . . . . . . . . .     (459,506)             (1.04)
----------------------------  ------------  -----------------

Balance at December 31, 2004    6,378,766               1.39
Granted. . . . . . . . . . .    6,368,000               1.45
Exercised. . . . . . . . . .     (237,000)             (1.02)
Expired. . . . . . . . . . .   (2,162,206)             (2.19)
----------------------------  ------------  -----------------

Balance at December 31, 2005   10,347,560   $           1.27
----------------------------  ------------  -----------------
----------------------------  ------------  -----------------
</TABLE>


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

<TABLE>
<CAPTION>

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


The  Company has elected to account for its stock-based compensation plans under
APB Opinion No. 25.  However, the Company has computed, for pro forma disclosure
purposes,  the  value  of all options granted during the year ended December 31,
2005  and  2004 using the minimum value method as prescribed by SFAS No. 123 and
amended  by  SFAS  No.  148.

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


                                      PAGE F-27


9.     COMMITMENTS  AND  CONTINGENCIES

(a)     Capital  leases

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


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


Future  minimum  lease  payments  are  as  follows:


<TABLE>
<CAPTION>

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

Total obligation. . . . . . . . . . . .    1,469
Less current portion. . . . . . . . . .   (1,469)
---------------------------------------  --------
Long-term portion . . . . . . . . . . .  $     -
---------------------------------------  --------
---------------------------------------  --------
</TABLE>



(b)     Other  accrued  liabilities

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

<TABLE>
<CAPTION>

<S>                                                 <C>       <C>
 Other Accrued Liabilities -  December 31, . . . .      2005      2004
---------------------------------------------------  --------  --------

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


                                      PAGE F-28

(c)     Building  lease

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

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

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


10.     CONCENTRATIONS

(a)     Credit  risk

The  Company maintains cash balances at various financial institutions primarily
located  in San Diego, California and New York, New York.  The accounts at these
institutions  are  secured  by  the  Federal Deposit Insurance Corporation up to
$100,000.  The  Company  has  not  experienced  any  losses  in  such  accounts.

(b)     Customer

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

11.     NOTE  RECEIVABLE

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


                                      PAGE F-29


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

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

12.  SUBSEQUENT  EVENTS

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

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

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

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


                                      PAGE F-30


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

Other  Provisions.

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

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

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

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

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

Acquisition  of  Starsys

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

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

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

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


                                      PAGE F-31


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

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

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

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

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

Working  Capital  Contribution.

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

Reservation  of  Options.

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

Termination  of  Loans

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


                                      PAGE F-32


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

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

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

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

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

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

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

Shareholder  Agent

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


                                      PAGE F-33


Entry  into  Non-Competition  Agreement.

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

Entry  into  Standstill  and  Lock-up  Agreements

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

Amendment  of  2004  Equity  Incentive  Plan.

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

Entry  into  Executive  Employment  Agreements

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

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


                                      PAGE F-34


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

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

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

Election  of  New  Director.

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

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

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

Appointment  of  President,  Starsys  Division.

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


                                      PAGE F-35


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

Increase  in  Authorized  Shares

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

Increase  in  Board  Size.

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


                                      PAGE F-36