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,  2004

[    ]     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 (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:  $4,890,743

The  aggregate  market value of the voting stock held by non affiliates computed
by  reference  to  the price at which the stock was sold, or the average bid and
asked  prices  of  such stock as of March 14, 2005 was $1.735, based on the last
sale  price  of  $1.72  as reported by the NASD Over the Counter Bulletin Board.

As  of  March  14,  2005, Registrant had outstanding 21,363,980 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                                                                2
        Business  Strategy                                                     7
        Products  and  Services;  Market                                       8
        Components  and  Raw  Materials                                       11
        Competition                                                           11
        Regulation                                                            11
        Employees                                                             13
        Intellectual  Property                                                14

     ITEM  2.     DESCRIPTION  OF  PROPERTY                                   14
     --------     -------------------------
     ITEM  3.     LEGAL  PROCEEDINGS                                          15
     --------     ------------------
     ITEM  4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         15
     --------     ---------------------------------------------------
PART  II                                                                      16
--------
     ITEM  5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS    16
     --------     --------------------------------------------------------
        Market  Information                                                   16
        Holders                                                               16
        Dividends                                                             16
        Equity  Compensation  Plan  Information                               17

     ITEM  6.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF FINANCIAL
                  CONDITION AND RESULTS  OF  OPERATIONS                       18
     --------     -----------------------------------------------------
        Overview                                                              18
        Selection  of  Significant  Contracts                                 19
        Results  of  Operations                                               22
        Liquidity  and  Capital  Resources                                    31
        Critical  Accounting  Standards                                       32
        Cash  Position                                                        33
        Recent  Accounting  Pronouncements                                    36
        Forward-Looking  Statements  and  Risk  Analysis                      37

     ITEM  7.     FINANCIAL  STATEMENTS                                       39
     --------     ---------------------
     ITEM  8.     CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS          39
     --------     --------------------------------------------------
     ITEM  8A.     CONTROLS  AND  PROCEDURES                                  41
     ---------     -------------------------
PART  III                                                                     42
---------
     ITEM  9.     DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
                  CONTROL PERSONS; COMPLIANCE  WITH  SECTION  16(a)
                  OF  THE  EXCHANGE  ACT                                      42
     -------      -------------------------------------------------
        Committees Of The Board Of Directors And Meeting Attendance           47
     ITEM  10.     EXECUTIVE  COMPENSATION                                    48
     ---------     -----------------------
        Executive  Officer  Compensation                                      48
        Director  Compensation                                                50
        Employment  Agreements                                                51
        Employee  Benefits                                                    52
        Section 16(A) Beneficial Ownership Reporting Compliance               53

     ITEM  11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                   AND MANAGEMENT                                             53
     ---------     -----------------------------------------------
     ITEM  12.     CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS         56
     ---------     --------------------------------------------------
     ITEM  13.     EXHIBITS  AND  REPORTS  ON  FORM  8-K                      57
     ---------     -------------------------------------
     ITEM  14.     PRINCIPAL  ACCOUNTANT  FEES  AND  SERVICES                 60
     ---------     ------------------------------------------
     SIGNATURES                                                               62
     ----------
CONSOLIDATED  FINANCIAL  STATEMENTS                                          F-1
-----------------------------------

                                       II
                                      PAGE

                                     PART I

ITEM  1.     DESCRIPTION  OF  BUSINESS

FORWARD  LOOKING  STATEMENTS

     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  disclosures  made  under  the   caption  "Management's
Discussion  and  Analysis  of Financial Condition and Results of Operations," in
our  General Registration Statement on Form 10SB12G/A filed January 28, 2000 and
in  our  other  periodic  reports (e.g., Form 10-KSB, Form 10-QSB and Form 8-K).

     In  addition  to historical information, the following discussion and other
parts of this document may contain forward-looking statements.  These statements
relate to future events or our future financial performance.  In some cases, you
can  identify  forward-looking  statements by terminology such as "may," "will,"
"should,"  "expect,"  "plan,"  "anticipate,"  "believe,"  "estimate," "predict,"
"potential,"  or  "continue,"  the  negative  of  such terms or other comparable
terminology.  These  statements  are  only  predictions.

     Although  we believe that the expectations reflected in the forward-looking
statements  are  reasonable,  we  cannot  guarantee  future  results,  levels of
activity,  performance  or  achievements.  Moreover,  neither  we  nor any other
person  assumes  responsibility  for  the  accuracy  and  completeness   of  the
forward-looking  statements.  We  undertake no obligation to publicly update any
of  the forward-looking statements after the date of this report to conform such
statements  to  actual  results  or  to  changes  in  our  expectations.

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


                                        1
                                      PAGE

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, hybrid rocket propulsion
for  space  and launch vehicles, as well as 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.

     Our  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  on  December  17,  1997.  We became a publicly traded company in
October  1997 and are  currently trading on the Nasdaq Over-the-Counter Bulletin
Board  ("OTCBB")  under  the  symbol  of  "SPDV."

     In  February  1998,  we  acquired  Integrated  Space Systems, in San Diego.
Integrated  Space  Systems  was  fully  integrated  into  SpaceDev.  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.  Integrated  Space Systems was
dissolved  in  2003.

                                        2
                                      PAGE

     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.

                                        3
                                      PAGE
Both  of  those  contracts  were  successfully  completed.

     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.  At approximately 7:45 AM PDT on Monday,
     June  21st,  SpaceDev powered SpaceShipOne well beyond the 50 mile altitude
     required  to  be  considered  a space flight, and created 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. The altitude is generally
     considered  to  be  the  threshold  of  space.

                                        4
                                      PAGE

     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.

     On  April  4, 2002, SpaceDev, Inc., an Oklahoma corporation, was formed for
the  purpose  of  investigating  and developing commercial space products in the
state  of  Oklahoma.  We  currently  have  no  plans to develop this business in
Oklahoma  and  our  subsidiary  there  remains  dormant.

     On April 30, 2002, the Company was 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 was awarded on
September 29, 2004 and is worth approximately $1,557,000.  The contract outlines
the  development  and  test  firing  of  our  large  Common Core Booster for the
SpaceDev  Small  Launch  Vehicle.  Congress  has  awarded  us approximately $3.0
million  in  additional  funding  for  this  project,  which  we  expect will be
available by mid-2005.  We believe that there is additional interest by Congress
in  providing  further  funding  to expand and accelerate the scope of the work;
however,  there  can  be  no  assurance  that  such  work will be awarded to us.

                                        5
                                      PAGE

     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
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
Task Order for approximately $1.1 million awarded on April 1, 2004 and completed
by September 30, 2004.  The second Task Order for approximately $8.3 million was
awarded  on  October 20, 2004. The principal place of performance will be Poway,
California.  We  expect  to  complete  the  work under the contract before March
2009.  Government  contract  funds  will  not  expire  at the end of the current
government  fiscal  year.  The  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 phase or "Task Order," resulted in a detailed mission
and  microsatellite  design.  The  second  phase  or "Task Order," was signed on
October  20,  2004  with  an effective date of October 1, 2004.  The second Task
Order  is  expected to be completed by January 2006.  The overall contract calls
for  us  to  analyze,  design,  develop, fabricate, integrate, test, operate and
support  a networked cluster of three formation-flying boost phase and midcourse
tracking  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 on or before February 2006.

                                        6
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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  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 in the commercial beyond earth
     orbit  "space";

     -  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;

                                        7
                                      PAGE

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

     -  Creates  barriers  to  entry  by  and  competition  from  competitors.

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 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 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 small, light,
high-performance, reliable and affordable 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 at
4:45  PM  PST  on January 12, 2003 from Vandenberg Air Force Base in California.
The  satellite  achieved 3-axis stabilization with all individual components and
systems  successfully  operating  and  continues  to  work  well  in  orbit.

                                        8
                                      PAGE

     Maneuvering  and  orbital  Transfer  Vehicle  - Our Maneuvering and orbital
Transfer  Vehicle  system  is  a  family of small, affordable, elegantly simple,
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 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 reliable, affordable
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 uniquely 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.

                                        9
                                      PAGE

OUR  PROPULSION  PRODUCTS  AND  SERVICES
----------------------------------------

     Hybrid  Rocket  Propulsion  and  Launch Vehicle Systems - We provide a wide
variety  of  safe,  clean,  simple,  reliable,  cost-effective 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 safely and economically transport
passengers  to  and  from  low  earth  orbit,  including the International Space
Station.  The  name of the vehicle is the SpaceDev DreamChaser(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  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.  One possibility for collaboration is the SpaceDev
DreamChaser(TM)  project,  which  is  currently  being discussed with NASA Ames.
Unlike  the  more  complex  SpaceShipOne,  for  which SpaceDev provided critical
proprietary  hybrid  rocket  motor  propulsion  technologies and components, the
SpaceDev DreamChaser(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 DreamChaser(TM) will have an altitude goal of approximately
160  km  (about  100  miles)  and  will 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
DreamChaser(TM)  will  use  motor  technology  being  developed for the SpaceDev
Streaker(TM)  booster stage, the most powerful motor in the Streaker family. The
SpaceDev  DreamChaser(TM)  motor  will  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.  Many of our products and services are now qualified or are
nearing  qualification  to  assist with missions that orbit the earth, travel to
another  planetary  body,  or  cruise  through  space  taking  measurements  and
transmitting  valuable  data  back  to  Earth.


                                       10
                                      PAGE

COMPONENTS  AND  RAW  MATERIALS

     Although  we  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.

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 clean, safe, commercially
available  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.

     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.

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

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                                      PAGE

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 as dictated by the rules associated with compliance to the ITAR
regulations.  Also,  our  ability  to  successfully   market   and   sell   into
international  markets  may  be  severely  hampered  due  to   ITAR   regulation
requirements.  Our  conservative  position  is  to  consider any material beyond
standard  marketing  material  to be regulated by ITAR regulations.  In 2003, we
began  an  active  and comprehensive internal and external ITAR training program
provided  by  our  regulatory  consulting  firm,  Q International Group, and the
Society  for  International  Affairs,  both  for our employees and our Empowered
Official, Mr. Slansky.  We also introduced in 2003 an Internal Export Compliance
Control Program for defense articles and defense services controlled by the U.S.
Department  of  State  under  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
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.  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 might perform would be subject to these
regulations.  Presently, we are not aware of any additional or unique government
regulations  related  to  commercial  deep  space  missions.

     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.

                                       12
                                      PAGE

     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.  This year we began an active
program to complete the steps required in order to win preliminary certification
for  classified  programs.  A  number of our employees have received preliminary
and  permanent  security  clearances.  We received preliminary certification for
classified  computer  system  processing  in  early  2005.

EMPLOYEES

     At  December  31,  2004, we employed approximately thirty (30) persons full
and  part-time, most of whom are spacecraft, propulsion, systems, mechanical and
electrical  engineers.  We  expect  to  hire  other  personnel  as necessary for
completion  of  projects,  product  development,  quality  assurance,  sales and
marketing,  finance  and  administration.  In addition, due to the nature of our
business,  it  may become necessary to lay off employees whose work is no longer
required  to  maintain  operations in order to prevent cost overruns.  We do not
anticipate  any such lay-offs in the near future.  We do not have any collective
bargaining  agreements with our employees, and we believe our employee-relations
are  good.

                                       13
                                      PAGE

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.  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 25,000 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.


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  Executive  Officer, Mr. Benson, provided a guarantee for the
leaseback.  [See  Notes  2 and 9(c) to our consolidated financial statements for
additional  information.]  The  original purchase price of the facility was $1.1
million, and the selling price of the facility was $3.2 million.  The total debt
repayment  from  the  transaction was approximately $2,407,000.  The approximate
net  proceeds  to  us  for  working  capital  purposes  was  $636,000.

                                       14
                                      PAGE

ITEM  3.     LEGAL  PROCEEDINGS

     None.

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

     None.

                                       15
                                      PAGE

<TABLE>
<CAPTION>


<S>             <C>         <C>
                QUARTERLY   QUARTERLY
QUARTER ENDING  HIGH        LOW
3/31/2003. . .  $     0.55  $     0.41
--------------  ----------  ----------
6/30/2003. . .  $     0.75  $     0.33
9/30/2003. . .  $     1.80  $     0.55
12/31/2003 . .  $     1.15  $     0.81
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
3/14/2005* . .  $     1.97  $     1.55
</TABLE>

*  March  14,  2005  high  and  low  from  01/01/2005  to  03/14/2005.

HOLDERS

     As  of  March 14, 2005, there were over 300 holders of record of our common
stock.  We estimate the total number of beneficial owners of our common stock to
be  in excess of 4,500 holders.  We believe that the number of beneficial owners
is substantially greater than the number of record holders because a significant
portion of our outstanding common stock is held in broker "street names" for the
benefit  of  individual  investors.

DIVIDENDS

     We  have  never  paid  a  cash  dividend  on  our Common Stock.  We accrued
dividends  on our Preferred Stock from August 25, 2004 through December 31, 2004
of  approximately $61,000.  The accrued dividends became payable in January 2005
and were converted into shares of our common stock at a conversion rate of $1.54
per  share.  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.  Payment  of  future  Preferred  Stock  dividends  may be in cash or our
common  stock.

                                       16
                                      PAGE

EQUITY  COMPENSATION  PLAN  INFORMATION


<TABLE>
<CAPTION>



<S>                 <C>                          <C>                  <C>
                                            (a)                  (b)                         (c)
------------------  ---------------------------  -------------------  --------------------------

Plan category       Number of securities         Weighted-average     Number of securities
                    to be issued upon            exercise price of    remaining available for
                    exercise of outstanding      outstanding          future issuance under
                    issuance options, warrants   options, warrants    equity compensation plans
                    and rights                   and rights           (excluding securities
                    reflected in column (a))
------------------  ---------------------------  -------------------  --------------------------
Equity
compensation plans                    3,878,766  $              1.05                   1,263,897
approved by
security holders

------------------  ---------------------------  -------------------  --------------------------
Equity . . . . . .                    2,500,000  $              2.00                           0
compensation plans
not approved by
security holders

------------------  ---------------------------  -------------------  --------------------------
Total. . . . . . .                    6,378,766  $              1.50                   1,263,897
------------------  ---------------------------  -------------------  --------------------------
</TABLE>

                                       17
                                      PAGE

ITEM  6.     MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF FINANCIAL CONDITION AND
RESULTS  OF  OPERATIONS

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

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

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

OVERVIEW

     We  are  engaged  in  the  conception,  design,  development,  manufacture,
integration  and  operations of space technology systems, products and services.
We  are currently focused on the commercial and military development of low-cost
microsatellites, nanosatellites and related subsystems, hybrid rocket propulsion
for  space,  launch  and human flight vehicles as well as associated engineering
and  technical  services  primarily to government agencies, and specifically the
Department  of  Defense.  Our  products  and  solutions  are  sold,  mainly on a
project-basis,  directly to these customers and include sophisticated micro- and

                                       18
                                      PAGE

nanosatellites,  hybrid  rocket-based  launch  vehicles, Maneuvering and orbital
Transfer  Vehicles  as  well as safe sub-orbital and orbital hybrid rocket-based
propulsion  systems.  Although  we believe there will be a commercial market for
our microsatellite and nanosatellite products and services in the long-term, the
early  adopters of this technology appears to be the military and our "products"
are  considered  to be the outcome of specific projects.  We are also developing
commercial  hybrid  rocket  motors  for  possible  use in small launch vehicles,
targets  and  sounding  rockets  and  small  high-performance space vehicles and
subsystems  for  commercial  customers.

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

SELECTION  OF  SIGNIFICANT  CONTRACTS

     On  March  31,  2004,   we   were   awarded   a   $43,362,271,   five-year,
cost-plus-fixed  fee indefinite delivery/indefinite quantity contract to conduct
a  microsatellite  distributed  sensing  experiment,  an  option  for  a   laser
communications  experiment,  and other microsatellite studies and experiments as
required  in  support  of  the  Advanced Systems Deputate of the Missile Defense
Agency.  This  effort  will  be  accomplished  in  a phased approach.  The total
five-year  contract has a ceiling amount of $43,362,271.  The principal place of
performance  will  be at our facilities located in Poway, California.  We expect
to  complete the work under the contract before March 2009.  Government contract
funds  will  not  expire  at the end of the current government fiscal year.  The
microsatellite distributed sensing experiment is intended to design and build up
to  six  responsive,  affordable,  high  performance  microsatellites to support
national  missile  defense.  The milestone-based, multiyear, multiphase contract
had  an effective start date of March 1, 2004.  The first phase was completed on
September  30,  2004 and resulted in detailed mission and microsat designs.  The
first  phase  revenue  was approximately $1.14 million.  On October 1, 2004, the
second phase of the contract began with an approximate value of $8.3 million and
is  expected to last approximately 18 months.  The overall contract calls for us
to  analyze,  design, develop, fabricate, integrate, test, operate and support a
networked  cluster  of three formation-flying boost phase and midcourse tracking
microsatellites,  with an option to design, develop, fabricate, integrate, test,
operate  and  support a second cluster of three formation flying microsats to be
networked  on-orbit  with  high  speed  laser  communications  technology.

     On  December  18,  2003, we were awarded a contract by the Defense Advanced
Research  Projects  Agency  for the study of Novel Satcom Microsat Constellation
Deployment.  The contract was a milestone-based, fixed price contract with total
consideration  of  approximately  $200,000.  On  August  6,  2004, an additional
$39,849  was  added  to  the  contract  for  increased  scope bringing the total
contract  value  on this fixed price effort to approximately $240,000.   We have
successfully  completed  this  contract  and the entire revenue of approximately
$240,000  was  realized during the twelve-month period ending December 31, 2004.
We  expect  to either further expand this contract or obtain new contracts under
the  Defense Advanced Research Projects Agency program(s); however, there can be
no  assurance  as  to  whether  such  contract(s)  will be awarded to us, or, if
awarded,  there  can  be  no assurance as to the amounts or terms of the awards.

                                       19
                                      PAGE

     On  October  2,  2003,  we were awarded an exclusive, follow-on contract to
provide  the  hybrid  rocket  motor systems and components for SpaceShipOne.  We
provide  our  facilities,  resources  and  a  team  of launch vehicle and hybrid
propulsion  engineers  and  technical  personnel  in  continued  support  of the
SpaceShipOne  program.  The  contract  called  for us to use our best efforts to
satisfy  the  requirements  of the SpaceShipOne program, based on our experience
with  the prior phases.  We provided re-usable flight test hardware, including a
bulkhead,  commonly  known  as  the  SpaceDev  bulkhead,  machined in the flight
configuration,  a  main  oxidizer  valve  of  the  current design and associated
interfaces  and  plumbing  to  the  SpaceDev  bulkhead,  a motor control system,
igniter  housings, pressure transducers, and thermocouples as required for input
to  the  motor  control  system.  In  addition,  we  produced and assembled test
motors,  including but not limited to, all expendable or semi-reusable materials
as  defined  by our baseline design motor.  We also provided on-site engineering
test  support  and post-test analysis.  Provisions were made in the contract for
minimum  monthly  payments in the event of customer schedule slippage as well as
additional  levels  of  support via engineering change orders, if required.  The
total  contract  value  was  originally  estimated  at  $615,000.  Approximately
$686,000  of  revenue  was  realized  in the year ending December 31, 2004, with
approximately $180,000 from engineering change orders and the remaining $506,000
from  the  contract.

     On  July  24,  2003,  we  were  awarded  a  contract by Lunar Enterprise of
California  for  a  first phase project to begin developing a conceptual mission
and  spacecraft  design for a lunar lander program. The unmanned mission will be
designed  to put a small dish antenna near the south pole of the Moon. From that
location  it  will  be in near-constant sunlight for solar power generation, and
should  be  able  to perform multi-wavelength astronomy while communicating with
ground  stations  on Earth. The contract value was $100,000 and was completed by
November  2003.  We  were  awarded  a  follow-on phase to further analyze launch
opportunities,  spacecraft  design,  trajectory possibilities, potential landing
areas,  available  technologies  for  a  small  radio  astronomy   system,   and
communications  and data handling requirements on July 20, 2004 in the amount of
$150,000.  Although  the  complete project is currently unfunded, if the project
were  to  proceed  past  the analysis stage, the total mission cost could exceed
$50-$75  million.  Again, we can give no assurance that any additional contracts
will  be awarded to us from this contract.  We successfully completed this stage
of  the  project,  and  revenues  for  the  year  ending  December 31, 2004 were
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   above.    Our
microsatellites  are  operated over the Internet and are capable of pointing and
tracking  targets  in space or on the ground.  This study explored fast response
microsatellite  launch  and  commissioning;  small,  low-power  passive sensors;
target  acquisition  and  tracking;  formation  flying and local area networking
within  a  cluster of microsatellites; and an extension of our proven use of the
Internet  for  on-orbit  command,  control  and data handling.  The contract was
successfully  concluded  on  February  27,  2004.  The  total contract value was
$800,000  with  approximately  $319,000  of  revenue   realized  in   2004   and
approximately  $481,000  of  revenue  realized  in  2003.    This  contract  was
considered  an  investigatory  phase  by  MDA.

                                       20
                                      PAGE

     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  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 $1,557,000.  The contract outlines
the  development  and  test  firing  of  our  large  Common Core Booster for the
SpaceDev  Small  Launch  Vehicle.  Congress  has  awarded  us approximately $3.0
million  in  additional  funding  for  this  project,  which  we  expect will be
available by mid-2005.  We believe that there is additional interest by Congress
in  providing  further  funding  to expand and accelerate the scope of the work;
however,  there  can  be  no  assurance  that  such  work will be awarded to us.
Revenue  from  this  project  for  the  year  ending  December  31,   2004   was
approximately  $58,000  for  Phase  I  and  approximately $161,000 for Phase II.
Revenue  from  this  project  for  the  year  ending  December  31,   2003   was
approximately  $42,000  for  Phase  I.

     Also,  on July 9, 2003, we were awarded a Phase I contract to develop micro
and  nanosatellite bus and subsystem designs. This Air Force Research Laboratory
Small  Business  Innovation  Research  contract  was  valued   at  approximately
$100,000,  and  enabled  us to explore the further miniaturization of our unique
and innovative microsatellite subsystems.  It 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 was fixed price, milestone-based and was
completed within one year.  On August 23, 2004, we were awarded Phase II of this
Small  Business  Innovation  Research,  which  was later amended on September 8,
2004,  to  shorten  the  length  of  the  overall  contract, worth approximately
$739,000  for carry-forward work. Revenues for the year ending December 31, 2004
were  approximately  $52,000 for Phase I and approximately $52,000 for Phase II.
Revenues  for  the  year ending December 31, 2003 were approximately $48,000 for
Phase  I.

     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  ending  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.   Revenue for the year
ending  December  31,  2003  was  approximately  $997,000  for  Phase  II.

                                       21
                                      PAGE

     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,   achieved   3-axis
stabilization,  meaning  it  was  pointing  and  tracking  properly,  with   all
individual  components  and systems successfully operating, and is continuing to
work  well  in  orbit  after more than two years.  The CHIPSat program generated
approximately  $2.1  million,  $3.2 million, $1.7 million, $0.4 million and less
than  $0.1  million of revenue in 2000, 2001, 2002, 2003 and 2004, respectively.
As  of December 31, 2003, the total contract costs were expended, mainly as cost
of goods sold.  There were minimal costs incurred in 2004.  The original support
contract  expired on December 31, 2003.  CHIPSat is still operating successfully
and  providing the University of California at Berkeley with new and interesting
data.  The  University of California at Berkeley requested to extend the program
and we negotiated a new time and materials contract in the first quarter of 2004
in  the  form  of a purchase order with the University of California at Berkeley
for  continuing  support  of this project.  The contract will continue until the
University  of  California  at  Berkeley  decides  that  no   further   relevant
information  is  forthcoming  or funding is terminated, at which time the use of
the  microsatellite  will  revert to NASA and then to us.  Revenues for the year
ending  December  31,  2004  and  2003  were approximately $25,000 and $356,000,
respectively.

     In  February  1998,  our  operations  were expanded with the acquisition of
Integrated Space Systems, Inc., a California corporation founded for the purpose
of  providing engineering and technical services related to space-based systems.
The  Integrated  Space Systems employee base, acquired upon acquisition, largely
consisted  of  former commercial Atlas launch vehicle engineers and managers who
worked  for  General  Dynamics and expanded our then current employee base to 20
employees.  Integrated  Space  Systems  was  purchased  for  approximately  $3.6
million,  paid  in  Rule  144 restricted common shares of SpaceDev.  Goodwill of
approximately $3.5 million was capitalized and was to be amortized over a period
of  60  months,  based  on  the  purchase price exceeding the net asset value of
approximately $164,000.  As a result of a change in corporate focus, on November
15, 2001, we determined that the unamortized balance of goodwill from Integrated
Space  Systems, which was approximately $923,000, had become impaired and it was
written  off.  While  the  Integrated  Space  Systems  segment did provide small
hybrid  propulsion  space systems and engineering services on separate contracts
(mainly with government agencies), the engineering service contracts had expired
and,  therefore,  would  not be producing revenue or cash flow to support future
operations.  We  determined  that  all  future business, contracts and proposals
would  be sought after only in the SpaceDev name, making it a more efficient way
for  us  to  manage  and  track  multiple  contracts  and work on many different
business  ventures  at  the  same  time  within the same operating segment.  All
activities  have been integrated into SpaceDev, Inc. and we dissolved Integrated
Space  Systems  in  December  2003.

RESULTS  OF  OPERATIONS

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

        YEAR ENDING DECEMBER 31, 2004 -VS.- YEAR ENDING DECEMBER 31, 2003

     During the year ending December 31, 2004, we had net sales of approximately
$4,891,000  as  compared  to  net sales of approximately $2,956,000 for the same
period  in  2003.  Sales increased primarily due to our new government contracts

                                       22
                                      PAGE

and few delays in finalizing follow-on contracts for the current Missile Defense
Agency  task  orders.  Sales  in  2004  reflected  our completion of the Missile
Defense  Agency  Phase 0 and Task Order 1 on the Missile Defense Agency contract
of  approximately $319,000 and $1,140,000, respectively, as well as the start of
Task  Order  II  for approximately $574,500 of our $43 million contract.  We had
ongoing  contracts with the Air Force Research Laboratory and the Small Business
Innovation Research contract Phase II, the option to that contract and an add-on
contract  totaled  approximately  $1.4  million.   Other   ongoing   work   from
SpaceShipOne  totaled  approximately  $686,000.  We  had  a new Defense Advanced
Research  Projects Agency contract that had revenues which totaled approximately
$240,000  and  our  Air  Force  Research  Laboratory  Small  Business Innovation
Research  work  for  Phase  I  and  II  had revenues which totaled approximately
$323,000.  We  also had smaller projects with approximately $208,500 in revenue,
which  included  CHIPSat,  and  the  lunar  lander project as well other smaller
projects.  Sales in 2003 reflected the substantial completion of CHIPSat and the
completion  of  the  original  SpaceShipOne  contract,  the  Air  Force Research
Laboratory  Small  Business  Innovation Research Phase I and the Missile Defense
Agency Phase 0 work, while SpaceShipOne began on October 2, 2003, a new contract
with  the  Missile Defense Agency began on July 9, 2003, a new contract with the
Air  Force  Research  Laboratory  began  on July 9, 2003 and a new contract with
Lunar  Enterprises  began  on  July  24,  2003.  The  total value of the Missile
Defense  Agency  contract,  the  Air  Force Research Laboratory contract and the
Lunar  Enterprises  contract  was  approximately  $800,000,  $1.4  million   and
$100,000,  respectively.  Revenues  for  the  year ending December 31, 2003 were
comprised  of  approximately  $29,600  and  $997,000 from the Air Force Research
Laboratory  Small  Business  Innovation  Research  (Phase  I  and II) contracts,
respectively;  $397,000  and  $115,000  from  the  original and new SpaceShipOne
contracts),  respectively; $250,000 and $481,000 from the Missile Defense Agency
(Phase  I  and  II)  contracts, respectively; $356,000 from the CHIPSat program;
$100,000 from the contract by Lunar Enterprises of California; and approximately
$234,400  from  all  other  programs.

     For  the  year  ending December 31, 2004, we had costs of sales (direct and
allocated  costs  associated  with  individual   contracts)   of   approximately
$3,821,000,  or 78.12% of net sales, as compared to approximately $2,415,000, or
81.69%  of  net  sales, during the same period in 2003.  The increase in cost of
sales  was  primarily  due to higher revenue combined with the implementation of
stronger  cost  controls  and  project  monitoring.  Also,  we  altered our cost
allocation  method  in  the  second quarter of 2003 as we completed CHIPSat, our
main  fixed  price  contract  at  the  time, and began work on our new Air Force
Research Laboratory and Missile Defense Agency cost plus contracts.  We continue
to  focus  efforts on developing project management skills and reports to assist
in  the  efficient  and  effective management of our projects.  The gross margin
percentage  for  the  year  ending December 31, 2004 was 21.88% of net sales, an
increase  of  3.57%  of  net  sales,  as compared to 18.31% of net sales for the
period  in  2003.

     We  experienced  a decrease of approximately $505,000 in operating expenses
from  approximately  $1,431,000,  or  48.42%  of  net  sales, in the year ending
December  31,  2003  to  approximately $926,000, or 18.93% of net sales, for the
year  ending  December  31,  2004.  Operating  expenses   include  general   and
administrative  expenses,  marketing  and   sales  expenses  and   research  and
development  expenses,  as  well  as  stock  and stock option based compensation
expenses.

     -  Marketing  and  sales expenses increased during 2004 (but decreased as a
     percentage  of sales), from approximately $395,000, or 13.36% of net sales,
     for  the year ending December 31, 2003, to approximately $419,000, or 8.56%
     of  net  sales,  during  the  same  period  in 2004. The total dollar value
     increased  by  approximately  $24,000, mainly due to our decision to expand
     our  marketing  and  sales  department,  with  partial  costs  of  our Vice
     President of New Business Development and our Chief Executive Officer being
     charged  to  marketing  and  sales  expenses.

                                       23
                                      PAGE

     - Research and development expenses decreased approximately $242,000 during
     2004.  Although  we  focus our efforts on government funded development and
     rarely  do  pure  research,  we  devote  certain  resources to building our
     intellectual  property  portfolio.  We  incurred  research  and development
     expenses  of approximately $281,000, or 9.51% of net sales, during the year
     ending  December 31, 2003. We decreased non-funded research and development
     expenditures  in  2004 to approximately $39,400. During 2003, approximately
     $192,000  of  research  and  development  costs  were related to our hybrid
     rocket  propulsion  design system and technologies outside the scope of our
     SpaceShipOne  contract  and  the  remaining  $89,000  was  related  to  our
     satellite  bus design and development effort. In 2004, we continued to fund
     a  small  amount  of  hybrid  rocket  propulsion  design   and  development
     independent  of  any  contract.

     -  We had no expenses from stock and stock option based compensation during
     the  year  ending  December  31, 2004, compared to approximately $9,000, or
     0.31%  of  net sales, for the same period in 2003. See "Critical Accounting
     Policies"  below.

     - General and administrative expenses decreased approximately $279,000 from
     approximately  $746,000,  or  25.23%  of  net  sales,  for  the year ending
     December 31, 2003 to approximately $467,000, or 9.56% of net sales, for the
     same  period  in  2004.  This decrease is attributed to better controls and
     internal procedures, reduced overhead costs and more of the actual overhead
     costs  being  more  finely  classified  as  cost  of  goods  sold.

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

     -  Interest  expense  for  the  year  ending December 31, 2004 and 2003 was
     approximately  $52,000, or 1.06% of net sales, and $91,000, or 3.09% of net
     sales, respectively. The decrease was due to a reduction in debt with fewer
     notes  payable.  We  continue  to  pay  interest expense on certain capital
     leases  and settlement notes, although the balances continue to decline. We
     accrued  interest expense on our related party note, which was paid in full
     during  2004,  and  on our revolving credit facility, which also had a zero
     balance  at  December 31, 2004. We accrued and paid interest on our related
     party  note  of approximately $29,000 for the year ending December 31, 2004
     and  accrued $47,000 for the year ending December 31, 2003. We also accrued
     and paid approximately $4,700 of interest on our various capital leases and
     notes  payable  and  accrued  and paid approximately $18,300 and $12,000 of
     interest on our revolving credit facility for the years ending December 31,
     2004  and  2003,  respectively.  For  the year ending December 31, 2003, we
     accrued and paid approximately $18,000 of interest on our convertible notes
     and accrued approximately $14,000 of interest, $42,000 of fees and $126,000
     of non-cash loan fees on our revolving credit facility. We began generating
     interest  income  in  2004 of approximately $19,500, or 0.40% of net sales,
     due  to  increasing  cash  balances.

                                       24
                                      PAGE

     - We recognized approximately $117,000 and $107,500 of the deferred gain on
     the  sale  of  the  building  during the years ending December 31, 2004 and
     2003, respectively, and we will continue to amortize the remaining deferred
     gain of approximately $948,000 into non-operating income over the remainder
     of  the lease. In relation to the gain we received on the building, we also
     accrued an income tax payable expense of $40,000 at March 31, 2003 of which
     none  remained at December 31, 2004 or 2003, respectively. The reduction of
     the income tax payable in 2003 was due to a change in estimate based on the
     loss  we  experienced  during  the  year.

     -  We  realized  loan  fees  related  to  our  revolving  credit   facility
     (approximately  $2,480,000)  and  expenses  related  to  the  conversion of
     previous  notes payable (approximately $774,000) into common stock at below
     fair  market value for a total of approximately $3,254,000 and $258,000 for
     the year ending December 31, 2004 and 2003. We do not anticipate additional
     expenses  related  to  similar  note  to equity conversions in the upcoming
     quarters  of  2005.

     - In conjunction with our convertible notes, we recorded a convertible note
     debt  discount  of  $475,000  related  to  warrants  that  accompanied  the
     convertible  debt issue in 2002; however, since we made a partial repayment
     and  the note holders converted the remaining balance and forfeited half of
     their  warrants,  the  debt  discount  amount  was reduced from $475,000 to
     $237,500.  The  reduction is exclusively attributable to forfeiture of half
     of  the  original  warrants.  During the year ending December 31, 2003, the
     convertible  debt  was  eliminated.    A  debt   discount   adjustment   of
     approximately  $234,000  was  made  and  the ending balance of $112,500 was
     recorded  on  the  statement  of  operations  for  the  year.

     During  the  year  ending  December  31,  2004,  we  incurred a net loss of
approximately  $3,027,000,  or  61.89%  of  net sales, compared to a net loss of
approximately  $1,246,000,  or 42.15% of net sales, for the same period in 2003.
During  the  year  ending  December  31,  2004,  we  incurred  a positive EBITDA
(earnings  before interest taxes depreciation and amortization) of approximately
$228,000,  or 4.66% of net sales, compared to a negative EBITDA of approximately
$723,000,  or  24.46%  of  net  sales,  for  the  year ending December 31, 2003.

     The   following   table   reconciles   Earnings   Before  Interest,  Taxes,
Depreciation  and Amortization (EBITDA) to net loss for the twelve-months ending
December  31,  2004  and  2003,  respectively:

<TABLE>
<CAPTION>


<S>                                     <C>                  <C>
FOR THE TWELVE-MONTHS ENDING . . . . .  DECEMBER 31, 2004    December 31, 2003
                                                  (AUDITED)            (Audited)
--------------------------------------  -------------------  -------------------
NET INCOME (LOSS). . . . . . . . . . .  $       (3,027,054)  $       (1,246,067)
--------------------------------------  -------------------  -------------------

Interest Income. . . . . . . . . . . .             (19,497)                   -
Interest Expense . . . . . . . . . . .              52,077               91,493
Non-Cash Interest exp. (Debt Discount)                   -              112,500
Gain on Building Sale. . . . . . . . .            (117,272)            (107,498)
 Loan Fee - Equity Conversion. . . . .           3,254,430              257,882
Provision for income taxes . . . . . .               1,600                1,600
Depreciation and Amortization. . . . .              83,531              166,971
--------------------------------------  -------------------  -------------------
EBITDA (LBITDA)* . . . . . . . . . . .  $          227,815   $         (723,119)
--------------------------------------  -------------------  -------------------
* Loss Before Interest, Taxes, Depreciation and Amortization.
</TABLE>

                                       25
                                      PAGE

     EBITDA  should  not  be  considered  as an alternative to net income (as an
indicator  of  operating  performance)  or  as an alternative to cash flow (as a
measure  of  liquidity or ability to service debt obligations).  We believe that
EBITDA  provides  an  important additional perspective on our operating results,
our ability to service our long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern.  The increase in the net
loss  was  mainly due to our revolving credit facility and the non-cash interest
expense  in  conversions  under  the  revolving  credit  facility. For the eight
consecutive  quarters  in  2003  and 2004, we showed continued progress in total
revenue  as  well  as  in  EBITDA.

                               [GRAPHIC  OMITED]

                                       26
                                      PAGE

      QUARTER ENDING DECEMBER 31, 2004 -VS.- QUARTER ENDING DECEMBER 31, 2003

                                 SPACEDEV, INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>


                                                                     THREE MONTHS ENDING
                                                                          (UNAUDITED)
<S>                                             <C>               <C>           <C>         <C>
 THREE MONTHS ENDING DECEMBER 31,. . . . . . .             2004             %        2003         %
----------------------------------------------  ----------------  ------------ ----------  --------

 NET SALES . . . . . . . . . . . . . . . . . .  $     1,445,174        100.00%  $ 901,746   100.00%
----------------------------------------------  ----------------  ------------  ----------  -------

 TOTAL COST OF SALES . . . . . . . . . . . . .        1,118,100         77.37%    732,573    81.24%
----------------------------------------------  ----------------  ------------  ----------  -------

 GROSS MARGIN. . . . . . . . . . . . . . . . .          327,075         22.63%    169,173    18.76%
----------------------------------------------  ----------------  ------------  ----------  -------

 OPERATING EXPENSES
    Marketing and sales expense. . . . . . . .          101,001          6.99%     83,606     9.27%
    Research and development . . . . . . . . .                -          0.00%      8,743     0.97%
    Stock and stock option based compensation.                -          0.00%      4,485     0.50%
    General and administrative . . . . . . . .          170,999         11.83%     84,050     9.32%
----------------------------------------------  ----------------  ------------  ----------  -------

 TOTAL OPERATING EXPENSES. . . . . . . . . . .          271,999         18.82%    180,884    20.06%


 INCOME/(LOSS) FROM OPERATIONS . . . . . . . .           55,075          3.81%    (11,711)   -1.30%


 NON-OPERATING EXPENSE/(INCOME)
    Interest expense/(income). . . . . . . . .          (20,093)        -1.39%     26,809     2.97%
    Non-cash interest expense debt discount. .                -          0.00%          -     0.00%
    Gain on Building Sale. . . . . . . . . . .          (29,318)        -2.03%    (29,318)   -3.25%
    Loan Fee - Equity Compensation . . . . . .          797,636         55.19%    109,470    12.14%
----------------------------------------------  ----------------  ------------  ----------  -------

 TOTAL NON-OPERATING EXPENSE/(INCOME). . . . .          748,225         51.77%    106,961    11.86%


 LOSS BEFORE INCOME TAXES. . . . . . . . . . .         (693,150)       -47.96%   (118,672)  -13.16%
 Income tax provision. . . . . . . . . . . . .            1,600          0.11%      1,600     0.18%
----------------------------------------------  ----------------  ------------  ----------  -------

 NET LOSS. . . . . . . . . . . . . . . . . . .  $      (694,750)       -48.07%  $(120,272)  -13.34%
----------------------------------------------  ----------------  ------------  ----------  -------

 NET LOSS PER SHARE:
   Net loss. . . . . . . . . . . . . . . . . .  $         (0.04)                $    (0.01)
----------------------------------------------  ----------------  ------------  ----------  -------

   Weighted-Average Shares Outstanding . . . .       19,545,951                 16,282,485
----------------------------------------------  ----------------  ------------  ----------  -------

</TABLE>

NOTE:  THE NUMBERS PRESENTED IN THE CHART ABOVE WERE NOT AUDITED OR REVIEWED FOR
THE  THREE-MONTH  PERIODS  ENDING DECEMBER 31, 2004 AND 2003, RESPECTIVELY.  WE,
AND  NOT OUR AUDITORS, ARE RESPONSIBLE FOR THEIR FAIR PRESENTATION IN CONFORMITY
WITH  GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES.

                                       27
                                      PAGE

     During  the  fourth  quarter  of  2004,  we recorded our eighth consecutive
quarter  of  revenue  growth  and  our fourth consecutive quarter of profit from
operations.  During  the three-month period ending December 31, 2004, we had net
sales  of  approximately  $1,445,000  as  compared to net sales of approximately
$902,000  for  the  same  three-month period in 2003, an increase of over 60.0%.
Sales  increased  primarily  due  to the addition and expansion of our contracts
with customers such as the Air Force Research Laboratory and the Missile Defense
Agency,  which  created  new  revenue  opportunities  for us.  Revenue increased
approximately  17%  from  approximately $1,230,000 in the third quarter of 2004,
mainly  due  to Task Order 2 of our Missile Defense Agency contract, which began
in  October  2004.  Revenues for the three-month period ending December 31, 2004
were  comprised  of  approximately $575,000 from the Missile Defense Agency Task
Order  2, approximately $422,000 from the Air Force Research Laboratory Phase II
contract  including  the  option  and  additional  contract value, approximately
$204,000 from the two Small Business Innovation Research contracts listed above,
approximately $110,000 from the Lunar Enterprises project, approximately $76,000
from  SpaceShipOne,  approximately  $40,000  from  our Defense Advanced Research
Projects  Agency  contract  and  approximately  $18,000 from all other programs.
During  the  same period of 2003, sales were comprised of approximately $336,000
from  the  Missile  Defense Agency contract, approximately $321,000 from the Air
Force  Research  Laboratory  Phase  II contract, approximately $102,000 from the
SpaceShipOne  contract,  approximately  $54,000  from  two  Air  Force  Research
Laboratory  Small  Business  Innovation Research projects, approximately $30,000
form  the  contract  with  Lunar  Enterprises,  approximately  $24,000  from the
completion  of  the  CHIPSat  program  and  approximately $35,000 from all other
programs.

     For  the  three-months  ending  December  31,  2003,  we had costs of sales
(direct  and  allocated  costs   associated  with   individual   contracts)   of
approximately  $1,118,000,  or  77%  of  net sales, as compared to approximately
$732,000,  or 81% of net sales, during the same three-month period in 2003.  The
increase  in cost of sales was primarily attributable to the increase in revenue
on  all  programs  and,  in particular, to increases in cost plus contracts as a
percentage of total contracts, which derive revenue from costs spent.  The gross
margin  for  the  three-month  period ending December 31, 2004 was approximately
$327,000,  or  23%  of  net sales, an increase of 4% of net sales over the prior
year.  The  increase  was  mainly due to the improved management of our projects
and  the  influence  of our fixed priced contracts, which generally carry higher
margins  than  our  cost  plus  contracts.

     We  experienced  an increase of approximately $91,000 in operating expenses
from  approximately  $181,000,  or  20% of net sales, for the three-month period
ending December 31, 2003 to approximately $272,000, or 19% of net sales, for the
three-month  period  ending  December  31, 2004, primarily due to an increase in
market  and  sales  and  general  and  administrative  cost.  Operating expenses
include  general  and  administrative expenses, marketing and sales expenses and
research  and  development  expenses  as  well  as  stock and stock option based
compensation  expenses.  Fluctuations  in  operating expenses for 2004 from 2003
are  primarily  attributable  to  the  following:

     -  Marketing  and sales expenses accounted for an increase of approximately
     $17,000  in  operating  expenses  during  the fourth quarter of 2004 (but a
     decrease as a percentage of sales), from approximately $84,000, or 9.27% of
     net  sales, for the three-months ending December 31, 2003, to approximately
     $101,000,  or 6.99% of net sales, during the same period in 2004. The total
     dollar  expenditure  increased  mainly  due  to  our decision to expand our
     marketing and sales department, with partial costs of our Vice President of
     New  Business  Development and our Chief Executive Officer being charged to
     marketing  and  sales  expenses

                                       28
                                      PAGE

     -  Research  and  development  expenses  accounted   for  a   decrease   of
     approximately  $9,000  in  operating expenses from no recorded research and
     development  expenses  during  the three-months ending December 31, 2004 to
     approximately  $9,000  during the same three-month period in 2003. Although
     we  focus our efforts primarily on government funded development and rarely
     do  pure research, we devote certain resources to building our intellectual
     property  portfolio.  During  2003, our research and development costs were
     related  to  our  hybrid  rocket  propulsion design system and technologies
     outside  the  scope  of  our  SpaceShipOne  contract.

     -  General  and administrative expenses accounted for approximately $82,500
     of  the increase in operating expenses. General and administrative expenses
     consist  primarily  of  salaries  for  administrative  personnel,  fees for
     outside  consultants,  rent, insurance, legal and accounting fees and other
     overhead expenses. General and administrative expenses for the three-months
     ending  December  31,  2004  were  approximately   $171,000   compared   to
     approximately  $88,500  (including approximately $4,500 for stock and stock
     option  based  compensation)  for  the same three-month period in 2003. The
     increase  was  primarily attributable to increased staff and support costs,
     the  implementation  of  our new accounting and project tracking system and
     the  addition  of  a  government  contract  administrator.

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

     - Interest expense/(income) for the three-month periods ending December 31,
     2004  and  2003  was  approximately  ($20,000),  or  1.4% of net sales, and
     $27,000,  or  3.9% of net sales, respectively. The improvement was due to a
     reduction  of interest on debt mainly from a repayment/conversion under our
     revolving  credit  facility, an adjustment to reclassified interest expense
     from  the  prior quarter and an increase in interest earned on growing cash
     balances. Interest expense is comprised of interest on our note to our CEO,
     interest on our revolving credit facility, interest on our convertible debt
     and  interest  on  our settlement notes/capital leases. For the three-month
     period  ending  December 31, 2004 and 2003, interest expense on our note to
     our  CEO  was  approximately  $0.00  and  $19,000,  respectively.  For  the
     three-month  period  ending December 31, 2004 and 2003, interest expense on
     our  revolving  credit  facility/convertible  debt was $11,000 and $18,000,
     respectively.  And  interest expense on our settlement notes/capital leases
     for  the  three-month  periods  ending  December  31,  2004  and  2003 were
     approximately  $900 and $1,800 respectively. We also earned interest income
     during  the  three-months ending December 31, 2004 of approximately $13,400
     from  our growing cash balances and reclassified approximately $18,500 from
     interest  expensed  in  the  prior  quarter.

     -  We  recognized approximately $29,000 of the deferred gain on the sale of
     the  building  during  the  three-months ending December 31, 2004 and 2003,
     respectively,  and we will continue to amortize the remaining deferred gain
     of  approximately  $948,000 into non-operating income over the remainder of
     the  lease.

     -  We  recognized  approximately  $798,000 in non-cash interest expense and
     loan  fees  of  which  approximately  $763,000 was related to our revolving
     credit  facility and approximately $35,000 was related to the conversion of
     notes  to  common  stock below fair market value for the three-month period
     ending  December  31, 2004. We anticipate no additional expenses related to
     similar  note  to  equity  conversions  in  the  upcoming quarters of 2005.

                                       29
                                      PAGE

     During  the  three-month period ending December 31, 2004, we incurred a net
loss  of  approximately  $695,000,  or  48%  of net sales, compared to a loss of
approximately $120,000, or 13% of net sales, for the same three-months ending in
2003.  During  the  three-month  period  ending December 31, 2004, we incurred a
positive  EBITDA  (earnings before interest taxes depreciation and amortization)
of  approximately  $83,000, or 5% of net sales, compared to a positive EBITDA of
approximately  $2,200,  or  1% of net sales, for the same three-months ending in
2003.  The  following  table  reconciles EBITDA to net loss for the three-months
ending  December  31,  2004  and  2003,  respectively:

<TABLE>
<CAPTION>



<S>                                     <C>                  <C>
FOR THE THREE-MONTHS ENDING. . . . . .  DECEMBER 31, 2004    December 31, 2003
                                                (UNAUDITED)          (Unaudited)
--------------------------------------  -------------------  -------------------
NET INCOME/(LOSS). . . . . . . . . . .  $         (694,750)  $         (120,272)
--------------------------------------  -------------------  -------------------

Interest Expense/(Income). . . . . . .             (20,093)              26,809
Non-Cash Interest exp. (Debt Discount)                   -                    -
Gain on Building Sale. . . . . . . . .             (29,318)             (29,318)
 Loan Fee - Equity Conversion. . . . .             797,636              109,470
Provision for income taxes . . . . . .               1,600                1,600
Depreciation and Amortization. . . . .              28,250               13,948
--------------------------------------  -------------------  -------------------
EBITDA . . . . . . . . . . . . . . . .  $           83,325   $            2,237
--------------------------------------  -------------------  -------------------
</TABLE>

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

                               [GRAPHIC  OMITED]

                                       30
                                      PAGE

LIQUIDITY  AND  CAPITAL  RESOURCES

     CASH  POSITION  FOR  YEAR ENDED DECEMBER 31, 2004 -VS.- YEAR ENDED DECEMBER
31,  2003

     Net  increase  in  cash  during  the  year  ending  December  31,  2004 was
approximately  $4,477,000  compared  to a net increase of approximately $564,000
for  the  same  period  in  2003.  Net cash used in operating activities totaled
approximately  $110,000  for  the  year  ending December 31, 2004, a decrease of
approximately $925,000 as compared to approximately $1,035,000 used in operating
activities  during the same period in 2003. The improvement in cash position was
mainly  due  to  our  improved  operating  performance,  an increase in accounts
receivable  from  new  and existing contracts and a reduction in work-in-process
due to the shift from fixed price contracts to cost plus fixed fee contracts, as
well  as  a  few  other  small  improvements.

     Net  cash  used  in investing activities totaled approximately $225,000 for
the year ending December 31, 2004, compared to approximately $3,111,000 provided
by  investing  activities  during the same period in 2003.  The increase in cash
used  in  investing  activities  is  attributable to the sale of the building on
January  31,  2003 and the purchase of fixed assets, primarily computer hardware
and  software  tools,  in  2004.

     Net  cash provided by financing activities totaled approximately $4,812,000
for  the  year  ending  December  31 2004, which is an increase of approximately
$6,323,000 from the approximately $1,511,000 used in financing activities during
the  same  period in 2003.  This is primarily attributable to the cash raised by
the  sale  of  our preferred stock (approximately $2,500,000 of gross proceeds),
cash  raised by the exercise of common stock options and warrants (approximately
$1,600,000)  and  advances/conversions  under our revolving credit facility with
the  Laurus  Master  Fund  in  2004  (approximately  $2,300,000).

     At  December  31,  2004,  our  cash,  which includes cash reserves and cash
available  for  investment,  was  approximately  $5,069,000,   as  compared   to
approximately  $592,000  at  December  31,  2003,  an  increase of approximately
$4,477,000 mainly due to the issuance of our preferred stock in August 2004, the
exercise   of   stock   options   and   warrants   throughout   the   year   and
advances/conversions  under  our  revolving credit facility throughout the year.

     As  of December 31, 2004, our backlog of funded and non-funded business was
approximately $47 million, as opposed to approximately $2 million as of December
31,  2003.  We  expect  approximately  $8  million  in  revenue from the Missile
Defense  Agency  program  in 2005.  Although the Missile Defense Agency contract
was awarded to us, there can be no assurance that the contract will be continued
through  all  phases,  and,  if  continued,  that  it  will generate the amounts
anticipated.

     During  the  year  ending  December  31, 2004, we completed work on our Air
Force  Research  Laboratory Phase II Small Business Innovation Research contract
worth approximately $1.6 million, as well as the negotiated a deferred option of
approximately  $0.8  million and the addition of approximately $0.1 million.  We
successfully  powered  SpaceShipOne in their quest to win the $10 million Ansari
X-Prize  in  October  2004.  We  completed  Task Order 1 for the Missile Defense
Agency and won two Phase II Small Business Innovation Research awards related to
the  Air  Force  Research  Laboratory  of  approximately  $2.3  million.

                                       31
                                      PAGE

     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 2,350,000 and $2,190,000 as of December 31, 2004 and 2003,
respectively,  consisted primarily of the income tax benefits from net operating
loss  and  capital loss carryforwards, amortization of goodwill and research and
development  credits.  A  valuation  allowance has been recorded to fully offset
the deferred tax asset as it is more likely than not that the assets will not be
utilized.  The valuation allowance increased approximately $126,000 in 2004 from
$2,190,000  at  December  31,  2003  to  $2,318,000  at  December  31,  2004.

     At  December  31, 2004, the Company has federal and state tax net operating
loss  and capital loss carryforwards of approximately $4,826,000 and $2,146,000,
respectively.  The  federal and state tax loss carryforwards will expire in 2023
and  2013,  respectively,  unless  previously utilized.  The State of California
suspended  the  utilization of net operating loss for 2002 and 2003, and limited
them  for  2004.

CRITICAL  ACCOUNTING  STANDARDS

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

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

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

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CASH  POSITION

     Although  we  were  cashflow positive in 2004, we raised over $4 million in
cash during the year, mainly through the sale of our preferred and common stock.
Our  ability to increase cash generation from operations and thereby continue as
a  going  concern  without  the  need  to  raise equity capital depends upon our
ability  to  ultimately  implement our business plan, which includes (but is not
limited  to)  generating substantial new revenue from the Missile Defense Agency
by  successfully  performing  under  our  $43 million contract and continuing to
attract and successfully complete other government and commercial contracts. The
Missile  Defense  Agency  contract  is  staged, and we cannot guarantee that all
subsequent  phases will be awarded or will be awarded to us.  Recent budget cuts
may  affect  government  spending  on  these  space-based  contracts.

     In  order to perform the Missile Defense Agency contract on schedule and to
successfully  execute  other  existing  and  new business opportunities, we must
substantially  increase our staff and hire new engineers or subcontract the work
to  third  parties.  Although  we  are actively and aggressively seeking to hire
spacecraft and propulsion engineers to fulfill existing and new business demand,
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.  New business opportunities
can  come  from  a  variety  of  sources, including state and federal grants and
government and commercial customer programs.  However, there can be no assurance
that  we  will  be  able  to  obtain  such  new  business  contracts or, if such
contracts  are  available,  that  we  can  obtain then on terms favorable to the
Company.  The  likelihood  of  our  success  must  be considered in light of the
expenses,  difficulties and delays frequently encountered in connection with the
developing businesses, those historically encountered by us, and the competitive
environment  in  which  we  operate.

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

     At  the  end  of 2002, we raised $475,000 from certain of our directors and
officers  by  issuing  2.03% convertible debentures.  The convertible debentures
entitled  the  holder  to convert the principal and unpaid accrued interest into
our  common stock when the note matured.  The original maturity on the notes was
six  (6)  months  from issue date; however, on March 19, 2003, the maturity date
was  extended to twelve (12) months from issue date.  The convertible debentures
were exercisable into common shares at a conversion price that equals the 20-day
average  asking  price  less 10%, which was established when the debentures were
issued,  or  the  initial conversion price.  Concurrent with the issuance of the
convertible debentures, we issued warrants to purchase up to 1,229,705 shares of
our  common  stock to the subscribers.  These warrants are exercisable for three
(3)  years  from  the  date  of  issuance  at the initial exercise price, or the
initial  conversion  price  on  the debentures.  On September 5, 2003, we repaid
one-half  of  the  convertible  notes,  with the condition that the note holders
would  convert  the  other half.  Also, as a condition of the partial repayment,
the  note holders were required to relinquish one-half of the 1,229,705 warrants
previously  issued.  As  additional  consideration for the transaction, the note
holders  were  offered 5% interest on their notes, rather than the stated 2.03%.
All  the  note holders accepted the offer and the convertible notes were retired
in 2003.  Of the 614,853 remaining warrants, all were exercised in 2004 and none
remained  outstanding  at  December  31,  2004.

                                       33
                                      PAGE

     During  the year ending December 31, 2003, we raised approximately $426,000
from  accredited  investors  by  selling  861,267  units of our common stock and
common  stock purchase warrants under in a private placement offering made under
Section  4(2)  of  the  Securities  Act  of  1933,  and  Rule 506, to accredited
investors  only.  We  subsequently  closed the Private Placement Offering.  (See
Note  8  of  the  Consolidated  Financial  Statements.)

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

     We  have  sustained  ourselves  over  the  last few years with a mixture of
government  and  commercial  contracts and capital raised in the private market.
In  particular, we anticipated and received an award from the Air Force Research
Laboratory  on  March  28, 2003 and from the Missile Defense Agency on March 31,
2004.  Both  awards  were  cost-plus  fixed  fee contracts, which required us to
incur  certain costs in advance of regular contract reimbursements.  Although we
have  needed  a certain amount of cash to fund advance payments on the contract,
we  have  been  entitled, as a small business concern, to recover our costs on a
weekly basis and we established the Laurus Master Fund revolving credit facility
at  the  end of the second quarter of 2003 to support our advance payment needs.
There  was  no balance on the revolving credit facility at December 31, 2004 and
we  do  not  anticipate  further  need to draw on the revolving credit facility;
however,  the  revolving  credit  facility  will remain in place pursuant to our
original  agreement  with  the Laurus Master Fund until June 2007, unless sooner
terminated  by  either party.   We would be required to pay Laurus a termination
fee  for  early  termination  of  the  revolving  credit  facility.

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

                                       34
                                      PAGE

     We  experienced  a  positive  cash  flow  in 2004 for the first time in our
history.  We  also realized operating profit in 2004; however, we incurred a net
loss  due to the non-cash expenses related to our revolving credit facility.  We
anticipate  that with our projected increase in revenue and backorders from near
term  contracts,  combined  with  our  fiscally  responsible  budget and project
controls,  that net positive cash flow from operations will continue and will be
sufficient  to fund both operations and capital expenditures in 2005 and beyond.
There  is  no assurance, however, that we will sustain our current positive cash
flow  or  our  operating  profit  now  or  in  the  future.

                                       35
                                      PAGE

RECENT  ACCOUNTING  PRONOUNCEMENTS

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition  and Disclosure-an amendment of SFAS No. 123."  SFAS No.
148  provides  alternative  methods  of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.  In
addition,  this  Statement  amends  the  disclosures  in both annual and interim
financial  statements  about  the  method of accounting for stock-based employee
compensation  and  the  effect  of  the  method  used  on reported results.  The
adoption  of  this  Statement did not have a material effect on our consolidated
financial  statements.

     In  November  2002,  FASB   issued  FASB   Interpretation   (FIN)  No.  45,
"Guarantor's  Accounting  and  Disclosure Requirements for Guarantees, Including
Indirect  Guarantees  of  Indebtedness  of  Others."  FIN  No.  45 elaborates on
previously  existing  disclosure  requirements  for  most  guarantees.  It  also
clarifies  that  at  the  time  a  company  issues a guarantee, the company must
recognize  an  initial  liability  for  the  fair value, or market value, of the
obligations it assumes under the guarantee and must disclose that information in
its  financial  statements. The provisions related to recognizing a liability at
inception  of  the  guarantee  for the fair value of the guarantor's obligations
does  not  apply  to  product  warranties  or  to  guarantees  accounted  for as
derivatives.  FIN  No.  45  also requires expanded disclosures regarding product
warranty  expense.  The  initial  recognition and initial measurement provisions
apply on a prospective basis to guarantees issued or modified after December 31,
2002.  The  adoption  of  this  Statement  did not have a material effect on the
consolidated  financial  statements.

     In  January  2003,  FASB  issued  FIN  No.  46,  "Consolidation of Variable
Interest  Entities,  an  interpretation  of  ARB  No.  51."  This interpretation
provides  guidance  on:  1)  the identification of entities for which control is
achieved  through  means  other  than  through voting rights, known as "variable
interest  entities"  (VIEs);  and  2)  which  business enterprise is the primary
beneficiary  and  when  it  should  consolidate  the  VIE.  This  new  model for
consolidation applies to entities: 1) where the equity investors (if any) do not
have  a controlling financial interest; or 2) whose equity investment at risk is
insufficient  to  finance  that entity's activities without receiving additional
subordinated  financial  support  from  other  parties.    In   addition,   this
interpretation  requires  that  both  the  primary  beneficiary  and  all  other
enterprises  with  a  significant  variable  interest  in  a VIE make additional
disclosures.  This  interpretation  is  effective  for  all  new VIEs created or
acquired  after January 31, 2003. For VIEs created or acquired prior to February
1,  2003, the provisions of the interpretation must be applied no later than the
beginning  of  the first interim or annual reporting period beginning after June
15,  2003.  Certain disclosures are effective immediately.  The adoption of this
Statement  did  not  have  an  effect  on the consolidated financial statements.

     In  April  2003,  FASB  issued SFAS No. 149, "Amendment of Statement 133 on
Derivative  Instruments  and  Hedging  Activities."  SFAS  No.  149  amends  and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including  certain  derivative   instruments   embedded   in   other   contracts
(collectively  referred to as derivatives) and for hedging activities under SFAS
No.  133,  "Accounting  for Derivative Instruments and Hedging Activities." SFAS
No. 149 requires that contracts with comparable characteristics be accounted for
similarly.  SFAS  No.  149  is  effective for contracts entered into or modified
after  June  30,  2003,  and for hedging relationships designated after June 30,
2003.  The adoption of this Statement did not have an effect on the consolidated
financial  statements.

                                       36
                                      PAGE

     In  May  2003,  the  FASB  issued  SFAS  No.  150,  "Accounting for Certain
Financial  Instruments  with  Characteristics  of  both Liabilities and Equity."
SFAS  No.  150  establishes  standards for how an issuer classifies and measures
certain  financial  instruments  with  characteristics  of  both liabilities and
equity.  It  requires  that  an  issuer  classify a financial instrument that is
within  its  scope as a liability (or an asset in some circumstances).  SFAS No.
150  is  effective  for financial instruments entered into or modified after May
31,  2003,  and  otherwise  is  effective  at the beginning of the first interim
period  beginning  after  June 15, 2003.  The adoption of this Statement did not
have  a  material  effect  on  the  consolidated  financial  statements.

     In  December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share Based
Payment"  (SFAS  No.  123R),  a  revision  to  Statement No. 123, Accounting for
Stock-Based  Compensation  which  supersedes  APB Opinion No. 25, Accounting for
Stock  Issued  to  Employees. The revised SFAS 123 eliminates the alternative to
use  Opinion  25's  intrinsic  value method of accounting and, instead, requires
entities  to  recognize  the  cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards.
Furthermore,  public  entities  are  required to measure liabilities incurred to
employees  in share-based payment transactions at fair value as well as estimate
the  number  of  instruments  for  which the requisite service is expected to be
rendered.  Any  incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair values before and after
the modification.  We have yet to determine the effect SFAS No. 123R may have on
our  financial  statements,  if  any.

FORWARD-LOOKING  STATEMENTS  AND  RISK  ANALYSIS

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

     To date, we have maintained a mix of government and commercial business. In
2004, we had about 85% government and government-related work.   In 2003, we had
about  82%  government or government-related work.  In 2005, we expect the ratio
to  be  about 90% government or government-related work.  We will continue to do
both  government  and  commercial  business and anticipate the mix of government
revenues  to  continue to be above 70% for the next several years as we increase
our  government  and commercial marketing efforts for both of our technology and
product  areas.  Currently,  we  are  focusing  on  the  domestic  United States
government  market,  which  we  believe  is  only  about  one-half of the global
government  market  for  our technology, products and services.  Although we are
interested in exploring international revenue and contract opportunities, we are
restricted  by  export  control regulations, e.g., International Traffic in Arms
Regulations, which may limit our ability to develop market opportunities outside
the  United  States.

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

                                       37
                                      PAGE

     We  believe that we will experience an accelerated growth in sales over the
next  few  years.  At  this  time, over 90% of the forecasted sales for 2005 are
under  contract  or near contract award.  There is no guarantee and there can be
no assurance that we will win enough new business to achieve our targeted growth
projection or to maintain a positive cash flow position.  Additionally, there is
no  guarantee  that awarded contracts will not be altered or terminated prior to
us  recognizing  our  projected  revenue  from  them.  Many contracts have "exit
ramps",  i.e., provides the customer the right to terminate the contract for any
of  a variety of reasons, including but not limited to non-performance by us, or
are  awarded  in  phases  the award of which is not guaranteed to us.  We do not
believe  that  any of our contracts will be terminated early; however, there can
be no assurance that they will not be terminated prior to completion or that all
phases  of  any  of  our  contracts  will  be awarded to us.  Finally, we do not
believe  that  significant capital expenditures will be required to achieve this
increase  in  sales;  however, additional capital may be required to support and
sustain  our  growth.

     During the year ended December 31, 2004, we raised approximately $6,375,000
through  a  combination  of  private sales of our preferred stock (approximately
$2,500,000),  exercises  of  options and warrants (approximately $1,600,000) and
conversions on our revolving credit facility (approximately $2,300,000).  During
the  year  ended  December  31, 2003, we raised approximately $654,000 through a
combination  of  private  sales  of  our  stock  (approximately  $426,000)   and
conversions  on  our  revolving  credit  facility  (approximately $228,000).  To
execute  our  strategy  of  rapidly  growing  our  Company  with small, capable,
low-cost  micro-  and  nanosatellites,  hybrid   propulsion  products   and  new
commercial  revenue  sources,  we may require additional funding in order to win
significant government and commercial programs.  We believe investor or customer
funding  of  $10  to $30 million may be required in the future, which could come
from  a combination of private and/or public equity placements or government and
commercial  customers.  Our  intent is to only raise additional capital now when
it  is  required or makes sense to do so.  We do not have any ongoing private or
public  equity  offerings  and  the  Board  has  not  authorized  any additional
financings  at  this  time.

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

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

                                       38
                                      PAGE

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

ITEM  7.     FINANCIAL  STATEMENTS

     Please  see  our audited financial statements for the period ended December
31,  2004  as  compared  to  the period ended December 31, 2003 attached hereto.

ITEM  8.     CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS

     In  2003,  we  changed  our  principal independent accountants due to their
decision,  at  the  time,  not  to  register  with the Public Company Accounting
Oversight Board established by the Sarbanes-Oxley Act of 2002, which was charged
with  the  responsibility  of overseeing the audits of public companies that are
subject  to  the federal securities laws.  Under the Sarbanes-Oxley Act of 2002,
the  Public  Company  Accounting   Oversight   Board's   duties   included   the
establishment  of a registration system for public accounting firms.  All public
accounting  firms  were  required to register with the Public Company Accounting
Oversight  Board  if  they  wished  to  prepare or issue audit reports on United
States  public  companies,  or  to play a substantial role in the preparation or
issuance  of  such  reports.  Once  registered,  public  accounting  firms  were
required  to  file periodic reports with the Public Company Accounting Oversight
Board.  At  the  end  of  the  first  quarter  of  2003, we were informed by our
independent  auditor,  Nation Smith Hermes Diamond, Accountants and Consultants,
P.C.  ("Nation  Smith"),  that  it  may  not  register  with  the Public Company
Accounting  Oversight  Board  and, as a result, would not be able to continue to
act  as our independent auditor once the rules were in effect.  Nation Smith did
not  resign  its position as a result of any disagreements with us on accounting
or  financial  disclosure  issues.

     Effective  June  3, 2003, we confirmed with Nation Smith that they would no
longer  be representing us as our accountants, except to provide consent herein.
As of that date, we informed Nation Smith that we were engaging a new audit firm
as  our  accountants.

                                       39
                                      PAGE

     Nation  Smith  last  reported  on  Registrant's  financial statements as of
February  13,  2003  and reviewed our Form 10-QSB for the first quarter of 2003.
The  report,  which covered the two fiscal years ended December 31, 2002, was an
unqualified  report  modified  for  going concern.  While Nation Smith expressed
concern  as  to  the Registrant's ability to remain a going concern, neither the
report  nor the financial statements for the periods contained any other adverse
opinion  or  disclaimer  of opinion, nor were they modified as to audit scope or
accounting  principles.

     Our  Board  of  Directors ratified the change of independent accountants on
June  3,  2003.

During  our  fiscal  year 2002 and the subsequent interim period through June 3,
2003,  there were no disagreements with Nation Smith on any matter of accounting
principles  or  practices,  financial statement disclosure, or auditing scope or
procedure,  which,  if  not resolved, to Nation Smith's satisfaction, would have
caused  it  to  make  reference  to  the  subject  matter of the disagreement in
connection  with  its  report.

     During  fiscal  year 2002 and the subsequent interim period through June 3,
2003,  there  were  no  reportable  events  (as  defined  in Regulation S-B Item
304(a)(1)(v)).

     During  fiscal  year 2002 and the subsequent interim period through June 3,
2003, Nation Smith did not advise us that the internal controls necessary for us
to  develop  reliable  financial  statements  did  not  exist.

     During  fiscal  year 2002 and the subsequent interim period through June 3,
2003,  Nation  Smith  did  not  advise us that any information had come to their
attention  which  had  led  them  to  no  longer be able to rely on management's
representation,  or  that  had made Nation Smith unwilling to be associated with
the  financial  statements  prepared  by  management.

     During  fiscal  year 2002 and the subsequent interim period through June 3,
2003,  Nation  Smith  did not advise us that the scope of any audit needed to be
expanded  significantly  or  that  more  investigation  was  necessary.

     During  fiscal  year 2002 and the subsequent interim period through June 3,
2003,  Nation  Smith  did not advise us that there was any information which the
accountants  concluded  would  materially impact the fairness and reliability of
either  (i)  a  previously  issued  audit  report  or  the  underlying financial
statements,  or  (ii)  the  financial statements issued or to be issued covering
the  fiscal  period(s)  subsequent  to  the  date  of  the most recent financial
statements  covered  by  an  audit  report  (including  information that, unless
resolved  to  the  accountant's satisfaction, would prevent it from rendering an
unqualified  audit  report  on  those  financial  statements).

     We  requested  that  Nation Smith furnish us with a letter addressed to the
SEC  stating whether or not it agrees with the above statements.  A copy of such
letter,  dated June 9, 2003, was filed as Exhibit 16.1 to our Form 8-K filing of
the  same  date.

     We  engaged  PKF,  Certified Public Accountants, A Professional Corporation
("PKF"),  as our new independent accountants on June 3, 2003 for the fiscal year
ending  December  31, 2003, and to review our quarterly financial statements for
the periods ending June 30, 2003 and September 30, 2003.  Prior to June 3, 2003,
we  had  not  consulted  with  PKF  regarding  (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of  audit  opinion  that  might  be rendered on our financial statements, and no
written  report or oral advice was provided to us by PKF concluding there was an
important  factor  to  be  considered  by  us  in  reaching  a decision as to an

                                       40
                                      PAGE

accounting,  auditing  or financial reporting issue; or (ii) any matter that was
either  the  subject  of  a  disagreement,  as  that  term  is  defined  in Item
304(a)(1)(iv)  of  Regulation  S-B  and  the related instructions to Item 304 of
Regulation  S-B,  or  a  reportable  event,  as  that  term  is  defined in Item
304(a)(1)(iv)  of  Regulation  S-B.

ITEM  8A.       CONTROLS  AND  PROCEDURES

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

                                       41
                                      PAGE

                                    PART III

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

     Our  management and directors' business activities are under the control of
our  Board  of  Directors.  Our  Chief  Executive  Officer, James W. Benson, our
President and Chief Financial Officer, Richard B. Slansky, our Vice President of
Engineering,  Frank  Macklin, and our Vice President of New Business Development
and  Project  Management,  Randall  K.  Simpson,  manage  the  Company's   daily
operations.  Our  Board  currently  consists of eight directors. Mr. Slansky was
added  to  the Board of Directors in November 2004.  J. Mark Grosvenor was added
and  resigned  from  the  Board  of  Directors  in 2003.  Below is a list of our
executive  officers  and  directors.

NAME                                                              POSITION  HELD
--------------------------------------------------------------------------------

James  W.  Benson                                     Chief  Executive  Officer,
13855  Stowe  Drive                          Director,  Chairman  of  the  Board
Poway,  California  92064

Richard  B.  Slansky                      President,  Chief  Financial  Officer,
13855  Stowe  Drive                              Director,  Corporate  Secretary
Poway,  CA   92064

Frank  Macklin                                     Vice  President,  Engineering
13855  Stowe  Drive
Poway,  California  92064

Randall  K.  Simpson                             Vice  President,  New  Business
13855  Stowe  Drive                          Development  &  Project  Management
Poway,  California  92064

Stuart  Schaffer                                                        Director
13855  Stowe  Drive
Poway,  CA   92064

Wesley  T.  Huntress*                                                   Director
13855  Stowe  Drive
Poway,  California  92064

Curt  Dean  Blake*                                                      Director
13855  Stowe  Drive
Poway,  California  92064

General  Howell  M.  Estes,  III  (USAF  Retired)*                      Director
13855  Stowe  Drive
Poway,  California  92064

Robert  S.  Walker*                                                     Director
13855  Stowe  Drive
Poway,  California  92064

Scott  McClendon  *                                                     Director
13855  Stowe  Drive
Poway,  California  92064

*     Denotes  Independent  Director

                                       42
                                      PAGE

     The  following  is a summary of the business experience of our officers and
directors  as  well  as  other  key  employees.

     James  W.  Benson,  age  60,  is  our  founder  and has served as our Chief
Executive  Officer and Chairman of the Board since inception. Mr. Benson started
the  trend  of successful computer entrepreneurs moving into the entrepreneurial
space arena.  In 1984, Mr. Benson founded Compusearch Corporation (later renamed
Compusearch Software Systems) in McLean, Virginia.  The company was based on the
first development of software algorithms and applications for personal computers
and  networked  servers  to  create  full  text  indexes  of  massive government
procurement  regulations  and to provide instant full text searches for any word
or  phrase;  the  first  instance  of  large scale, commercial implementation of
PC-based  full  text  searching,  which  later grew to encompass such systems as
worldwide  web  search  engines.  Seeing  related  opportunities in document and
image  management,  Mr.  Benson  started  the  award-winning  ImageFast Software
Systems  in 1989, which later merged with Compusearch.  In 1995, Mr. Benson sold
Compusearch  and ImageFast, and retired at age fifty.  After months of research,
Mr.  Benson  started SpaceDev, Inc., a Nevada corporation, which was acquired by
us  in  October  1997.  Mr. Benson holds a Bachelor of Science 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.

     Richard  B.  Slansky,  age  48,  is our President, Chief Financial Officer,
Director  and  Corporate  Secretary  and joined us on February 10, 2003 as Chief
Financial Officer and Corporate Secretary. In November 2004, he 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.
Previously,  Mr.  Slansky  served  as Chief Financial Officer, Vice President of
Finance,  Administration  and  Operations  and  Corporate  Secretary  for Path 1
Network  Technologies,  Inc.,  a  company focused on merging broadcast and cable
quality  video transport with IP networks from May 2000 to July 2002. Before his
tenure  at  Path 1, Mr. Slansky served as President, Chief Financial Officer and
member  of   the   Board   of   Directors   of   Nautronix,   Inc.,   a   marine
electronics/engineering  services  company, from January 1999 to May 2000. Prior
to  Nautronix,  Mr.  Slansky  served  as  Chief  Financial  Officer  of   Alexis
Corporation,  an  international  pharmaceutical   research  products  technology
company, from August 1995 to January 1999. He also served as President and Chief
Financial  Officer  of  C-N  Biosciences, formerly Calbiochem, from July 1989 to
July  1995.  Mr.  Slansky  is currently serving on the Board of Directors of two
privately  held high technology companies, one closely held, private real estate
company  and  the  Girl  Scouts  of San Diego and Imperial Counties. 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.

                                       43
                                      PAGE

     Frank  Macklin,  age 48, was appointed as our Vice President of Engineering
in  2004.  Mr.  Macklin has been our chief engineer of hybrid propulsion systems
and  the  technical  leader  for our National Reconnaissance Office funded SPOTV
Hybrid System Definition study, and is acting chief engineer for our 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.  Prior  to  his  work at Integrated Space
Systems,  Mr.  Macklin  worked at the General Dynamics Space Systems Division in
San  Diego  from  January  1987  to December 1994.  During his tenure at General
Dynamics,  Mr.  Macklin integrated a new guidance system onto the new generation
of  Atlas  launch  vehicles  and  became intimately familiar with all aspects of
vehicle  flight  software and hardware. He also designed and implemented diverse
ground  guidance  performance  and  analysis software systems, became a complete
end-to-end systems expert, and served as the guidance system expert on the elite
"tiger  team"  sent  to  support  all  launches.  Prior to General Dynamics, Mr.
Macklin  served  as  a  member  of  the Peacekeeper developmental launch team at
Vandenberg  Air  Force  Base  from  March  1984  to  December 1986, where he was
responsible for the $30M guidance and control system, led a group of 30 industry
engineers  and  gave the final guidance system go/no-go for launch.  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 BSEE from San Diego
State  University  and  is  a  California Board Certified Professional Engineer.

     Randall  K.  Simpson,  age  58,  is  our  Vice  President  of  New Business
Development  and  Project Management and joined us 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.  From March 1997 to September 2000,
Mr.  Simpson  was  Vice  President  of Engineering for Cubic Defense Systems, an
engineering  and  production  company  providing military training ranges, laser
instrumentation  products,  space  avionics   and   battlefield   communications
equipment.    From  November  1992  to  February  1997,  Mr. Simpson was Program
Director  for  Advanced  Test  Systems and Engineering Director for GDE Systems,
which  develops,  integrates and produces test equipment for advanced electronic
aircraft,  munitions,  space  launch,  satellite and telecommunications systems.
Mr.  Simpson  began his career at General Dynamics/Convair where he held various
positions.  Mr.  Simpson  received  both  his BSEE and MSEE from San Diego State
University.

     Stuart Schaffer, age 45, was appointed to our Board of Directors on May 17,
2002.  Mr.  Schaffer  is  currently  VP  Marketing,   for  Overture  Performance
Marketing  --  a  business  unit  of Overture Services, which is a subsidiary of
Yahoo!  Mr. Schaffer was our vice president of product development and marketing
from  May  2002  to  August 2003.  From 1998 to 2001, Mr. Schaffer acted as vice
president of marketing for Infocus Corporation, a fully reporting company, where
he  managed  all  aspects  of the marketing mix for market-share leading digital
projection  business  throughout  the  Americas  region.  In  that position, Mr.
Schaffer  revitalized  the  Proxima brand, managed a multi-million dollar annual
advertising,  communications  and  program budget, directed multiple outside and
in-house  agencies,  led product marketing teams in defining and delivering both
mobile  and  conference  room digital projector product lines, developed channel
strategies  and  programs  for  both  value-added and volume channels, served as
primary  press  spokesperson  for the company, established a market intelligence
structure  focused on developing customer and industry knowledge and spearheaded
merger  teams  to ensure the smooth transition of the merger between the Infocus
and  Proxima marketing organizations.  Prior to Infocus, Mr. Schaffer worked for
the  Hewlett-Packard  Company from 1985 to 1998, where he held various positions
in  Business  Development,  Marketing  and  Business  Planning. Mr. Schaffer has
worked  with  the  Leukemia  &  Lymphoma  Society,  on  a volunteer basis, as an
Assistant  Coach and Mentor. Mr. Schaffer has an MBA from Harvard University and
a  BS  degree  in  physics  from  Harvey  Mudd  College.

                                       44
                                      PAGE

     Wesley  T.  Huntress,  age  63, was elected to our Board of Directors as an
independent  director  at our annual shareholder meeting held June 30, 1999, and
is  a member of our Audit Committee and Compensation 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.   Prior to his appointment at Carnegie, Dr. Huntress served the
Nation's  space program as the Associate Administrator for Space Science at NASA
from  October  1993  through  September 1998 where he was responsible for NASA's
programs  in  astrophysics, planetary exploration, and space physics. During his
tenure,  NASA  space  science  produced  numerous major discoveries, and greatly
increased  the  launch rate of missions. These discoveries include the discovery
of  possible  ancient  microbial life in a Mars meteorite; a possible subsurface
ocean  on  Jupiter's moon Europa; the finding that gamma ray bursts originate at
vast distances from the Milky Way and are extraordinarily powerful; discovery of
massive  rivers  of  plasma  inside  the  Sun; and a wealth of announcements and
images  from  the Hubble Space Telescope, which have revolutionized astronomy as
well  as increased public interest in the cosmos.  Dr. Huntress also served as a
Director  of  NASA's Solar System Exploration Division from 1990 to 1993, and as
special  assistant to NASA's Director of the Earth Science and Applications from
1988  to  1990.  Dr.  Huntress  came  to  NASA  Headquarters  from Caltech's Jet
Propulsion  Laboratory  ("JPL").  Dr. Huntress joined JPL as a National Research
Council  resident  associate  after  receiving  is  B.S. in Chemistry from Brown
University  in 1964 and his Ph.D. in Chemical Physics from Stanford in 1968.  He
became  a  permanent  research  scientist  at  JPL in 1969.  He and his JPL team
gained  an  international  reputation  for  their pioneering studies of chemical
evolution  in interstellar clouds, comets and planetary atmospheres.  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,  age  47,  was appointed to our Board of Directors as an
independent  director  on  September  5, 2000.  He serves as our Audit Committee
Chairman  and  is a member of our Nominating/Corporate Governance Committee. Mr.
Blake is CEO 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  acted  as  the Chief Operating Officer of the Starwave
Corporation  from  1993  until  1999,  where  he  managed  business development,
finance,  legal  and  business  affairs,  and  operations  for  the world's most
successful  collection  of  content  sites on the Internet. During that time, he
developed  business  strategies, financial models, and structured and negotiated
venture  agreements  for Starwave's flagship site, ESPN Sportszone, at that time
the  highest  traffic  destination  site  on the Internet. He also developed and
negotiated  venture agreements with the NBA, NFL, Outside Magazine and NASCAR to
create  sites  around  these  brands.  Mr.  Blake  negotiated  the  sale   of  a
controlling  interest  in Starwave Corporation to Disney/ABC. Prior to Starwave,
Mr.  Blake worked at Corbis from 1992 to 1993, where he led the acquisitions and
licensing effort to fulfill Bill Gates' vision of creating the largest taxonomic
database  of  digital images in the world. Mr. Blake acted as General Counsel to
Aldus  Corporation  from  1989  to  1992, where he was responsible for all legal
matters  of  the $125 million public corporation and its subsidiaries.  Prior to
that,  Mr.  Blake  was  an attorney at Shidler, McBroom, Gates and Lucas, during
which time he was assigned as onsite counsel to the Microsoft Corporation, where
he  was  primarily  responsible for the domestic OEM/Product Support and Systems
Software  divisions.  Mr.  Blake  has  an  MBA  and  JD  from  the University of
Washington.

                                       45
                                      PAGE

     General  Howell  M. Estes, III (USAF Retired), age 63, was appointed to our
Board  of Directors as an independent director on April 2, 2001, and is a member
of  our  Nominating/Corporate  Governance  Committee  and  of  our  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  ("CINCNORAD") and the United States Space
Command  ("CINCSPACE"),  and  the  Commander  of  the  Air  Force  Space Command
("COMAFSPC")  headquartered at Peterson AFB, 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 JFK School of Government. Gen.
Howell Estes is the President of Howell Estes & Associates, Inc., a wholly owned
consulting  firm  to  CEOs,  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
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 (the "Rumsfeld Commission").

     Robert  S.  Walker,  age  62, was appointed to our Board of Directors as an
independent  director   on  April  2,  2001.    He   currently   sits   on   our
Nominating/Corporate  Governance  Committee. Mr. Walker has acted as Chairman of
Wexler & Walker Public Policy Associates in Washington, D.C. since January 1997.
As  a  former  Congressman (1977-1997), Chairman of the House Science Committee,
Vice  Chairman  of  the  Budget  Committee,  and a long-time member of the House
Republican  leadership,  Walker  became a leader in advancing the nation's space
program,  especially  the  arena of commercial space, for which he was the first
sitting  House  Member  to  be  awarded  NASA's highest honor, the Distinguished
Service  Medal. Bob Walker is a frequent speaker at conferences and forums.  His
main  issues  include  the  breadth and scope of space regulation today, and how
deregulation  could unleash the telecommunications, space tourism, broadcast and
Internet  industries.  Mr.  Walker  currently sits on the boards of directors of
Aerospace Corporation, a position he has held since March 1997.  Wexler & Walker
is  a  Washington-based, full-service government relations firm founded in 1981.
Wexler  &  Walker  principals  have  served  in Congress, in the White House and
federal  agencies, as congressional staff, in state and local governments and in
political campaigns. Wexler & Walker is a leader on the technology issues of the
twenty-first  century.  During  2002,  we incurred consulting fees with Hill and
Knowlton,  Inc.,  an  affiliate  of  Wexler  & Walker, in an aggregate amount of
approximately  $56,000.  No  fees  were  paid  to  Wexler  &  Walker  in  2003.

     Scott  McClendon,  age  66,  was  appointed to our Board of Directors as an
independent  director on July 19, 2002. He currently sits on our Audit Committee
and  our  Compensation  Committee.  McClendon  currently  sits  on  the Board of
Directors  for  Overland  Storage,  Inc.,  a  public  company,  where he acts as
chairman  of  the  Board.  He became the chairman after serving as president and
chief  executive  officer  from  October  1991  to March 2001.  Prior to joining
Overland  Storage,  Inc.,  Mr. McClendon was employed by Hewlett-Packard Company
for  over 32 years in various positions of engineering, manufacturing, sales and
marketing.  In  addition  to  SpaceDev  and  Overland  Storage, Mr. McClendon is
currently  serving on the Board of Directors of Procera Networks, Inc., a public
company,  and  Sicommnet,  Inc.,  privately  held  high technology company.  Mr.
McClendon  received  a  Bachelor  of Science degree in electrical engineering in
June 1960, and a Master of Science degree in electrical engineering in June 1962
from  Stanford  University  School  of  Engineering.

                                       46
                                      PAGE

     One  of  our independent directors currently sits on the board of directors
of  another  Reporting  Company.  "Reporting Companies" include companies with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act  of  1934,  as  amended  (the  "1934 Act") or subject to the requirements of
Section  15(d)  of  the  1934  Act,  or  any company registered as an investment
company  under  the Investment Company Act of 1940, as amended (the "1940 Act").

COMMITTEES  OF  THE  BOARD  OF  DIRECTORS  AND  MEETING  ATTENDANCE

     We  have  a  standing audit committee comprised of Messrs. Blake, McClendon
and Dr. Huntress.  In 2004, we established a nominating and governance committee
comprised  of  Retired  General  Estes,  Mr.  Walker  and  Dr.  Huntress  and  a
compensation  committee  comprised  of  Messrs.  Blake and McClendon and Retired
General  Estes.  The  Company does not maintain any pension, retirement or other
arrangements other than as disclosed in the following table for compensating its
Directors.  Our  Board  of  Directors took action five (5) times during the last
fiscal  year, with all five (5) being at regular or special meetings attended by
the  members  of  the  Board either personally or telephonically.  There were no
unanimous  written  consents  in  2004. Our Audit Committee took separate action
five  (5)  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.  The  Nominating  and Corporate Governance Committee and the
Compensation  Committee  met  once  to  approve  their  respective  charters.

                                       47
                                      PAGE

ITEM  10.     EXECUTIVE  COMPENSATION

EXECUTIVE  OFFICER  COMPENSATION

During  the  fiscal  years  ended  December 31, 2002, 2003 and 2004, the Company
granted  options  to  certain of its officers as compensation for their services
pursuant  to  the  Company's  stock  option  plan.  Total  compensation  paid to
officers  of  the  Company  for  its past three fiscal years is set forth below:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                                                       Long Term Compensation
                                                                   --------------------------------------------------------

                                Annual Compensation                  Awards                             Payouts
                                ----------------------               ----------                         ---------

<S>                             <C>   <C>     <C>    <C>           <C>            <C>             <C>           <C>
Name and Principal Position(1)  Year  Salary  Bonus  Other Annual  Restricted     Securities      LTIP Payouts  All Other
                                      ($)     ($)    Compensation  Stock Award(s) Underlying      ($)           Compensation
                                                     ($)           ($)            Options/ SARs #               ($)
------------------------------  ----  ------- ------ -------------  --------------  ------------   ------------  -----------
James W. Benson, CEO (2) . . .  2002  141,325      -          -                 -     10,000(2)              -             -
.. . . . . . . . . . . . . . .   2003  150,000      -          -                 -            -               -             -
.. . . . . . . . . . . . . . .   2004  177,923 40,000        3,894               -            -               -             -

Richard B. Slansky, President,  2002        -      -          -                 -            -               -             -
.. .  . . . . . . .  CFO. . . . .2003   94,625      -        1,183               -    355,000(3)              -             -
.. . . . . . . . . . . . . . .   2004  150,000      -       27,672               -    395,000(3)              -             -

Randall K. Simpson, V.P. . . .  2002        -      -          -                 -            -               -             -
...New Business Development. . ..2003        -      -          -                 -            -               -             -
.. . . . . . . . . . . . . . .   2004  114,231      -          -                 -    250,000(4)              -             -

Frank Macklin, V.P. . .. . . .  2002        -      -          -                 -            -               -             -
...             Engineering. . ..2003        -      -          -                 -            -               -             -
.. . . . . . . . . . . . . . .   2004  109,110      -        4,067               -     50,000(5)              -             -

------------------------------  ----  ------- ------ -------------  --------------  ------------   ------------  -----------
------------------------------  ----  ------- ------ -------------  --------------  ------------   ------------  -----------
</TABLE>

(1)     The  table  includes  information  as to the Chief Executive Officer and
highest paid officers of the Company for the last fiscal year, including persons
whose  information  would have been required but for the fact that they were not
serving  as officers of the Company at its fiscal year end.  For purposes of the
table,  only  persons whose total annual salary and bonus exceeded $100,000 have
been  included.

(2)     Mr.  Benson  was  awarded  10,000 options in 2001 as a part of an annual
award  of  options to our employees. The options are incentive stock options and
were  granted  with  an exercise price equal to 110% of the fair market value of
our  common  stock  on  the  date  of  grant.

(3)     Mr.  Slansky  was  awarded  up to 385,000 options in 2003 as part of his
employment  agreement,  with  25,000  vested  immediately,  180,000  vesting  in
six-month  increments  over  five  years  and the remaining based on performance
criteria established by the CEO.  The timeframe for certain performance criteria
lapsed  in  2003 and 30,000 options not earned were forfeited; thereby, reducing
Mr.  Slansky's  potential securities underlying options to a maximum of 355,000,
as  illustrated  above. Mr. Slansky was awarded up to 395,000 options in 2004 as
part  of  an overall option normalization and based on positions held; and these
options  vest  based  on  the  following:  options  on 197,500 shares vesting in
six-month increments over five years and the remaining vest based on performance
criteria  established  by  the  CEO,  as  approved  by  the  Board.

                                       48
                                      PAGE

  (4)     Mr.  Simpson  was awarded up to 250,000 options in 2004 as part of his
employment  agreement,  with  125,000  vesting in six-month increments over five
years  and  the  remaining vest based on performance criteria established by the
CEO  or  President,  as  approved  by  the  Board.

  (5)     Mr.  Macklin  was  awarded  up to 50,000 options in 2004 as part of an
overall option normalization and based on positions held; and these options vest
based  on  six-month  increments  over  five  years.


During  the  last  fiscal  year and as of December 31, 2004, the Company granted
stock  options  to  executive  officers  as  set  forth  in the following table:

<TABLE>
<CAPTION>

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

Individual Grants
------------------
<S>                 <C>                    <C>                       <C>                <C>
Name . . . . . . .  Number of Securities   % of Total Options/SARs   Exercise of Base   Expiration
                    Underlying             Granted to Employees in   Price ($/Sh)       Date
                    Options/SARs           Fiscal Year
                    Granted (#)
------------------  --------------------   -----------------------   ----------------   ------------

James W. Benson                        0                         0                  0              0

Richard B. Slansky               395,000                       18%               0.92      3/25/2010

Randall K. Simpson               250,000                       11%               1.19      1/26/2010

Frank Macklin                     50,000                        2%               0.92      3/25/2010
------------------  --------------------   -----------------------   ----------------   ------------
</TABLE>

     As  of  December  31,  2004, the Company had vested and unvested securities
underlying  stock  options  to  executive officers as set forth in the following
table:

                    Option/SAR Grants Ended December 31, 2004

<TABLE>
<CAPTION>



                                                         Number of Securities Underlying          Value of Unexercised In-the-Money
                                                         Unexercised Options/SARs at FY-End (#)   Options/SARs at FY- End ($)
                                                         --------------------------------------   ---------------------------------

<S>                 <C>                 <C>              <C>                                       <C>

                                                         Exercisable/                              Exercisable/
Name . . . . . . .  Shares Acquired on  Value Realized   Unexercisable                             Unexercisable(1)
                    Exercise (#)        ($)
------------------  ------------------  --------------   --------------------------------------   ---------------------------------
James W. Benson. .                   0               0                                 255,000/                            254,734/
------------------  ------------------  --------------   --------------------------------------   ---------------------------------
                                                                                      1,000,000                             375,000
------------------  ------------------  --------------   --------------------------------------   ---------------------------------
Richard B. Slansky                   0               0                                  276,250/                           184,860/
------------------  ------------------  --------------   --------------------------------------   ---------------------------------
                                                                                        473,750                             359,590
------------------  ------------------  --------------   --------------------------------------   ---------------------------------
Randall Simpson                      0               0                                   12,500/                            14,875/
------------------  ------------------  --------------   --------------------------------------   ---------------------------------
                                                                                        237,500                             282,625
------------------  ------------------  --------------   --------------------------------------   ---------------------------------
Frank Macklin                        0               0                                    8,000/                            48,583/
------------------  ------------------  --------------   --------------------------------------   ---------------------------------
                                                                                         45,000                              41,400
------------------  ------------------  --------------   --------------------------------------   ---------------------------------

</TABLE>

(1)     For  purposes  of  determining  whether  options  are "in-the-money," we
defined  fair market value as the five-day weighted average of the closing price
of  our  common  stock  on  the Over-The-Counter Bulletin Board as of  March 14,
2005,  or  $1.72  per  share.  All  the  options  listed  on   the   table   are
"in-the-money",  except  unvested  options  on  750,000  of Mr. Benson's shares.

                                       49
                                      PAGE

PERQUISITES

     We  provide our Chief Executive Officer, Mr. Benson, with a few perquisites
including  a cell phone with basic coverage and charges, an annual membership to
alpha  trader.com,  annual  air travel club memberships and a monthly hosting on
web  site  works.  Although  the  value  of  these  perks is not substantial, we
believe  these  perks  are  an  important  component  of chief executive officer
compensation.

DIRECTOR  COMPENSATION

     At  our  annual  meeting on July 16, 2000, our Board of Directors adopted a
compensation  plan  for  independent  directors whereby they receive options for
attending  meetings  of  the  Board  as  follows: each such director received an
option to purchase 5,000 shares for each of two telephonic meetings attended per
year,  and an option to purchase 10,000 shares for each of two meetings attended
in person per year.  These directors did not receive additional compensation for
attending  meetings  in  excess  of  those described above until March 2004.  In
addition  to  the above, independent directors received $5,000 in options on the
date  of  election or appointment.  All such options were issued pursuant to our
1999  Incentive  Stock  Option  Plan  at fair market value as of the date of the
meeting  attended, vested 50% on the first anniversary date of the date of grant
and  50%  on  the second anniversary date of the date of grant and expire on the
five-year  anniversary  of  the  grant  date.

     On  March  25,  2004, our Board of Directors modified our compensation plan
for independent directors.  Under the modified plan, non-employee directors will
receive  options  for attending meetings of the Board as follows:  each director
shall  receive  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  will  also  receive  compensation for attending committee meetings as
follows: each director shall receive 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  shall  receive  an  option  to  purchase   2,500   shares   for   each
Nominating/Governance  Committee  meeting  attended,  which options shall not be
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  will be issued pursuant to the Plan at fair market value as of the date
of  the  meeting  attended,  will vest 50% on  the first anniversary date of the
date  of  grant  and 50% on the second anniversary date of the date of grant and
will  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, 2004. We do not pay directors who are
also  officers  of  the  Company  additional  compensation  for their service as
directors.

                                       50
                                      PAGE

<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
-----------------------------  --------     -------   ----------     ---------   ------------
James W. Benson . . . . . . .         -           -            -             -              -
-----------------------------  --------     -------   ----------     ---------   ------------
Richard B. Slansky. . . . . .         -           -            -             -              -
-----------------------------  --------     -------   ----------     ---------   ------------
Stuart Schaffer . . . . . . .         -           -            -             -              -
-----------------------------  --------     -------   ----------     ---------   ------------
Wesley T. Huntress. . . . . .         -           -            -             -         75,000
-----------------------------  --------     -------   ----------     ---------   ------------
Curt Dean Blake . . . . . . .         -           -            -             -         74,000
-----------------------------  --------     -------   ----------     ---------   ------------
General Howell M. Estes, III.         -           -            -             -         30,000
-----------------------------  --------     -------   ----------     ---------   ------------
Robert S. Walker. . . . . . .         -           -            -             -         18,000
-----------------------------  --------     -------   ----------     ---------   ------------
Scott McClendon . . . . . . .         -           -            -             -         75,000
-----------------------------  --------     -------   ----------     ---------   ------------
</TABLE>

EMPLOYMENT  AGREEMENTS

     On November 21, 1997, we entered into a five-year employment agreement with
our  CEO,  Mr.  Benson.  This  agreement provides for compensation of salary and
stock  as  well as stock options.  This agreement also prohibits Mr. Benson from
competing with us, disclosing any confidential information, or soliciting any of
our  employees  or  customers for one year after termination of employment.  Our
Board  of  Directors revised Mr. Benson's employment agreement at its meeting on
July 16, 2000.  This employment contract supersedes the previous agreement.  The
term  of this revised employment contract is for a period of five (5) years from
July  16,  2000.  The  revised  agreement  provides  for the grant of options to
purchase  up  to  4,000,000  shares  of  our common stock upon the occurrence of
certain  events,  of  which  options for 2,500,000 have been granted, 500,000 of
which  are  currently  vested.

     On May 17, 2002, we entered into an "at-will" employment agreement with Mr.
Schaffer.  The  agreement  provided  for  Mr. Schaffer's compensation of salary,
benefits  and  options to purchase up to 450,000 shares of our common stock.  On
July  2,  2003,  we entered into a Confidential Separation Agreement and General
Release  with  Mr. Schaffer.  The agreement provided for Mr. Schaffer to receive
salary and benefits until August 8, 2003 and for the resignation of Mr. Schaffer
as  an  officer, but not as a director.  In exchange for a release of claims and
other  promises  set  forth  in  the  agreement,  Mr.  Schaffer retained certain
exercise  rights on his vested options of 90,000 shares until the earlier of (i)
eighteen  (18) months from his resignation as a member of our Board of Directors
or  other  subsequent  consulting  relationship  with us, or (ii) July 19, 2008.
After  August  8,  2004,  Mr. Schaffer was eligible for stock options related to
attending  Board  Meetings,  even  though  he  is  not considered an independent
director  due  to  his  recent  employment  with  us.

     On  February  14,  2003,  we entered into an "at-will" employment agreement
with  Mr.  Slansky.  The  agreement  provided  for Mr. Slansky's compensation of
salary,  benefits,  performance  bonuses  and  options to purchase up to 385,000
shares  of our common stock, (which was subsequently reduced to 355,000 due to a
missed  vesting  incentive  for  options  on 30,000 shares).  The agreement also
provided  for  severance  under certain termination provisions and prohibits Mr.
Slansky  from  soliciting our employees or competing with us if he were to leave
the  Company.

                                       51
                                      PAGE

     On  November 17, 2003, we entered into an "at-will" employment relationship
with  Mr.  Dario ("Dan") DaPra to become our Vice President of Engineering.  Our
offer  letter  provided  for  Mr.  DaPra's  compensation of salary, benefits and
options  to purchase up to 250,000 shares of our common stock.  The offer letter
also  provided  for severance under certain termination provisions and prohibits
Mr.  DaPra  from  soliciting  our  employees  or  competing  with us.  Mr. DaPra
resigned  on  March  5,  2004  and  subsequently  entered  into  a  Confidential
Separation  Agreement  and  General Release with us.  The Agreement provided for
Mr.  DaPra  to receive one-half pay through April 30, 2004 in lieu of severance,
and to retain options on 40,000 shares of our stock with the ability to exercise
those  options  until  October  31,  2004.

EMPLOYEE  BENEFITS

     At  our  1999  Annual  Stockholder  Meeting,  the  shareholders  adopted an
Incentive  Employee Stock Option Plan under which the Board of Directors had the
ability  to  grant  our  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  provide  for  preferential tax treatment, are only available to
employees,  including  officers  and  affiliates,  and  may  not  be  issued  to
non-employee  directors.  The exercise price of the Incentive Stock Options must
be 100% of the fair market value of the stock on the date the option is granted.
Pursuant  to  our  plan,  the exercise price for the non-statutory stock options
will  not be less than 85% of the fair market value of the stock on the date the
option  is  granted. We are required to reserve an amount of common shares equal
to the number of shares, which may be purchased as a result of awards made under
the  Plan  at  any  time.

     At  the  2000  Annual  Stockholder  Meeting,  the  shareholders approved an
amendment  to  the  Stock  Option  Plan of 1999, increasing the number of shares
eligible for issuance under the Plan to 30% of the then outstanding common stock
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, at its annual meetings in 2001 and 2002, made no
adjustment, as a determination was made that the number of shares then available
under  the  Plan was sufficient to meet the Company's needs. All shares issuable
under  the  1999  Incentive  Stock  Option  Plan  have been issued or in reserve
subject  to outstanding awards under the plan. The plan is, therefore, no longer
in  use  except  as  necessary  for  the  exercise of those outstanding options.

     At  our  2004  Annual  Stockholder  Meeting,  held  on  August 5, 2004, the
stockholders  adopted  a  2004 Equity Incentive Plan.  The 2004 Equity Incentive
Plan authorized and reserved for issuance under the Plan 2,000,000 shares of our
common  stock.  The 2004 Equity Incentive Plan is an important part of our total
compensation  program  because  competitive  benefit  programs  are  a  critical
component  of  our  efforts to attract and retain qualified employees, directors
and  consultants.  Options  granted  under  the  plan  may  be  Incentive  Stock
Options  or non-statutory stock options, as determined by the Board of Directors
or a committee appointed by the Board of Directors at the time of grant. Limited
rights  and stock awards may also be granted under the Plan.  As of December 31,
2004,  6,184,698 shares were authorized for issuance under the 1999 Stock Option
Plan  and  the  2004  Equity  Incentive  Plan,  3,878,766 of which are currently
subject  to  outstanding options and awards and options on 1,005,035 shares were
exercised  in  2004.  During  2004,  we issued non-statutory options to purchase
272,000  shares to our independent directors for attendance at our 2004 Board of
Directors  meetings.

     The  Stock  Option  Plan  of 1999 was registered with the U.S. Securities &
Exchange Commission on Form S-8. Shares issuable under the 2004 Equity Incentive
Plan  were  registered  on  Form  S-8  on  March  28,  2005.

                                       52
                                      PAGE

     In  addition  to  the  1999 Stock Option Plan and the 2004 Equity Incentive
Plan,  our  shareholders  adopted  the  1999 Employee Stock Purchase Plan, which
authorized  our  Board  of Directors to make twelve consecutive offerings of our
common  stock  to our employees.  The 1999 Employee Stock Purchase Plan has been
instituted  and  the  first  employees enrolled in the plan in August 2003.  The
first  shares  of  common  stock were issued under the Plan in February 2004 and
every  six-month  anniversary thereafter.  The 1999 Employee Stock Purchase Plan
expired  in June 2005; however, the Board authorized a one-year extension of the
plan at their meeting in November 2004, while the Compensation Committee reviews
the  value  of  the  plan  to  employees  and  the  desire  for its continuance.

     We  also  offer  a  variety  of  health,  dental,  vision,  401(k) and life
insurance  benefits  to  our  employees  in  conjunction  with our co-employment
partner,  Administaff.

SECTION  16(A)  BENEFICIAL  OWNERSHIP  REPORTING  COMPLIANCE

     Based  upon  a  review on the Forms 3 and 4 furnished to us with respect to
our  most  recent  fiscal  year, each of the Directors and/or Executive Officers
timely filed his initial Form 3 and Form 4 under Section 16(a) of the Securities
and  Exchange  Act of 1934 during 2003 with the following exceptions: Mr. Benson
filed  a Form 4 a few days late after transferring his indirect ownership of 1.2
million  shares  to  his  children in February 2004.  The shares were held by SD
Holdings LLC which was dissolved on November 6, 2003.  Mr. Schaffer filed a Form
4  a  few  days  late  after  exercising  a  warrant in September 2004, which he
received  as  part of a convertible debt offering.  Mr. Slansky filed a Form 4 a
few  months  late  after  receiving  a small amount of stock from under our 1999
Employee  Stock  Purchase  Plan.

ITEM  11.     SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table  provides information as of March 14, 2005 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 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.

                                       53
                                      PAGE

<TABLE>
<CAPTION>

<S>                     <C>                                    <C>                       <C>

Title of                Name and Address of                    Amount and                 Percent of
Class                   Beneficial Owner                       Nature of                  Class(1)
                                                               Beneficial
                                                               Ownership(1)
----------              ----------------------                 ----------------           -----------
..0001 par               Susan C. Benson                            4,875,853(2)                22.55%
value                   13855 Stowe Drive
common                  Poway, California 92064
stock

..0001 par               James W. Benson, CEO                       4,865,854(3)                22.51%
value                   and Chairman
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Richard B. Slansky                           397,544(4)                 1.83%
value                   President and CFO
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Frank Macklin                                243,073(5)                 1.14%
value                   13855 Stowe Drive
common                  Poway, California 92064
stock

..0001 par               Randall K. Simpson                            28,366(6)                 0.13%
value                   13855 Stowe Drive
common                  Poway, California 92064
stock

..0001 par               J. Mark Grosvenor                          1,330,376(7)                 6.04%
value                   13855 Stowe Drive
common                  Poway, California 92064
stock

..0001 par               Wesley T. Huntress Jr.                       124,015(8)                 0.58%
value                   Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Curt Dean Blake                              169,430(9)                 0.79%
value                   Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               General Howell M.                            88,167(10)                 0.41%
value                   Estes III, Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Robert S. Walker                             77,167(11)                 0.36%
value                   Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Stuart Schaffer, Director                   218,206(12)                 1.02%
value                   13855 Stowe Drive
common                  Poway, California 92064
stock

..0001 par               Scott McClendon                              64,460(13)                 0.30%
value                   Director
common                  13855 Stowe Drive
stock                   Poway, California 92064
----------              ----------------------                 ----------------           -----------
..0001 par               Officers and Directors as                 6,276,282(14)                27.84%
value                   a group (10 Persons)
common
stock
----------              ----------------------                 ----------------           -----------
----------              ----------------------                 ----------------           -----------

</TABLE>

                                       54
                                      PAGE

(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 14, 2004,
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 21,363,980
on  March  14,  2005.

(2)     Represents  4,372,147  shares  held  directly  by  Ms. Susan Benson as a
result  of  a  marital  separation agreement between Mr. James W. Benson and Ms.
Susan  C.  Benson  plus  248,706  shares held in Space Development Institute and
vested  options on 255,000 shares.  In addition, Ms. Benson has unvested options
on  1,000,000  shares.  Mr.  and Ms. Benson disclaim ownership of shares held by
their  children.  Mr.  and  Ms.  Benson executed and filed a property settlement
agreement  on  November 18, 2004 and hold their stock in sole and separate name.

(3)     Represents  4,362,147  shares  held directly by Mr. James W. Benson as a
result  of  a  marital  separation agreement between Mr. James W. Benson and Ms.
Susan  C.  Benson  plus  248,707  shares held in Space Development Institute and
vested  options on 255,000 shares.  In addition, Mr. Benson has unvested options
on  1,000,000  shares.  Mr.  and Ms. Benson disclaim ownership of shares held by
their  children.  Mr.  and  Ms.  Benson executed and filed a property settlement
agreement  on  November 18, 2004 and hold their stock in sole and separate name.

(4)     Mr.  Slansky  owns 83,544 shares of which 38,462 shares he purchased for
cash  in  a  private  transaction  with  Mr.  Skarupa, the Company's former Vice
President  of  Operations  and an additional 38,462 shares Mr. Slansky bought by
exercising  his  warrant  rights which were also purchased from Mr. Skarupa.  In
addition,  Mr.  Slansky  has vested options on 314,000 shares.  Mr. Slansky also
holds 436,000 unvested options which are not expected to vest within the next 60
days.

(5)     Mr.  Macklin  owns  230,073  shares and vested options on 13,000 shares.
Mr.  Macklin  also  holds 40,000 unvested options which will not vest within the
next  60  days.

(6)     Mr.  Simpson  owns  3,366  shares of our common stock, vested options on
25,000  shares of our common stock and also holds 225,000 unvested options which
will  not  vest  within  the  next  60  days.

(7)     Mr.  Grosvenor  owns  665,188  shares  of  our common stock plus 665,188
vested warrants that he purchased in our private placement.  On May 6, 2003, Mr.
Grosvenor  was  granted  options  on  19,615 shares, which he forfeited upon his
resignation  from  the  Board  on  September  15,  2003.

(8)     Mr.  Huntress  owns 8,868 shares of our common stock.  Mr. Huntress also
owns  115,147  vested  options,  which  he  received  as  compensation  for  his
participation on our Board of Directors.  In addition, Mr. Huntress has unvested
options  on  61,500  shares  which  will  not  vest  within  the  next  60 days.

(9)     Mr.  Blake  owns  30,612  shares  of our common stock plus 30,612 vested
warrants  that  he  purchased  in  our  private  placement.  Mr. Blake also owns
108,206  vested options, which he received as compensation for his participation
on  our  Board  of  Directors.  In  addition,  Mr. Blake has unvested options on
55,500  shares  which  will  not  vest  within  the  next  60  days.

(10)     General  Estes  III  owns  88,167  vested options, which he received as
compensation  for  his  participation  on  our Board of Directors.  In addition,
General  Estes  III  has  unvested  options on 28,500 shares which will not vest
within  the  next  60  days.

                                       55
                                      PAGE

(11)     Mr.  Walker  owns  77,167  vested  options,   which  he   received   as
compensation  for his participation on our Board of Directors.  In addition, Mr.
Walker  has  unvested  options on 22,500 shares will not vest within the next 60
days.

(12)     Mr.  Schaffer  owns  128,206 shares of which 64,103 were converted from
warrants.  In  2003,  as  part  of the Company's convertible debt repayment, Mr.
Schaffer  forgave  64,103  warrants  and  converted  $25,000  of his debt to the
Company into 64,103 shares.  Mr. Schaffer also owns 90,000 vested options, which
he  received  as  part  of his compensation package as Vice President of Product
Development  and  Marketing.

(10)     Mr.  McClendon  owns  64,460  vested  options,  which  he  received  as
compensation  for his participation on our Board of Directors.  In addition, Mr.
McClendon  has  unvested options on 56,000 shares which will not vest within the
next  60  days.

(11)     Officers  and directors as a group include our eight Board members, two
of  whom are also officers of the Company, and Messrs. Simpson, and Macklin, who
are  officers  of  the  company.

Change  in  Control

     James  W.  Benson, our Chief Executive Officer and Chairman of the Board of
Directors,  and  Susan  Benson,  our former Corporate Secretary, are married but
separated.  They  filed  a  property  settlement agreement on November 18, 2004.
Mr.  and  Ms.  Benson  hold  their  ownership  in  SpaceDev as sole and separate
property  and are therefore listed separately in the beneficial ownership table.


ITEM  12.     CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

     James  W.  Benson, our Chief Executive 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.

     One  of  our  independent  directors,  Robert  S. Walker, is a principal of
Wexler  &  Walker  Public  Policy  Associates,  a Washington-based, full-service
government  relations  firm  founded  in  1981.  Wexler & Walker principals have
served  in  Congress,  in the White House and federal agencies, as congressional
staff,  in  state  and  local  governments and in political campaigns.  Wexler &
Walker is a leader on the technology issues of the twenty-first century.  We did
not incur consulting fees with Hill and Knowlton, Inc., an affiliate of Wexler &
Walker,  in  2003  or  2004.

     In  December  2001,  we entered into a consulting agreement with one of our
independent  directors,  Curt  D.  Blake,  pursuant to which Mr. Blake agreed to
perform  certain  services for us and identify and qualify significant investors
and potential acquisition targets for us.  Under the agreement, Mr. Blake was to
receive compensation, in cash and non-statutory stock options, for his services.
In  addition,  Mr.  Blake was to receive a cash finder's fee plus a common stock
grant  for all monies raised as a result of introductions made by him.  However,
as a result of the independence rules imposed by the Sarbanes-Oxley Act of 2002,
Mr. Blake voluntarily terminated his agreement with us on November 25, 2002.  We
made  no  payments  to  Mr.  Blake in 2004 and 2003, other than reimbursement of
Board-related  travel  expenses.

                                       56
                                      PAGE

     From  October  14,  2002 through November 14, 2002, we sold an aggregate of
$475,000  of  2.03%  convertible  debentures  to three of our then directors and
officers.  The total funding was completed on November 14, 2002. The convertible
debentures  entitled  the  holder  to  convert  the principal and unpaid accrued
interest  into our common stock when the note matured. The notes originally were
set  to  mature six (6) months from issue date and were subsequently extended to
twelve (12) months from issue date on March 19, 2003. The convertible debentures
were  exercisable  into a number of our common shares at a conversion price that
equaled the 20-day average asking price less 10%, which was established when the
note  was issued. Concurrent with the issuance of the convertible debentures, we
issued  to  the  subscribers, warrants to purchase up to 1,229,705 shares of our
common  stock. These warrants were exercisable for three (3) years from the date
of  issuance  at  the  initial  exercise price. 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 recorded as debt discount. See Note
8(c) to our Consolidated Financial Statements for discussion of the terms of the
warrants.  The  debt  discount was amortized as additional interest expense over
the term of the convertible debentures. On September 5, 2003, we repaid one-half
of the convertible notes, with the condition that the note holders would convert
the  other half. Also, as a condition of the partial repayment, the note holders
were required to relinquish one-half of the 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% for a total of $18,161
of interest expense. All the note holders accepted the offer and the convertible
notes were retired. As of December 31, 2003, we recorded a credit of $88,408, as
debt  discount  recovery;  therefore, for the year ending December 31, 2003, the
debt  discount  expense  was  $112,500.  The  Company also expensed $131,411 for
non-cash  loan fee expense related to the convertible note. Fair market value of
the  stock was determined by discounting the closing market price on the date of
the transaction by 20%, based on the nature of the restricted securities. Of the
614,852  remaining  warrants,  all  were  exercised  in  2004  and none remained
outstanding  at  December  31,  2004.

ITEM  13.     EXHIBITS  AND  REPORTS  ON  FORM  8-K

(a)     Exhibits:
<TABLE>
<CAPTION>



ITEM                                                                                                              EXH. NO.
-----------------------------------------------------------------------------------------------------------       --------
<S>                                                                                                               <C>
SpaceDev's Articles of Incorporation(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3.1
SpaceDev's Articles of Amendment to Articles of Incorporation dated November 4, 1997
Authorizing Series B Preferred Stock(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3.2
SpaceDev's Articles of Amendment to Articles of Incorporation dated December 17, 1997
Changing Name to SpaceDev, Inc. (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3.3
SpaceDev's Bylaws(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3.4
SpaceDev's Articles of Amendment to Articles of Incorporation dated July 21, 2003
Increasing the Authorized Shares of Common Stock (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       3.5
Certificate  of  Designations  dated  as  of  August  25,  2004,  by and between SpaceDev,
Inc.  and  the  Laurus  Master  Fund, Ltd.(13). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3.6
Form of Common Stock Certificate(1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.1
Form of Non-Qualified Stock Option(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.2
Form of Incentive Stock Option(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.3
Form of Re-Pricing Warrant(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.4

                                       57
                                      PAGE

Form of Warrant(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.5
1999 Stock Option Plan(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.6
First Amendment to 1999 Stock Option Plan(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.7
1999 Employee Stock Purchase Plan(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.8
Form of Warrant from November 2, 2000 Private Placement (4). . . . . . . . . . . . . . . . . . . . . . . . . . .       4.9
Common Stock Purchase Warrant-Phillips Aerospace (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      4.10
Note Purchase Agreement for Series A Subordinated Convertible Notes (6). . . . . . . . . . . . . . . . . . . . .      4.11
Form of Series A Subordinated Convertible Note (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      4.12
Form of Warrant for Series A Subordinated Convertible Note Offering (6). . . . . . . . . . . . . . . . . . . . .      4.13
Form of Certificate of Series C Preferred Stock (13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      4.14
2004 Equity Incentive Plan(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      4.15
Certificate of  Series C Preferred Stock, Dated August 25, 2004, by and among SpaceDev and Laurus(13). . . . . .      4.16
Form of Warrant, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . . . . . . . .      4.17
Common Stock Exchange Agreement Between SpaceDev and SIL (1) . . . . . . . . . . . . . . . . . . . . . . . . . .      10.1
Mutual Rescission and Release of Share Acquisition Agreement (1) . . . . . . . . . . . . . . . . . . . . . . . .      10.2
Share Exchange Agreement Between SpaceDev and ISS (1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      10.3
Agreement of License and Purchase of Technology Between SpaceDev and AMROC (1) . . . . . . . . . . . . . . . . .      10.4
Firm Fixed Price Agreement Number 108252 Between SpaceDev and Regents of the University of California (1). . . .      10.5
Employment Agreement of James W. Benson (2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      10.6
Employment Agreement between ISS and Charles H. Lloyd (1). . . . . . . . . . . . . . . . . . . . . . . . . . . .      10.7
Deed of Counter-Indemnity dated August 28, 1999 (3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      10.8
Financial Advisory Services Agreement, dated June 18, 2001 (5) . . . . . . . . . . . . . . . . . . . . . . . . .      10.9
Consultant/Advisory Services Agreement, dated June 18, 2001 (5). . . . . . . . . . . . . . . . . . . . . . . . .     10.10
Employment Agreement between SpaceDev, Inc. and Stuart Schaffer, dated May 17, 2002(7) . . . . . . . . . . . . .     10.11
First Amendment to Employment Agreement with Stuart Schaffer, dated May 17, 2002(7). . . . . . . . . . . . . . .     10.12
Employment Agreement between SpaceDev, Inc. and Emery Skarupa, dated May 24, 2002(7) . . . . . . . . . . . . . .     10.13
Confidential Separation Agreement and General Release of Claims, dated May 31, 2002(7) . . . . . . . . . . . . .     10.14
Code of Business Conduct and Ethics(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     10.15
Employment Agreement between SpaceDev and Richard B. Slansky, dated Feb. 10, 2003(7) . . . . . . . . . . . . . .     10.16
Second Amendment to Series A Subordinated Convertible Note - Benson1, dated Mar. 25, 2003(7) . . . . . . . . . .     10.17
Second Amendment to Series A Subordinated Convertible Note - Benson2, dated Mar. 25, 2003(7) . . . . . . . . . .     10.18
Second Amendment to Series A Subordinated Convertible Note - Benson3, dated Mar. 25, 2003(7) . . . . . . . . . .     10.19
Second Amendment to Series A Subordinated Convertible Note - Benson4, dated Mar. 25, 2003(7) . . . . . . . . . .     10.20
Second Amendment to Series A Subordinated Convertible Note - Skarupa, dated Mar. 25, 2003(7) . . . . . . . . . .     10.21
Second Amendment to Series A Subordinated Convertible Note - Schaffer, dated Mar. 25, 2003(7). . . . . . . . . .     10.22

                                       58
                                      PAGE

Confidential Separation Agreement and General Release of Claims with Mr. Schaffer, dated July 2, 2003(8) . . . .     10.23
AFRL Small Vehicle Launch Technology SBIR contract(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     10.24
AFRL Small Satellite Bus Technologies SBIR contract(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     10.25
AFRL Small Shuttle Compatible Propulsion Module contract(9). . . . . . . . . . . . . . . . . . . . . . . . . . .     10.26
MDA Advanced Systems Deputate for the Microsatellite Experiment(9) . . . . . . . . . . . . . . . . . . . . . . .     10.27
MDA Advanced Systems Deputate for the Microsatellite Experiment (Modification) (9) . . . . . . . . . . . . . . .     10.28
Lunar Enterprises of California contract(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     10.29
Hybrid Rocket Motor Systems and Components contract*(9). . . . . . . . . . . . . . . . . . . . . . . . . . . . .     10.30
Third Amendment to Series A Subordinated Convertible Note - Benson1, dated Sept. 5,  2003(9) . . . . . . . . . .     10.31
Third Amendment to Series A Subordinated Convertible Note - Benson2, dated Sept. 5,  2003(9) . . . . . . . . . .     10.32
Third Amendment to Series A Subordinated Convertible Note - Benson3, dated Sept. 5,  2003(9) . . . . . . . . . .     10.33
Third Amendment to Series A Subordinated Convertible Note - Benson4, dated Sept. 5,  2003(9) . . . . . . . . . .     10.34
Third Amendment to Series A Subordinated Convertible Note - Skarupa, dated Sept. 5,  2003(9) . . . . . . . . . .     10.35
Third Amendment to Series A Subordinated Convertible Note - Schaffer, dated Sept. 5, 2003(9) . . . . . . . . . .     10.36
Employment Offer between SpaceDev and Dario Emanuel DaPra, dated November 17, 2003(10) . . . . . . . . . . . . .     10.37
Employment Offer between SpaceDev and Randall K. Simpson, dated Jan. 16, 2004(10). . . . . . . . . . . . . . . .     10.38
Confidential Separation Agreement and General Release of Claims with Mr. DaPra, dated March 18, 2004(10) . . . .     10.39
Missile Defense Agency Contract with SpaceDev, dated March 31, 2004(10). . . . . . . . . . . . . . . . . . . . .     10.40
Amendment No. 1 to Note with the Laurus Master Fund, dated March 31, 2004(10). . . . . . . . . . . . . . . . . .     10.41
Waiver Letter from Laurus Master Fund, dated March 31, 2004(10). . . . . . . . . . . . . . . . . . . . . . . . .     10.42
First Task Order Under Missile Defense Agency Contract with SpaceDev, dated April 1, 2004(10). . . . . . . . . .     10.43
Separation Agreement and General Release, by and between SpaceDev and Jeffrey Janicik dated June 18, 2004 (12). .    10.44
Modification to Small Shuttle Compatible Propulsion Module contract with AFRL dated July 7, 2004(12) . . . . . .     10.45
Lunar Enterprises of California contract with SpaceDev dated July 20, 2004(12) . . . . . . . . . . . . . . . . .     10.46
List of Subsidiaries of the Company(10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     10.47
Security Purchase Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . .     10.48
Registration Rights Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . .     10.49
Letter Agreement, Dated August 25, 2004, by and among SpaceDev and Laurus(13) . . . . . . . . . . . . . . . . .      10.50
Air Force Research Laboratories contract with SpaceDev dated as of August  23, 2004(14). . . . . . . . . . . . .     10.51
Air Force Research Laboratories Statement of Work(14)*. . . . . . . . . . . . . . . . . . . . . . . . . . . . .      10.52
Small Business  Innovation  Research  contract between the Air Force Research Lab and SpaceDev,
Dated September 29, 2004(15). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    10.53
Second Task Order Under Missile Defense Agency Contract with SpaceDev, dated October 20, 2004*(15) . . . . . . .     10.54
AFRL SBIR "mini-mo" contract extension with SpaceDev dated August 20, 2004*(15). . . . . . . . . . . . . . . . .     10.55
Air Force Research Laboratories amended contract with SpaceDev dated as of September 28, 2004(15). . . . . . . .     10.56
Consent of Independent Registered Accounting Firm (2004) - Form 10-KSB, dated March 28, 2005, PKF. . . . . . . .      23.1
Consent of Independent Registered Accounting Firm (2004) - Form S-8, file 333-47338 dated March 28, 2005, PKF. .      23.2
Consent of Independent Registered Accounting Firm (2004) - Form S-8, dated March 28, 2005, PKF. . . . . . . . .       23.3
Certificate of James W. Benson Pursuant to Rule 13a-14(a) promulgated under the Securities and
Exchange act of 1934 as amended. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      31.1
Certificate of Richard B. Slansky Pursuant to Rule 13a-14(a) promulgated under the Securities and
and Exchange act of 1934 as amended. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      31.2
Certificate of James W. Benson Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code. . . . . . . . . . .      32.1
Certificate of Richard B. Slansky Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code . . . . . . . . .      32.2
</TABLE>

                                       59
                                      PAGE

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

(b)     Reports  on  Form  8-K:

     We have filed six reports on Form 8-K, since fiscal year ended December 31,
2003.  These reports, dated August 30, 2004, September 1, 2004, October 5, 2004,
October  26,  2004,  November  19, 2004 and November 23, 2004, disclosed: 1) our
Securities  Purchase  Agreement  with  the  Laurus Master Fund whereby we issued
250,000  shares  of  our  Series  C  Convertible Preferred Stock to Laurus; 2) a
contract  that  we  received  from the Air Force Research Laboratory to continue
working  on  Phase  II  of  a  small satellite bus technology; 3) a continuation
contract that we received from the Air Force Research Laboratory to proceed with
Phase  II of a small launch vehicle program; 4) the award of a second Task Order
from  the  Missile  Defense  Agency to continue working on a distributed sensing
experiment;  5)  the announcement that Mr. Slansky was promoted to our President
and  appointed  to  our  Board  of  Directors;  and  6)  the property settlement
agreement  between  our founding Chairman and CEO, Mr. Benson, and his wife, Ms.
Susan  Benson.

(1)  Incorporated  by reference to the corresponding Exhibit previously filed as
     an  Exhibit  to  Registrant's  Form  10-SB  (File  #0-28947).
(2)  Incorporated by reference to Exhibit 10.1 previously filed as an Exhibit to
     Registrant's  Form  10-QSB  filed  on  August  10,  2000.
(3)  Incorporated by reference to Exhibit 10.2 previously filed as an Exhibit to
     Registrant's  Form  8-K  filed  on  September  20,  2000.
(4)  Incorporated  by reference to the corresponding Exhibit previously filed as
     an  Exhibit  to  Registrant's  Form  10-KSB  filed  on  April  2,  2001.
(5)  Incorporated  by reference to Exhibits 10.1 and 10.2 previously filed as an
     Exhibit  to  Registrant's  Form  8-K  filed  on  July  19,  2001.
(6)  Incorporated  by reference to Exhibits 4.11, 4.12 and 4.13 previously filed
     as  an  Exhibit  to  Registrant's  Form  10-QSB filed on November 14, 2002.
(7)  Incorporated  by  reference  to Exhibits 10.11, 10.12, 10.13, 10.14, 10.15,
     10.16,  10.17,  10.18, 10.19, 10.20, 10.21 and 10.22 previously filed as an
     Exhibit  to  Registrant's  Form  10-KSB  on  March  28,  2003.
(8)  Incorporated  by  reference  to Exhibit 3.5, 4.8, 4.14 and 10.27 previously
     filed  as  an  Exhibit  to  Registrant's  Form  SB-2  on  July  25,  2003.
(9)  Incorporated  by  reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6,
     10.7,  10.8,  10.9,  10.10,  10.11,  10.12 and 10.13 previously filed as an
     Exhibit  to  Registrant's  Form  10-QSB  on  November  12,  2003.
(10) Incorporated  by  reference  to Exhibits 10.37, 10.38, 10.39, 10.40, 10.41,
     10.42,  10.43,  and  21 previously filed as an Exhibit to Registrant's Form
     10-KSB  filed  on  April  6,  2004.
(11) Incorporated  by  reference  to  Registrant's Form Schedule 14A Information
     Proxy  Statement,  filed  July  7,  2004.
(12) Incorporated  by reference to Exhibits 10.1, 10.2 and 10.3 previously filed
     as  an  Exhibit  to  Registrant's  Form  10-QSB  on  August  9,  2004.
(13) Incorporated  by  reference  to Exhibits 3.1, 4.1, 4.2, 10.1, 10.2 and 10.3
     previously filed as an Exhibit to Registrant's Form 8-K filed on August 30,
     2004.
(14) Incorporated  by reference to Exhibits 10.1 and 10.2 previously filed as an
     Exhibit  to  Registrant's  Form  8-K  filed  on  September  1,  2004.
(15) Incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4 previously
     filed  as  an  Exhibit  to  Registrant's  Form 10-QSB on November 15, 2004.

                                       60
                                      PAGE

ITEM  14.     PRINCIPAL  ACCOUNTANT  FEES  AND  SERVICES

     The  following are the fees billed us by our auditors, PKF and Nation Smith
Hermes  Diamond,  P.C.  ("Nation  Smith"),  respectively,  for services rendered
thereby  during  2004  and  2003:

<TABLE>
<CAPTION>



<S>                 <C>      <C>
                       2004     2003
                    -------  -------
Audit Fees . . . .  $44,000  $55,025
------------------  -------  -------
Audit Related Fees  $     -  $     -
------------------  -------  -------
Tax Fees . . . . .  $ 7,800  $ 7,850
------------------  -------  -------
All Other Fees . .  $28,522  $ 5,093
------------------  -------  -------
Total. . . . . . .  $82,326  $69,971
------------------  -------  -------
------------------  -------  -------
</TABLE>

                                       60
                                      PAGE

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  and Nation Smith 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 Nation Smith 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  or  Nation  Smith  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 and Nation Smith'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  approved  by  the  Audit  Committee  of  our Board of Directors.

                                       61
                                      PAGE

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,  2005                                By:  /s/James  W.  Benson
                                                            --------------------
                                                         James  W.  Benson,  CEO


Date:  March  28,  2005                             By:  /s/Richard  B.  Slansky
                                                         -----------------------
                                      Richard  B.  Slansky,  President  and  CFO


     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,  2005                                By:  /s/James  W.  Benson
                                                            --------------------
                                           James  W.  Benson,  Chairman  of  the
                                                            Board  of  Directors


Date:  March  28,  2005                             By:  /s/Richard  B.  Slansky
                                                         -----------------------
                                                 Richard  B.  Slansky,  Director


Date:  March  28,  2005                                 By:  /s/Scott  McClendon
                                                             -------------------
                                                     Scott  McClendon,  Director


Date:  March  28,  2005                         By: /s/Gen. Howell M. Estes, III
                                                    ----------------------------
                                        Gen.  Howell  M.  Estes,  III,  Director


Date:  March  28,  2005                             By:  /s/Stuart  E.  Schaffer
                                                            --------------------
                                                 Stuart  E.  Schaffer,  Director


Date:  March  28,  2005                               By:  /s/Robert  S.  Walker
                                                           ---------------------
                                                   Robert  S.  Walker,  Director


Date:  March  28,  2005                                  By:  /s/Curt  D.  Blake
                                                              ------------------
                                                      Curt  D.  Blake,  Director


Date:  March  28,  2005                             By:  /s/Wesley  T.  Huntress
                                                         -----------------------
                                               Wesley  T.  Huntress,  Director

                                       62
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY
                                                                        CONTENTS



                        CONSOLIDATED FINANCIAL STATEMENTS



REPORT  OF  INDEPENDENT  REGISTERED  PUBLIC  ACCOUNTING  FIRM                F-2

FINANCIAL  STATEMENTS
     Consolidated  Balance  Sheets                                  F-3  to  F-4
     Consolidated  Statements  of  Operations                                F-5
     Consolidated  Statements  of  Stockholders' Equity (Deficit)     F-6 to F-8
     Consolidated  Statements  of  Cash  Flows                     F-9  to  F-10
     Notes  to  Consolidated  Financial  Statements               F-11  to  F-31

                                      F-1
                                      PAGE


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  SUBSIDIARY  as of December 31, 2004 and 2003, respectively, and the related
consolidated  statements  of operations, stockholders' equity (deficit) 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  SUBSIDIARY  as  of  December  31,  2004  and 2003, 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  10,  2005                               Certified  Public  Accountants
                                                    A  Professional  Corporation

                                      F-2
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY

                                                     CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>



<S>                                     <C>         <C>
 December 31,. . . . . . . . . . . . .        2004        2003
--------------------------------------  ----------  ----------

 ASSETS

 CURRENT ASSETS
    Cash (Note 10(a)). . . . . . . . .  $5,068,601  $  592,006
    Accounts receivable (Note 10(b)) .     620,097     187,062
    Inventory. . . . . . . . . . . . .           0       9,961
    Work in Progress . . . . . . . . .           0     110,490
--------------------------------------  ----------  ----------
 Total current assets. . . . . . . . .   5,688,698     899,519

 FIXED ASSETs - Net (Notes 1(g) and 2)     279,381     137,532

 CAPITALIZED SOFTWARE  COSTS . . . . .           0           -

 OTHER ASSETS. . . . . . . . . . . . .     122,355      47,768
--------------------------------------  ----------  ----------
 TOTAL ASSETS. . . . . . . . . . . . .  $6,090,434  $1,084,819
--------------------------------------  ----------  ----------
--------------------------------------  ----------  ----------

</TABLE>

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

                                      F-3
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY

                                                     CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>



<S>                                                                     <C>            <C>
 December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2004           2003
----------------------------------------------------------------------  -------------  -------------

 LIABILITIES AND STOCKHOLDERSEQUITY

 CURRENT LIABILITIES
    Current portion of notes payable (Note 4(a)) . . . . . . . . . . .  $     36,670   $     41,464
    Current portion of capitalized lease obligations (Note 9(a)) . . .         3,784         10,332
    Notes payable - related party (Note 4(b)). . . . . . . . . . . . .             0         80,000
    Accounts payable and accrued expenses. . . . . . . . . . . . . . .       338,809        311,606
    Accrued payroll, vacation and related taxes. . . . . . . . . . . .       195,045         84,001
    Revolving line of credit (Note 4(c)) . . . . . . . . . . . . . . .             0        748,893
    Employee Stock Purchase Plan (Note (7(b)). . . . . . . . . . . . .         9,332          5,498
    Other accrued liabilities (Note 9(b)). . . . . . . . . . . . . . .       207,262        248,530
----------------------------------------------------------------------  -------------  -------------
 TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . .       790,902      1,530,324

 NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(A)). . . . . . . . . .         9,457         46,127

 CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(A)). .         1,469          5,253

 NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(B)). .             0        505,522

 DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2) . . . . . . . . . . . .       947,949      1,065,221

 DEFERRED REVENUE (NOTE 1(F)). . . . . . . . . . . . . . . . . . . . .         5,000          5,000
----------------------------------------------------------------------  -------------  -------------

 TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . .     1,754,777      3,157,447

 COMMITMENTS AND CONTINGENCIES (NOTE 9)

 STOCKHOLDERSEQUITY (DEFICIT)
    Convertible preferred stock, $.001 par value, 10,000,000 shares
    authorized, and 250,000 shares issued and outstanding (Note 8(a)).           250              -
    Common stock, $.0001 par value; 50,000,000 shares authorized, and
    21,153,660 and 16,413,260 shares issued and outstanding,
    respectively (Note 8(b)) . . . . . . . . . . . . . . . . . . . . .         2,114          1,641
    Additional paid-in capital . . . . . . . . . . . . . . . . . . . .    18,739,090      9,243,507
    Additional paid-in capital - stock options (Note 8(d)) . . . . . .       750,000        750,000
    Deferred compensation (Note 8(d)). . . . . . . . . . . . . . . . .      (250,000)      (250,000)
    Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . .   (14,905,797)   (11,817,776)
----------------------------------------------------------------------  -------------  -------------
 TOTAL STOCKHOLDERSEQUITY (DEFICIT). . . . . . . . . . . . . . . . . .     4,335,657     (2,072,628)
----------------------------------------------------------------------  -------------  -------------
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . . . . .  $  6,090,434   $  1,084,819
----------------------------------------------------------------------  -------------  -------------
----------------------------------------------------------------------  -------------  -------------

</TABLE>

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

                                      F-4
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY

                                           CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>



<S>                                                   <C>           <C>           <C>           <C>


 Years Ending December 31, . . . . . . . . . . . . .         2004              %         2003         %
----------------------------------------------------  ------------  ------------  ------------  -------

 NET SALES . . . . . . . . . . . . . . . . . . . . .  $ 4,890,743        100.00%  $ 2,956,322   100.00%
----------------------------------------------------  ------------  ------------  ------------  -------

 COST OF SALES . . . . . . . . . . . . . . . . . . .    3,820,683         78.12%    2,414,997    81.69%
----------------------------------------------------  ------------  ------------  ------------  -------

 GROSS MARGIN. . . . . . . . . . . . . . . . . . . .    1,070,060         21.88%      541,325    18.31%

 OPERATING EXPENSES
    Marketing and sales expense. . . . . . . . . . .      418,831          8.56%      394,974    13.36%
    Research and development . . . . . . . . . . . .       39,473          0.81%      281,280     9.51%
    Stock and stock option based compensation. . . .            0          0.00%        9,170     0.31%
    General and administrative . . . . . . . . . . .      467,471          9.56%      745,993    25.23%
----------------------------------------------------  ------------  ------------  ------------  -------
 TOTAL OPERATING EXPENSES. . . . . . . . . . . . . .      925,775         18.93%    1,431,417    48.42%
----------------------------------------------------  ------------  ------------  ------------  -------
 INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . .      144,285          2.95%     (890,092)  -30.11%
----------------------------------------------------  ------------  ------------  ------------  -------
 NON-OPERATING EXPENSE/(INCOME)
    Interest income. . . . . . . . . . . . . . . . .      (19,497)        -0.40%            -     0.00%
    Interest expense . . . . . . . . . . . . . . . .       52,077          1.06%       91,492     3.09%
    Non-cash interest expense debt discount (Note 5)            0          0.00%      112,500     3.81%
    Gain on Building Sale (Note 4(a)). . . . . . . .     (117,272)        -2.40%     (107,499)   -3.64%
    Loan Fee - Equity Compensation (Note 4(c) & 5) .    3,254,430         66.54%      257,882     8.72%
----------------------------------------------------  ------------  ------------  ------------  -------
 TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . .    3,169,739         64.81%      354,375    11.99%
----------------------------------------------------  ------------  ------------  ------------  -------

 LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . .   (3,025,454)       -61.86%   (1,244,467)  -42.10%
 Income tax provision (Notes 1(j) and 6) . . . . . .        1,600          0.03%        1,600     0.05%
----------------------------------------------------  ------------  ------------  ------------  -------
 NET LOSS. . . . . . . . . . . . . . . . . . . . . .  $(3,027,054)       -61.89%  $(1,246,067)  -42.15%
----------------------------------------------------  ------------  ------------  ------------  -------
----------------------------------------------------  ------------  ------------  ------------  -------
 NET LOSS PER SHARE:
      Net loss . . . . . . . . . . . . . . . . . . .  $     (0.16)                $     (0.08)
-------------------------------------------------------------------------------------------------------
      Weighted-Average Shares Outstanding. . . . . .   18,610,141                   16,092,292
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------

</TABLE>

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

                                      F-5
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY

                                                      CONSOLIDATED STATEMENTS OF
                                                  STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>

<S>                                                                           <C>              <C>            <C>         <C>

                                                                              Preferred Stock  Common Stock
                                                                              ---------------  -------------
                                                                              Shares           Amount         Shares      Amount
----------------------------------------------------------------------------  ---------------  -------------  ----------  -------

BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . .                -  $           -  14,477,640  $ 1,447
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . .                -              -     861,267       86
Common stock issued from notes on revolving credit facility (Note 4( c)) . .                -              -     415,000       42
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . .                -              -       7,500        1
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . .                -              -     614,853       61
Common stock issued from employee stock options (Note 7(b)). . . . . . . . .                -              -      37,000        4
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . .                -              -           -        -

   Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                -              -           -        -
----------------------------------------------------------------------------  ---------------  -------------  ----------  -------

BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . .                -              -  16,413,260    1,641
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . .          250,000            250           -        -
Common stock issued for cash from employee stock purchase plan (Note 8(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 (Note 7(b)). . . . . . . . .                -              -   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 (Note 5 and 8(c))                -              -     614,853       61
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                -              -           -        -

   Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                -              -           -        -
----------------------------------------------------------------------------  ---------------  -------------  ----------  -------
BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . .          250,000  $         250  21,153,660  $ 2,114
----------------------------------------------------------------------------  ---------------  -------------  ----------  -------
----------------------------------------------------------------------------  ---------------  -------------  ----------  -------

</TABLE>

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

                                      F-6
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY

                                                      CONSOLIDATED STATEMENTS OF
                                                  STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>

<S>                                                                           <C>           <C>             <C>
                                                                              Additional
                                                                              Additional    Paid-In
                                                                              Paid-in       Capital -       Deferred
                                                                              Capital       Stock Options   Compensation
----------------------------------------------------------------------------  ------------  --------------  -------------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . .  $ 8,302,803   $      750,000  $    (250,000)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . .      425,856                -              -
Common stock issued from notes on revolving credit facility (Note 4( c)) . .      354,679                -              -
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . .        9,169                -              -
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . .      368,850                -              -
Common stock issued from employee stock options (Note 7(b)). . . . . . . . .       19,650                -              -
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . .     (237,500)

  Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            -
----------------------------------------------------------------------------  ------------  --------------  -------------
                                                                                9,243,507          750,000       (250,000)
BALANCE AT DECEMBER 31, 2003
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . .    2,366,250
Common stock issued for cash from employee stock purchase plan (Note 8(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 (Note 7(b)). . . . . . . . .    1,264,649                -              -
Common stock issued from private placement memorandum warrants (Note 8(b)) .       88,738                -              -
Common Stock issued from convertible debt program warrants (Note 5 and 8(c))    1,011,241                -              -
Declared Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            -                -              -
                                                                                        -                -              -
  Net loss                                                                              -                -              -
----------------------------------------------------------------------------  ------------  --------------  -------------

BALANCE AT DECEMBER 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . .  $18,739,090   $      750,000  $    (250,000)
----------------------------------------------------------------------------  ------------  --------------  -------------
----------------------------------------------------------------------------  ------------  --------------  -------------

</TABLE>

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

                                      F-7
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY

                                        CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
                                                                EQUITY (DEFICIT)
<TABLE>
<CAPTION>



<S>                                                                           <C>            <C>

                                                                              Accumulated
                                                                              Deficit        Total
----------------------------------------------------------------------------  -------------  ------------
BALANCE AT JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . .  $(10,571,710)  $(1,767,459)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . . . .             -       425,942
Common stock issued from notes on revolving credit facility (Note 4( c)) . .             -       354,721
Common stock issued for services (Note 8 (b)). . . . . . . . . . . . . . . .             -         9,170
Common stock issued from convertible debt program (Note 5 and 8(c)). . . . .             -       368,911
Common stock issued from employee stock options (Note 7(b)). . . . . . . . .             -        19,654
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . . . .             -      (237,500)
                                                                                         -
  Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (1,246,067)   (1,246,067)
----------------------------------------------------------------------------  -------------  ------------
                                                                                         -
BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . .   (11,817,776)   (2,072,628)
Preferred Stock stock issued for cash (Note 8(a)). . . . . . . . . . . . . .             -     2,366,500
Common stock issued for cash from employee stock purchase plan (Note 8(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 (Note 7(b)). . . . . . . . .             -     1,264,749
Common stock issued from private placement memorandum warrants (Note 8(b)) .             -        88,750
Common Stock issued from convertible debt program warrants (Note 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
----------------------------------------------------------------------------  -------------  ------------
----------------------------------------------------------------------------  -------------  ------------
</TABLE>

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

                                      F-8
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>



<S>                                                          <C>           <C>
 Years Ended December 31, . . . . . . . . . . . . . . . . .         2004          2003
-----------------------------------------------------------  ------------  ------------
 CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss. . . . . . . . . . . . . . . . . . . . . . . .  $(3,027,054)  $(1,246,067)
    Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
       Depreciation and amortization. . . . . . . . . . . .       83,531       166,971
       Gain on disposal of building . . . . . . . . . . . .     (117,272)     (107,499)
       Non-cash interest expense - convertible debt program      773,802       131,411
       Non-cash loan fees . . . . . . . . . . . . . . . . .    2,480,628       126,471
       Common stock issued for compensation and services. .            -         9,170
       Change in operating assets and liabilities:

         Accounts receivable. . . . . . . . . . . . . . . .     (433,035)     (104,737)
         Work in Progress . . . . . . . . . . . . . . . . .      110,490      (110,490)
         Prepaid and other current assets . . . . . . . . .      (74,587)      (33,888)
         Inventory. . . . . . . . . . . . . . . . . . . . .        9,961        (8,232)
         Convertible debt notes payable . . . . . . . . . .            -       130,661
         Costs in excess of billings and estimated earnings            -       281,175
         Interest on revolving line of credit . . . . . . .       18,349        13,601
         Accounts payable and accrued expenses. . . . . . .       27,203      (286,874)
         Accrued payroll, vacation and related taxes. . . .      111,044       (90,187)
         Customer deposits and deferred revenue . . . . . .            -       (69,402)
         Provision for anticipated loss . . . . . . . . . .            -       (11,044)
         Interest - related party . . . . . . . . . . . . .       29,256        47,023
         Other accrued liabilities. . . . . . . . . . . . .     (102,235)      126,919
-----------------------------------------------------------  ------------  ------------
 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. . . .     (109,919)   (1,035,018)
-----------------------------------------------------------  ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
    Change in investing activities:
      Proceeds from the sale of building. . . . . . . . . .            -     3,150,124
      Purchases of fixed assets . . . . . . . . . . . . . .     (225,380)      (39,292)
-----------------------------------------------------------  ------------  ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES . . . .     (225,380)    3,110,832
-----------------------------------------------------------  ------------  ------------
 CASH FLOWS FROM FINANCING ACTIVITIES
      Principal payments on notes payable . . . . . . . . .      (41,464)   (2,432,595)
      Principal payments on capitalized lease obligations .      (10,332)      (35,764)
      Payments on notes payable - related party . . . . . .     (427,280)     (199,997)
      Proceeds from revolving credit facility . . . . . . .    1,504,508       963,542
      Employee Stock Purchase Plan. . . . . . . . . . . . .       16,460         5,498
      Proceeds from issuance of preferred stock . . . . . .    2,366,500             -
      Proceeds from issuance of common stock. . . . . . . .    1,403,502       445,596
-----------------------------------------------------------  ------------  ------------
 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . . .    4,811,894    (1,511,456)
-----------------------------------------------------------  ------------  ------------
 Net increase in cash . . . . . . . . . . . . . . . . . . .    4,476,595       564,358
-----------------------------------------------------------  ------------  ------------
 CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . .      592,006        27,648
-----------------------------------------------------------  ------------  ------------
 CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . .  $ 5,068,601   $   592,006
-----------------------------------------------------------  ------------  ------------
-----------------------------------------------------------  ------------  ------------

</TABLE>

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

                                      F-9
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

<S>                                                   <C>       <C>
Years Ended December 31, . . . . . . . . . . . . .      2004     2003
---------------------------------------------------  --------  -------

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
     Interest . . . . . . . . . . . . . . . . . . .  $313,978  $41,726
     Income Taxes . . . . . . . . . . . . . . . . .  $  1,600  $ 1,600
---------------------------------------------------  --------  -------
</TABLE>


 NONCASH  INVESTING  AND  FINANCING  ACTIVITIES:

During the years ending December 31, 2004 and 2003, the Company issued 2,991,417
     and  415,000 shares of its common stock, respectively, to the Laurus Master
     Fund  from  conversions  under  its  revolving  credit  facility,   thereby
     realizing a corresponding reduction in current liabilities of approximately
     $2,271,750  and  $228,500,  respectively.  The  Company recorded additional
     non-cash  loan  fees  of $2,480,628 and $126,471, respectively, 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 participates in its' prior convertible debt program
     from  conversions  of  warrants,  thereby  receiving  cash in the amount of
     $187,500.  The  Company  recorded additional non-cash loan fees of $773,802
     and  charged  these  fees  to  expense.

During  2004  the  Company  converted  $12,627  of  employee stock purchase plan
     contributions  into  14,010  shares  of  common  stock.

During 2004 the Company declared dividends payable of $60,967 to the holder's of
     its  preferred  stock.

During  2003,  the  Company issued 7,500 shares of restricted stock for employee
     awards and services and for summer & student interns, and recorded expenses
     of  $9,170.

During  2003,  the  Company  issued  861,267 shares of stock under the Company's
     Private  Placement  Memorandum  for  cash  of  $425,942.

During 2003, the Company eliminated its convertible debt by repaying half of the
     notes in cash ($237,500) and having the note holders convert the other half
     into  614,853  shares  of  the Company's common stock. The Company recorded
     additional  loan  fees  of  $131,411  and  charged  these  fees  to equity.


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

                                      F-10
                                      PAGE

                                                                  SPACEDEV, INC.
                                                                  AND SUBSIDIARY
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES

A  summary of the Company's significant accounting policies consistently 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,  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"),
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 on December 17, 1997. For accounting purposes, the transaction was
accounted  for  as  a  reverse  merger  with  the Company as the acquirer. Since
SpaceDev  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 California corporation founded for the
purpose  of  providing 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  Rule  144 restricted common shares of SpaceDev.  Goodwill of
approximately $3.5 million was capitalized and was to be amortized over a period
of  sixty (60) months, based on the purchase price exceeding the net asset value
of  approximately  $164,000.  As  a  result  of  a change in corporate focus, on
November  15,  2001,  the  Company  determined  that  the unamortized balance of
goodwill  from ISS, which was approximately $923,000, had become impaired and it
was  written-off.  While  the  ISS  segment  did provide small hybrid propulsion
space  systems  and  engineering  services  on  separate  contracts (mainly with
government  agencies),  the  engineering  service  contracts  had  expired  and,
therefore,  would  not  be  producing  revenue  or  cash  flow to support future
operations.  The  Company  determined  that  all  future business, contracts and
proposals  would  be  sought  after  only in the SpaceDev name, making it a more
efficient  way  for  it  to manage and track multiple contracts and work on many
different  business ventures at the same time within the same operating segment.
The  Company filed for dissolution of ISS in December 2003, since all activities
had  been  integrated  into  SpaceDev,  Inc.

                                      F-11
                                      PAGE

The Company had working capital of $4,897,796 and incurred an operational profit
of  $144,285 as well as a net loss of $3,027,054 for the year ended December 31,
2004.  For  the  year ended December 31, 2003, the Company had a working capital
deficit of $630,805 and a loss from operations of $890,092 as well as a net loss
of $1,246,067. On March 31, 2004, the Company was awarded a $43,362,271 contract
from  the  Missile  Defense Agency. Management intends to continue obtaining new
commercial  and  government  contracts  and  discontinue  the utilization of its
revolving  credit facility. The Company may raise additional equity capital in a
public  or  private offering in certain circumstances. There can be no assurance
that  existing contracts will be completed successfully or that new contracts or
additional  debt  or equity financing that may be needed to fund operations will
be  available or, if available, obtained in sufficient amounts necessary to meet
the  Company's  needs.  Management  does  believe that current contracts will be
sufficient  to  fund  the  Company  through  2005  and  beyond.

(b)     Principles  of  consolidation

The  consolidated  financial  statements include the accounts of the Company and
its  wholly-owned  inactive  subsidiary,  SpaceDev  Oklahoma,  Inc.,  and former
wholly-owned  inactive  subsidiary  Integrated Space Systems, Inc., a California
corporation.  Integrated  Space Systems was dissolved in December 2003 after all
activities  had  been  integrated  into  SpaceDev,  Inc.

(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, 2004 and 2003,
the  allowance  for uncollectible accounts was $32,637 and $17,500 respectively.

                                      F-12
                                      PAGE

(e)     Software  Development  Costs

In  accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting  for  the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed,"  the  Company  capitalized  the  direct  costs and allocated overhead
associated  with a software development product.  Initial costs were capitalized
as development costs prior to the design of a detailed program or working model.
Costs incurred subsequent to the product release and development costs performed
under  contract  were  charged  to  operations.  Beginning in the second quarter
2002,  and  completing  in  2003, capitalized software costs were amortized over
their  estimated  useful life of eighteen months using the straight-line method.
Periodically, and at least annually, management performs a review for impairment
in accordance with SFAS No. 144.  As of December 31, 2003, the Company had fully
amortized  the  capitalized  software  costs.

(f)     Revenue  recognition

The  Company's  revenues  in  2004  and  2003 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  2004  and  2003  were  recognized  as expenses were incurred.
Estimated  contract  profits  were taken into earnings in proportion to revenues
recorded.  Revenues under certain long-term fixed price contracts, which provide
for  the  delivery  of  minimal  quantities  or  require  significant amounts of
development  effort  in relation to total contract value, 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.

(g)     Depreciation  and  amortization

Fixed  assets are depreciated over their estimated useful lives of three-to-five
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  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  the  sale  of its only facility in December 2002, 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).

                                      F-13
                                      PAGE

(h)     Research  and  development

The  Company is engaged in design and development activities with its commercial
and  government  customers.  The  Company  has  SBIR  (Small Business Innovation
Research)  grants  from  the  government  and  continues   to  seek   new   SBIR
opportunities.  Costs  incurred  under  SBIR grants are charged against revenues
received  under  SBIR  grants.   Non-reimbursable   research   and   development
expenditures  relating to possible future products are expensed as incurred. The
Company  incurred  $39,473  in  non-reimbursable  research and development costs
during  2004,  as  compared  to  $281,280  in  non-reimbursable   research   and
development  costs  during  2003.

(i)     Advertising

The  Company  follows the policy of charging the costs of advertising to expense
as  incurred.  Advertising  expense  was  $1,113  and  $1,460  in 2004 and 2003,
respectively.  Although  the  direct  cost  of  advertising  is low, the Company
incurs costs related to general public relations and website development as part
of  its  general  and  administrative  expenses.

(j)     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.

(k)     Stock-based  compensation

In  October  1995,  the  FASB (Financial Accounting Standards Board) issued SFAS
(Statements  of  Financial  Accounting  Standards)  No.  123,  "Accounting   for
Stock-Based Compensation." The Company adopted SFAS No. 123 in 1997. The Company
has  elected  to  measure  compensation  expense  for  its  stock-based employee
compensation  plans  using  the  intrinsic  value  method  prescribed   by   APB
(Accounting  Principles  Board)  Opinion No. 25, "Accounting for Stock Issued to
Employees,"  and  has  provided pro forma disclosures as if the fair value based
method  prescribed  in  SFAS  No.  123  had been utilized. See Note 8(d). During
December 2002, FASB issued SFAS No. 148 "Accounting for Stock Based Compensation
-  Transition and Disclosure," which amends SFAS No. 123 to require companies to
elect  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.
If  the Company had accounted for these options in accordance with SFAS No. 123,
the  total value of options granted during 2004 and 2003 would be amortized on a
pro  forma  basis  over  the  vesting period of the options. Thus, the Company's
consolidated  net  loss  would  have  been  as  follows:

                                      F-14
                                      PAGE
<TABLE>
<CAPTION>



Years Ending December 31
---------------------------------------------------------------------------         ------------  ------------
<S>                                                                                 <C>           <C>

 Net Loss: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        2004          2003

 As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $(3,027,054)  $(1,246,067)
 ADD:     Stock based employee compensation expense
          included in reported net income                                                     -              -
 DEDUCT:  Stock based employee compensation expense determined under
          the fair value based method for all awards . . . . . . . . . . . .        $  (390,773)  $  (234,525)
---------------------------------------------------------------------------         ------------  ------------
 Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $(3,417,827)  $(1,480,592)
---------------------------------------------------------------------------         ------------  ------------
---------------------------------------------------------------------------         ------------  ------------
 Loss per Share:

 As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $     (0.16)  $     (0.08)
 Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $     (0.18)  $     (0.09)
---------------------------------------------------------------------------         ------------  ------------
</TABLE>

(l)     Common  stock,  stock  options  and  warrants  to  non-employees

The  Company  has  valued  its  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.

(m)     Net  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  has  not  been  presented,  as the
computation  would  result  in  anti-dilution.

(n)     Financial  instruments

The Company's financial instruments consist primarily of cash, T-bills, accounts
receivable,  capital  leases and notes payable.  These financial instruments are
stated at their respective carrying values, which approximate their fair values.

(o)      Segment  reporting

The Company merged its Space Missions Division business segment and ISS business
segment  in  2002  and  closed  ISS in 2003.  The Company has one other inactive
subsidiary, SpaceDev Oklahoma, Inc.  The Company follows the requirement of SFAS
No.  131  "Disclosures  about Segments of an Enterprise and Related Information"
("SFAS  No.  131").

                                      F-15
                                      PAGE

(p)     New  accounting  standards

In  December 2004, FASB issued SFAS No. 123 (revised 2004) "Share Based Payment"
(SFAS  No.  123R),  a  revision to Statement No. 123, Accounting for Stock-Based
Compensation which supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees.  The  revised SFAS 123 eliminates the alternative to use Opinion 25's
intrinsic  value  method  of  accounting  and,  instead,  requires  entities  to
recognize  the  cost  of  employee  services  received in exchange for awards of
equity  instruments  based  on  the  grant-date  fair  value  of  those  awards.
Furthermore,  public  entities  are  required to measure liabilities incurred to
employees  in share-based payment transactions at fair value as well as estimate
the  number  of  instruments  for  which the requisite service is expected to be
rendered.  Any  incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair values before and after
the modification.  The Company has yet to determine the effect SFAS No. 123R may
have  on  its  financial  statements,  if  any.

Effective  as  of  December  31,  2004,   the   Company  adopted   the   revised
interpretation of Financial Accounting Standards Board (FASB) Interpretation No.
46 (FIN 46), "Consolidation of Variable Interest Entities," (FIN 46-R). FIN 46-R
requires  that certain variable interest entities be consolidated by the primary
beneficiary  of the entity if the equity investors in the entity do not have the
characteristics  of  a  controlling financial interest or do not have sufficient
equity  at  risk  for  the  entity  to finance its activities without additional
subordinated financial support from other parties. The Company does not have any
investments in entities it believes are variable interest entities for which the
Company  is  the  primary  beneficiary.

(q)     Inventory

Inventories  are  valued  at  the lower of cost or market using the average cost
method,  which  approximates  the  first-in,  first-out  method   of   inventory
valuation.

2.     FIXED  ASSETS

In  December  2002, the Company entered an agreement to sell its interest in its
only facility.  As of December 31, 2002 the Company listed a receivable held for
sale  of  $3,150,124  which  was realized when the transaction 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  the sale, the Company entered into a lease agreement with
the buyer to lease-back its facilities (see Note 9(c)).  The gain on the sale of
the  facility  was deferred and will be amortized over the remaining term of the
lease.  Deferred  gain  of $1,172,720 will be amortized on a straight-line basis
over  ten  (10) years beginning February 2003 and ending in February 2013.  This
amortization will be included in the Company's non-operating income and expense.

                                      F-16
                                      PAGE

<TABLE>
<CAPTION>



Fixed assets consisted of the following:
<S>                                       <C>         <C>
December 31, . . . . . . . . . . . . . .       2004        2003
----------------------------------------  ----------  ----------
Capital leases . . . . . . . . . . . . .  $ 153,097   $ 153,097
Computer equipment . . . . . . . . . . .    383,512     163,721
Building improvements. . . . . . . . . .     14,124       9,488
Furniture and fixtures . . . . . . . . .      6,224       5,271
----------------------------------------  ----------  ----------
                                            556,957     331,577
Less accumulated depreciation
   and amortization. . . . . . . . . . .   (277,576)   (194,045)
----------------------------------------  ----------  ----------
                                          $ 279,381   $ 137,532
----------------------------------------  ----------  ----------
----------------------------------------  ----------  ----------
</TABLE>

Depreciation and amortization expense for fixed assets was approximately $83,500
and  $53,000  for  the  years  ending  December 31, 2004 and 2003, respectively.
Depreciation and amortization expense was higher during 2004 due to the purchase
of  new fixed assets, mainly new computer hardware and software, during 2004. Of
the  above  depreciation, approximately $33,000 and $28,000, for the year ending
December  31,  2004  and  2003,  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.

(a)     AMROC

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
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.

                                      F-17
                                      PAGE

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 percent, a zero percent 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.

<TABLE>
<CAPTION>

Other intangible assets consisted of the following:
<S>                                                  <C>    <C>
December 31,                                          2004       2003
---------------------------------------------------  -----  ----------
Other intangibles . . . . . . . . . . . . . . . . .  $   0  $ 116,292
Less accumulated amortization . . . . . . . . . . .      0   (116,292)
---------------------------------------------------  -----  ----------
                                                     $   0  $       0
---------------------------------------------------  -----  ----------
---------------------------------------------------  -----  ----------

</TABLE>

The  Company's  intangible  assets  were  fully amortized in 2003.  Amortization
expense  was  approximately  $11,000  for  2003.

4.     NOTES  PAYABLE
(a)     Building  and  settlement  notes
In  December  2002,  the Company entered into an agreement to sell its ownership
interest  in  its  only  facility.  The transaction 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 the sale, the Company entered into a
lease  agreement  with  the  buyer to leaseback its facilities. 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.  The Company's
Chief  Executive  Officer  provided  a guarantee for the leaseback.  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, 2004 and 2003, the deferred gain was
$947,949  and  $1,065,221,  respectively.  This amortization will be included in
the  Company's non-operating income and expense and totaled $117,272 in 2004 and
$107,499  in  2003.

Deferred  Gain  consisted  of  the  following:

<TABLE>
<CAPTION>



<S>                <C>          <C>
December 31,             2004         2003
-----------------  -----------  -----------

Deferred Gain      $1,172,720   $1,172,720
Less Amortization    (224,771)    (107,499)
-----------------  -----------  -----------
                   $  947,949   $1,065,221
-----------------  -----------  -----------
-----------------  -----------  -----------

</TABLE>


                                      F-18
                                      PAGE

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, 2004
and 2003, the outstanding balances on these notes were $46,127 and $87,591, with
interest  expense  of  $3,258  and  $4,956,  respectively.

Future  minimum  principal  payments  on  notes  payable  are  as  follows:


<TABLE>
<CAPTION>



<S>                       <C>
Year Ending December 31,
------------------------  -------
2005 . . . . . . . . . .  $36,670
2006 . . . . . . . . . .    9,457
2007 . . . . . . . . . .        0
------------------------  -------
Total Settlement Notes    $46,127
------------------------  -------
------------------------  -------

</TABLE>

(b)     Related  parties

The  Company  had a note payable to its CEO.  At December 31, 2004 and 2003, the
balances  were $0 and $585,522, respectively, with accrued interest of 10%.  The
note  was amended on March 20, 2000 to call for annual payments of not less than
$80,000 per year with interest at 10%.  As part of the Company's preferred stock
offering  (see Note 8(a)), the note was paid in full during the third quarter of
2004.

Interest  expense  on  this  note  was  $29,256  and  $47,023 for 2004 and 2003,
respectively.

(c)     Revolving  Credit  Facility.

On  June  3,  2003,  the  Company  entered  into  a  Security Agreement, Secured
Convertible  Note,  Registration  Rights  Agreement  and  Common  Stock Purchase
Warrant,  with the Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form
8-K  dated June 18, 2003.  Pursuant to the agreements, the Company received a $1
million  revolving  credit facility in the form of a three-year Convertible Note
secured  by  its  assets subject to the amount of eligible accounts receivables.
The net proceeds from the Convertible Note were used for general working capital
purposes.  Advances  on the Convertible Note are repaid at the Company's option,
in cash or through the issuance of the Company's shares of common stock provided
the  market  price  is  118%  of  the  fixed  conversion  price or greater.  The
Convertible  Note  carries  an  interest  rate of Wall Street Journal Prime plus
0.75% on any outstanding balance.  In addition, the Company is required to pay a
collateral  management  payment  of  0.55%  of the average aggregate outstanding
balance  during  the  month  plus  an  unused  line  payment of 0.20% per annum.
Approximately $19,500 in interest and approximately $5,000 in fees were expensed
under  the  revolving credit facility in 2004.  There was no outstanding balance
on  the  revolving  credit  facility  at  December  31,  2004.

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

                                      F-19
                                      PAGE

The  Convertible Note includes a right of conversion in favor of Laurus.  Laurus
has  exercised  its conversion rights from time to time on outstanding balances.
When  Laurus  chooses to exercise its conversion rights, the Convertible Note is
convertible  into  shares  of  the  Company's common stock at a fixed conversion
price,  subject  to adjustments for stock splits, combinations and dividends and
for  shares  of  common  stock  issued  for less than the fixed conversion price
(unless  exempted  pursuant  to  the agreements).  The Agreement was modified on
March  31,  2004  to  provide  for a six-month waiver 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 after conversion of a total of $2.5 million to 103% of the then fair
market  value  of  our  common  stock  ("Adjusted  Fixed  Conversion  Price").

Laurus converted 2,991,417 shares to reduce the Company's debt by $2,271,750 for
the  twelve-month  period ending December 31, 2004.  Laurus converted a total of
3,406,417  shares  to  reduce  the debt by $2,500,000 since the inception of the
revolving  credit  facility.  For  the  twelve-month  period ending 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 and $2,607,099 for the
non-cash  loan fee expense since the inception of the revolving credit facility.
The  fair  market value used in 2003 was established using a 20% discount to the
closing  price  on  the  date  of  conversion  based  on  the   restricted   and
thinly-traded nature of the Company stock in 2003 and the fair market value used
in  2004  was established using the closing price on the date of conversion with
no  discount  taken  due  to  the  increased  volume  in  the  Company's  stock.

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

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

                                      F-20
                                      PAGE

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

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

As  stated above, in conjunction with the Company's Preferred Stock financing on
August  25, 2004, Laurus agreed to extend the revolving credit facility reported
on  Form  8-K  filed June 18, 2003 from $1.0 million to $1.5 million.  The first
$1.0  million  converted  under the revolving credit facility was converted last
year  and  earlier  this year at a rate of $0.55 per share during 2003 and 2004.
On  March  31,  2004,  the  conversion  price  for  the  next $500,000 under the
revolving credit facility was set at $0.85 per share.  The next $1 million under
the  revolving  credit  facility  was  convertible at a rate of $1.00 per share.
There  was  no  balance  on  the revolving credit facility at December 31, 2004.

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 (6) months from issue date.  On March 25, 2003, an
amendment  was executed which extended these notes an additional six (6) 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 (3) years from the date
of  issuance  at the initial exercise price which is equal to the 20-day average
ask  price  less  10%,  which  was  established when the 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.

                                      F-21
                                      PAGE

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, 2003, the Company recorded a
credit  of  $88,408,  as  debt discount recovery; therefore, for the year ending
December  31,  2003,  the  debt  discount expense was $112,500. The Company also
expensed  $131,411 for non-cash loan fee expense. Fair market value of the stock
was  determined  by  discounting  the  closing  market  price on the date of the
transaction  by  20%,  based  on  the  nature  of  the  restricted  securities.

<TABLE>
<CAPTION>



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

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

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

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,  received  the  reduction  in  $187,500 in related party debt and expensed
$773,802  in  non-cash  loan  fees.

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  $2,350,000  and $2,190,000 as of December 31, 2004 and
2003,  respectively,  consisted  primarily  of  the income tax benefits from net
operating  loss  and  capital  loss  carryforwards, amortization of goodwill and
research  and  development  credits.  A valuation allowance has been recorded to
fully  offset  the  deferred  tax  asset  as it is more likely than not that the
assets  will  not  be utilized.  The valuation allowance increased approximately
$126,000  in 2004 from $2,190,000 at December 31, 2003 to $2,318,000 at December
31,  2004.

                                      F-22
                                      PAGE

Significant  components  of  the  benefit  for  income taxes for the years ended
December  31,  2004  and  2003  are  as  follows:

<TABLE>
<CAPTION>



<S>                 <C>     <C>
                      2004    2003
                    ------  ------
Current
 Federal . . . . .  $    -  $    -
 State . . . . . .   1,600   1,600
                    ------  ------
                     1,600   1,600
Deferred
 Federal . . . . .       -       -
 State . . . . . .       -       -
                    ------  ------
                         -       -

Income tax expense  $1,600  $1,600
                    ======  ======
</TABLE>

At  December  31, 2004, the Company had federal and state tax net operating loss
and  capital  loss  carryforwards  of  approximately  $4,826,000 and $2,146,000,
respectively.  The  federal and state tax loss carryforwards will expire in 2012
and 2007, respectively, unless previously utilized.  The State of California has
suspended  the  utilization  of  net operating loss for 2003 and limited them in
2004.

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,. . . . . . . . . .    2004     2003
---------------------------------------------  -------  -------
  Statutory U.S. federal rate . . . . . . . .    35.0%    34.0%
---------------------------------------------  -------  -------
  State income taxes - net of federal benefit     5.7%     5.8%
  Permanent differences . . . . . . . . . . .  (37.8%)       -
  Change in valuation allowance . . . . . . .   (2.9%)  (39.8%)
---------------------------------------------  -------  -------
  Provision for income taxes. . . . . . . . .     0.0%     0.0%
---------------------------------------------  -------  -------
</TABLE>


                                      F-23
                                      PAGE

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,. . . . . . . . . . . . .         2004          2003
---------------------------------------  ------------  ------------
  Deferred tax assets:
---------------------------------------  ------------  ------------
   Loss carryforwards . . . . . . . . .  $ 1,765,000   $ 1,588,000
      Deferred gain on sale of building      416,000       435,000
   Temporary differences. . . . . . . .       77,000       127,000
   Research and development credits . .       92,000        40,000
---------------------------------------  ------------  ------------
  Gross deferred tax assets . . . . . .    2,350,000     2,190,000
---------------------------------------  ------------  ------------
      Deferred tax liability. . . . . .      (32,000)            -
---------------------------------------  ------------  ------------
  Valuation allowance . . . . . . . . .   (2,318,000)   (2,190,000)
                                         $         -   $         -
---------------------------------------  ------------  ------------
---------------------------------------  ------------  ------------

</TABLE>

As  of December 31, 2004, the Company recorded a valuation allowance of $214,000
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  effect 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.

Pursuant  to  Internal  Revenue  Code  Section 382, the Company's use of its net
operating loss carryforwards may be limited as a result of cumulative changes in
ownership  of  more  than  50%  over  a  three  year  period.

The  Company  has unused U.S. and state tax credits of approximately $52,000 and
$39,000,  that  begin  to  expire  2013  and  2008,  respectively.


7.     EMPLOYEE  BENEFIT  PLAN

(a)     Profit  sharing  401(k)  plan

During  2004,  the Company amended their 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 $13,000 per
year,  whichever  is  lower, for the year ending December 31, 2004.  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  2004 and 2003, the Company contributed $2,705 and $0
to  the  Plan.

                                      F-24
                                      PAGE

(b)     Incentive  stock  option  and  employee  stock  purchase  plans

At  its  1999  Annual Stockholder Meeting, the shareholders adopted an Incentive
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 our plan, the exercise price for
the  non-statutory stock options were not less than 85% of the fair market value
of  the  stock  on  the date the option was granted.  The Company is required to
reserve  an  amount of common shares equal to the number of shares, which may be
purchased  as  a  result  of  awards  made  under  the  Plan  at  any  time.

At  the  2000 Annual Stockholder Meeting, the shareholders approved an amendment
to  the  Stock Option Plan of 1999, 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, at its annual meetings in 2004 and 2003, made no
adjustment, as a determination was made that the number of shares then available
under  the  Plan  was  sufficient  to  meet  the  Company's  needs.

At the 2004 Annual Stockholder Meeting, the shareholders approved the 2004 Stock
Option  Plan  authorizing  options  on  2,000,000 shares be set apart under this
plan.  As  of  December  31, 2004, 6,184,698 shares were authorized for issuance
under  both  plans,  3,878,766  of which were subject to outstanding options and
awards.  Shares  issuable  under  the  1999  plan  were registered with the U.S.
Securities & Exchange Commission on Form S-8.  A Form S-8 registration statement
for  shares  issuable under the 2004 plan will be filed simultaneously with this
report.

During 2004, the Company issued non-statutory options to purchase 287,000 shares
to  its  independent  directors  for  attendance  at its 2003 Board of Directors
meetings.  In  addition  to  the  Stock  Option  Plan  of 1999, the shareholders
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  our  common  stock  to  its  employees.  The  1999 Employee Stock
Purchase  Plan  has been instituted and the first employees enrolled in the plan
in  August 2003.  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  85%  of  the  fair  market  value  of  the  stock on the date the stock is
purchased.  During 2004 and 2003 employees contributed $16,464 and $6,440 to the
employee stock purchase plan, and 14,010 and 0 shares were issued under the plan
as  of  December  31,  2004  and  2003,  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.

                                      F-25
                                      PAGE

8.     STOCKHOLDERS'  EQUITY

(a)     Convertible  preferred  stock

On  August  25,  2004,  the Company entered into a Securities Purchase Agreement
with  the Laurus Master Fund, Ltd., whereby the Company issued 250,000 shares of
its  Series  C  Non-Redeemable Convertible Preferred Stock, par value $0.001 per
share  (the  "Preferred  Stock"),  to  Laurus for an aggregate purchase price of
$2,500,000  or  $10.00 per share (the "Stated Value").  The preferred shares are
convertible  into  shares  of  the Company's $0.0001 par value common stock at a
rate  of  $1.54  per  share  at  any  time  after  the date of issuance, and pay
quarterly, cumulative dividends at a rate of 6.85% with the first payment due on
January  1,  2005.  As  of  December  31,  2004,  approximately $61,000 has been
accrued  for  dividends and are payable in cash or shares of our common stock at
the  holder's option with the exception that dividends must be paid in shares of
our  common  stock  for  up to 25% of the aggregate dollar trading volume if the
fair  market  value  of the Company's common stock for the 20-days preceding the
conversion  date  exceeds  120% of the conversion rate. The preferred shares are
redeemable by the Company in whole or in part at any time after issuance for (a)
115%  of  the  Stated Value if the average closing price of the common stock for
the  22  days  immediately  preceding the date of conversion does not exceed the
conversion  rate  or  (b)  the  Stated Value if the average closing price of our
common  stock  for  the  22  days  immediately  preceding the date of conversion
exceeds the Stated Value. The preferred shares have a liquidation right equal to
the Stated Value upon the Company's dissolution, liquidation or winding-up.  The
preferred  shares  have  no  voting  rights.

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

(b)     Common  stock

During  2004  and  2003, the Company issued 0 and 7,500 shares, respectively, of
its  common  stock  for  employee awards and services and for summer and student
interns,  and  recorded expenses of $0 and $9,170, respectively.  The fair value
of  the  shares  issued  was  calculated  using the closing price on the date of
issuance.

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

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

The  Company  sold  153,060  Units  under  the  PPO  during  2002  for  $75,000.

                                      F-26
                                      PAGE

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

(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, 2004, 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 2,363,827 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

On  November  21,  1997,  the  Company  entered  into a five (5) year employment
agreement  with  its  CEO.  As  part  of  the  employment agreement, the Company
granted  options  to the CEO to purchase up to 2,500,000 shares of the Company's
$0.0001  par  value  restricted  common  stock.

The  options are subject to the following vesting conditions, which were amended
on January 21, 2000, and further amended on July 16, 2000 with an option for the
board  to  award  an  additional  1,500,000  options  at  a  later  date:

                                      F-27
                                      PAGE

<TABLE>
<CAPTION>

                                                                                                                  Exercise
                       Number                                                                                    price per
                       Of shares         Vesting Conditions                                                          share
----------------       ---------         -----------------------------------------------------------   -----------------
<S>                    <C>               <C>                                                           <C>
Granted Options:
                       500,000. . . . .  Currently vested                                              $            1.00
                       500,000. . . . .  Obtaining $6,500,000 additional equity capital                $            1.50
                       500,000. . . . .  Financing and executing a definitive space launch agreement   $             .00
                       500,000. . . . .  Launching of first lunar or deep-space mission                $            2.50
                       500,000. . . . .  Successful completion of first lunar or deep-space mission    $            3.00
Options to be
Granted upon
the Occurrence
of Certain Events:
                       250,000. . . . .  Upon the Company market capitalization reaching $250 million    $          5.00
                       500,000. . . . .  Upon the Company market capitalization reaching $500 million    $         10.00
                       750,000. . . . .  Upon the Company market capitalization reaching $1 billion      $         20.00
----------------       ---------         -----------------------------------------------------------   -----------------

</TABLE>

All  options  expire ten (10) years from date of second amendment i.e., July 16,
2000.

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

On  August  27,  2001, as part of an annual review process, an additional 10,000
options  were granted to the CEO at the exercise price of $0.9469 per share with
a  set  vesting  schedule of 3,333 shares per year after issuance with the third
year  having 3,334 options vest.  These options expire five (5) years from grant
date.


                                      F-28
                                      PAGE

The following summarizes stock option activity related to all of the option plan
and  employee  compensation  agreements:

<TABLE>
<CAPTION>



<S>                           <C>           <C>
                              Weighted
                              Options       Average
                              Outstanding   Exercise Prices
----------------------------  ------------  ----------------
Balance at January 1, 2003 .    5,448,772   $           0.91
Granted. . . . . . . . . . .    1,219,615               0.76
Exercised. . . . . . . . . .      (37,000)              0.53
Expired. . . . . . . . . . .   (1,006,580)              0.52
----------------------------  ------------  ----------------

Balance at December 31, 2003    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   $           1.50
----------------------------  ------------  ----------------
----------------------------  ------------  ----------------

</TABLE>

The  weighted  average fair value of options granted to employees under the 1999
Incentive  Stock  Option Plan and the 2004 Equity Incentive Plan during 2004 and
2003  was  $1.23  and $0.76, respectively.  At December 31, 2004 and 2003, there
were  1,900,460 and 2,266,520 options exercisable at a weighted average exercise
price  of  $0.83  and  $1.05  per  share,  respectively.  The  weighted  average
remaining  life  of  outstanding options under the plan at December 31, 2004 was
4.40  years.


<TABLE>
<CAPTION>



<S>           <C>                    <C>                        <C>                <C>
              Weighted-Average       Weighted-
Range of . .  Remaining Contractual  Average Exercisable Price
Exercise . .  Number of Shares       Life of Shares             Number of Shares   Exercisable
Price . . . . Outstanding            Outstanding                Exercisable        Price
------------  ---------------------  -------------------------  ----------------- ------------
0.42-0.99 .              2,317,413                       3.92          1,036,607  $       0.64
1.00-1.99.               2,459,131                       4.53            861,631          1.05
2.00-2.99.               1,102,222                       5.11              2,222          2.25
3.00-3.50.                 500,000                       5.05                  -             -
------------  ---------------------  -------------------------  ----------------- ------------
                         6,378,766. .                    4.40          1,900,460  $       0.83
------------  ---------------------  -------------------------  ----------------- ------------
------------  ---------------------  -------------------------  ----------------- ------------

</TABLE>

The  Company has elected to account for its stock-based compensation plans under
APB  25.  However,  the Company has computed, for pro forma disclosure purposes,
the  value  of  all options granted during 2004 and 2003 using the minimum value
method  as  prescribed by SFAS No. 123.  Under this method, the Company used the
risk-free  interest rate at 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  of 117% and 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.


                                      F-29
                                      PAGE

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:

<TABLE>
<CAPTION>



<S>                            <C>         <C>
December 31,. . . . . . . . .       2004        2003
-----------------------------  ----------  ----------
Computer equipment. . . . . .  $ 153,097   $ 153,097
Less accumulated depreciation   (136,640)   (103,857)
                               $  16,457   $  49,240
-----------------------------  ----------  ----------
-----------------------------  ----------  ----------

</TABLE>

Future  minimum  lease  payments  are  as  follows:

<TABLE>
<CAPTION>



<S>                                      <C>
Year Ending December 31, 2003
---------------------------------------  --------
2005. . . . . . . . . . . . . . . . . .  $ 4,425
2006. . . . . . . . . . . . . . . . . .    1,526
2007. . . . . . . . . . . . . . . . . .        -
2008. . . . . . . . . . . . . . . . . .        -
Thereafter. . . . . . . . . . . . . . .        -
---------------------------------------  --------
Total minimum lease payments. . . . . .    5,951
Amount representing interest. . . . . .      698
---------------------------------------  --------
Present value of minimum lease payments    5,253

Total obligation. . . . . . . . . . . .    5,253
Less current portion. . . . . . . . . .   (3,784)
---------------------------------------  --------
Long-term portion . . . . . . . . . . .  $ 1,469
---------------------------------------  --------
---------------------------------------  --------

</TABLE>

(b)     Other  accrued  liabilities

During  2004  and  2003, the Company accrued expenses in connection with current
projects,  our  preferred stock sale, and other commitments.  The total of these
accruals  were  $207,262  and  $248,530  as  of  December  31,  2004  and  2003,
respectively.

In  November  2002, the Company entered an agreement to sell its interest in its
only  facility.  The transaction closed in January 2003.  The escrow transaction
included  the  sale  of  the  land  and building at 13855 Stowe Drive, Poway, CA
92064.  The  fees  that were incurred for the sale of the building were $121,311
and  were  recorded as other accrued liabilities.  The fees include broker fees,
escrow  and  title  fees  and  property  taxes.

(c)     Building  lease

In  conjunction  with  the sale of its only facility, the Company entered into a
non-cancelable  operating  lease with the buyer to lease-back its facilities for
ten  (10)  years  (see  Note  2).  The  base rent was $25,678 per month at lease
inception  and is currently $26,577 as of December 31, 2004 and will continue to
increase  by 3.5% per year.  Mr. Benson, the Company's CEO, provided a guarantee
for  the  leaseback.

                                      F-30
                                      PAGE

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  2004  and  2003,  the  Company  had  two  and three major customers that
accounted for sales of approximately $3,737,000, or 76% and $1,782,600 or 60% of
consolidated  revenue,  respectively.  At December 31, 2004 and 2003, the amount
receivable  from  these  customers  was  approximately  $612,900  and  $160,200,
respectively.

(c)     Contract

In  November  1999,  the  Space  Missions Division was awarded a turnkey mission
contract  by  the  Space  Sciences Laboratory at the University of California at
Berkeley worth as of December 31, 2002 approximately $7.2 million, including two
change orders worth approximately $412,000 on June 12, 2002 and October 7, 2002.
This  contract  represented  14% of the Company's revenue in 2003.  The contract
concluded  on  December  31,  2003.

                                      F-31
                                      PAGE