<PAGE>

                     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, 2001

[   ]   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) 375-2000

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: $4,099,094

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 15, 2002 was $7,705,142, based on the
last sale price of $0.52 as reported by the NASD Over the Counter Bulletin
Board.

As of March 15, 2002, Registrant had outstanding 14,817,580 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

PART I
------


ITEM 1.  DESCRIPTION OF BUSINESS...............................................1

   BACKGROUND..................................................................1
   THE COMPANY.................................................................5
   VISION STATEMENT............................................................6
   BUSINESS PLAN AND COMPANY STRATEGY..........................................7
   PRODUCTS AND SERVICES.......................................................8
   MARKET STRATEGIES..........................................................15
   COMPETITION................................................................16
   REGULATION.................................................................17
   EMPLOYEES..................................................................18
   INTELLECTUAL PROPERTY......................................................19

ITEM 2.  DESCRIPTION OF PROPERTY..............................................19

ITEM 3.  LEGAL PROCEEDINGS....................................................20

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................21

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............22

   MARKET INFORMATION.........................................................22
   HOLDERS....................................................................22
   DIVIDENDS..................................................................22

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS................................................22

ITEM 7.  FINANCIAL STATEMENTS.................................................31

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS........................31

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT....................32

ITEM 10. EXECUTIVE COMPENSATION...............................................36

   REMUNERATION PAID TO EXECUTIVES............................................36
   REMUNERATION PAID TO DIRECTORS.............................................37
   EMPLOYMENT AGREEMENTS......................................................38
   EMPLOYEE BENEFITS..........................................................39

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......39

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................40

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................42

SIGNATURES.....................................................................1

<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

         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. In addition to
historical information, the following discussion and other parts of this
document contain forward-looking information that involves risks and
uncertainties. Actual results could differ materially from those anticipated by
such forward-looking information due to a number of factors beyond the Company's
control.

         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 litigation, claims and other actions,
and potential litigation, claims and other actions by or against us, including,
but not limited to, the litigation that has been filed by and against EMC
Holdings Corporation; technological changes and introductions of new competing
products; the current recession; terrorist attacks or acts of war, particularly
given the acts of terrorism against the United States on September 11, 2001 and
subsequent military responses by the United States; 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 are products.

         Given these uncertainties, investors are cautioned not to place too
much weight on such statements. We are not currently obligated to update these
forward-looking statements.

BACKGROUND

         SpaceDev Inc. (the "Company" or "SpaceDev") was founded to be a leader
in commercial "Space Exploration". We believe in order to unlock the revenue
generating potential of space the industry will need to develop new practical
ways to make space exploration and development profitable. Since its inception,
we have sought to make SpaceDev the first company to successfully define,
implement and execute profitable commercial, low-cost space missions e.g.
robotic missions to the Moon and beyond, and to create safe, clean and
affordable space propulsion system products to reduce the cost of access to
space.

         SpaceDev is driven by the following four principles:

         o        Brand SpaceDev as the market leader in bold, new practical and
                  profitable ways of commercial space exploration and
                  development;
         o        Produce highly profitable, capable and affordable space
                  missions, space products and space services for commercial and
                  government customers and markets;
         o        Leverage our successes to create a greater market for SpaceDev
                  products and services by applying a "microcomputer way of
                  thinking" in the creation of a standards-based value chain of
                  newer, smaller, lower cost space technologies; and

                                       1
<PAGE>

         o        Create and build new commercial space markets with strategic
                  partners and investors.

         SpaceDev has two primary lines of space products: (i) unmanned
earth-orbiting micro-satellites, unmanned deep space micro-spacecraft and
micro-satellite subsystems as well as software systems; and (ii) Space
propulsion systems using clean, safe hybrid rocket motor technology These
products are being marketed and sold into domestic and international government
and commercial markets.

         In addition to the space hardware business, we are working with
partners to create new markets that, over the next five to ten years, can
generate significant new space-related service, media, tourism and commercial
revenue streams well beyond the value of the space hardware that it builds.
While we cannot predict the extent to which we can accomplish this goal with
certainty, we are currently focused on:

         o        Selling micro-satellites subsystems and micro-propulsion
                  products;
         o        Developing unique enabling technology for the sub-orbital
                  manned space plane tourism market through strategic
                  partnerships; and
         o        Creating a new unmanned Beyond Earth Orbit commercial market
                  with spacecraft derived from the work done for JPL on the Mars
                  Micro-Mission contract.

         SpaceDev was organized under the laws of the State of Colorado on
December 23, 1996. It became a publicly traded company in October 1997 and is
trading on the Nasdaq OTCBB under the symbol of "SPDV."

         In February 1998, the Company acquired Integrated Space Systems
("ISS"), in San Diego. ISS was fully integrated into SpaceDev. Most of the ISS
employees were former launch vehicle engineers and managers who worked for
General Dynamics (which was acquired by Martin-Marietta) in San Diego. At
SpaceDev they primarily develop products based on hybrid rocket motor
technology. With the acquisition of ISS, SpaceDev's employee base increased to
twenty (20) employees in February 1998. On November 15, 2001, management
determined that the un-amortized balance of goodwill from the ISS acquisition,
which was approximately $923,000, became impaired and was written off. This
action was taken primarily because the Company decided to exit the engineering
services business.

         In August 1998, SpaceDev acquired the patents and intellectual property
produced by American Rocket Company ("AMROC"), which has since gone out of
business. AMROC specialized in hybrid rocket technology (solid fuel plus liquid
oxidizer) for small sounding rockets and launch vehicles. AMROC's purpose and
sole focus was to design, build and test hybrid rocket motors with the intention
of producing commercial hybrid sounding rockets and launch vehicles. Dozens of
hybrid motors were built, and hundreds of test firings were conducted by AMROC.
The acquisition of such data has had a positive effect on SpaceDev operations,
providing access to a very large cache of potentially valuable hybrid rocket
documents, designs and test results that have in part been used in SpaceDev
rocket motor contracts and products.

         The Company's initial business plan was centered on an asteroid
prospector mission known as the Near Earth Asteroid Prospector ("NEAP") mission.
NEAP was modeled after NASA's successful Near Earth Asteroid Rendezvous ("NEAR")
mission to the degree that NASA formally recognized it as a commercial Mission
of Opportunity. This was significant because Missions of Opportunity had never


                                       2
<PAGE>

been included in NASA's Discovery program. Missions of Opportunity are missions
to be flown by entities other than NASA on which there is room for one or more
additional experiments. In the past, it had been assumed by NASA that Missions
of Opportunity would be government missions of other countries.

         By 1998, our core team had refined the definition of the NEAP mission.
Launch of NEAP was planned for late 2001, with a rendezvous at the near-Earth
asteroid Nereus in mid-2002. However, due to program delays, the mission is
being reprogrammed to another accessible target asteroid and a launch date is
not planned at this time. The reprogramming is primarily the result of schedule
slips as a result of launch vehicle readiness, funding delays, and/or priority
changes. Although multiple back-up targets are available, due to the number of
factors involved and the Company's need for commercial or government revenue,
there can be no guaranteed assurance that NEAP will ever be launched. In order
to accomplish the launch of NEAP, we will require commercial or government
revenue in the form of sales, and there can be no guarantee that we will be able
to obtain sales sufficient to support the mission.

         In late 1998, we began bidding on and winning government-sponsored
research and development ("R&D") contracts, which were directly related to our
strategic commercial space interests. The Company competed with seven other
industry teams to performed a mission and spacecraft feasibility assessment
study for the proposed 200-kg Mars MicroMissions and was one of five firms
selected by NASA's Jet Propulsion Laboratory ("JPL"). The final report was
delivered to JPL in March 1999 and we are now able to offer lunar and Mars
commercial deep-space missions based on this highly innovative space system
design. For more information see "PRODUCTS AND SERVICES - Micro Spacecraft
Products and Missions" below.

         In mid-1999, ISS competitively won an R&D contract from the National
Reconnaissance Office ("NRO") to study a family of very small, hybrid-based
"micro" kick-motors for small-satellite orbital transfer applications. This
contract was successfully completed, and we were subsequently awarded several
other study contracts with the NRO, which have also been successfully completed.

         In November 1999, SpaceDev was awarded a US $4,995,868 million turnkey
mission contract by the Space Sciences Laboratory ("SSL") at University of
California, Berkeley ("UCB"). SpaceDev was competitively selected by UCB/SSL to
design, build, integrate, test and operate for one year a small NASA-sponsored
scientific, Earth-orbiting spacecraft called CHIPSat. CHIPSat is the first
mission of NASA's low-cost University-Class Explorer ("UNEX") series to be
approved for the implementation phase. Due to additional NASA and customer
reviews, additional work and schedule extensions, the CHIPSat contract award was
increased by $600,000 on June 15, 2001 and again by $1,200,000 on November 28,
2001, bringing the total contract value to approximately $6,800,000. Launch of
CHIPSat is now expected to take place in late 2002. The CHIPSat program
generated $2,050,547 of revenue in 2000 and $3,163,000 of revenue in 2001. For
more information on CHIPSat, see "PRODUCTS AND SERVICES - Micro Spacecraft
Products and Missions" below.

         On February 1, 2000, we announced that the Company had teamed with
Boeing to investigate opportunities of mutual interest in the commercial
deep-space arena. For more information see "PRODUCTS AND SERVICES - Micro
Spacecraft Products and Missions" below. Various projects were reviewed, and
SpaceDev is now responsible to find funding for these programs. We are working
with various companies and consultants to assist us in obtaining the
sponsorships, media contracts and science data revenue to implement one of these
projects.

                                       3
<PAGE>

         On March 22, 2000, we received notification from the California
Spaceport Authority and the California Space and Technology Alliance ("CSTA")
that SpaceDev had been awarded a grant of $105,000 to be used for test firing
SpaceDev hybrid rocket motors. California's Western Commercial Space Center also
awarded SpaceDev a $200,000 grant to help build-out and equip its satellite and
space vehicle manufacturing facilities. These facilities were completed in
January 2001.

         In July 2000, the NRO granted SpaceDev two separate, follow-on
competitive awards of $400,000 each for further hybrid rocket engine design,
test, evaluation, and development. SpaceDev's work for the NRO has helped fund
two innovative hybrid rocket motor products:

         o        a family of small versatile orbital maneuvering and transfer
                  vehicles ("MTVs") using clean, safe hybrid rocket propulsion
                  technology, and
         o        a flight-ready prototype hybrid propulsion module for a 50-kg
                  class micro-satellite.

As outlined above, these contracts have been successfully completed.

         In January 2001, SpaceDev Australia Limited was formed for the purpose
of creating a strategic alliance between SpaceDev and Space Projects Australia
Limited, an Australian business entity formed to create an Australian owned
spaceport. In February 2001, the Company filed a prospectus with the Australian
Securities and Investments Commission (ASIC) to publicly raise AUS $8 million.
The purpose of the alliance was to expand commercial space projects in Australia
and Asia

         On April 16, 2001, ASIC placed a final stop order on the prospectus.
ASIC held two hearings regarding the prospectus, in which it raised concerns
regarding the relationship of Registrant to Space Projects Australia, Ltd (SPA),
and the division of funds raised in the offering between the two entities. In
addition, ASIC voiced concerns regarding the use of forecasts and projections
prepared on behalf of SpaceDev Australia, Ltd, which were prepared by management
and reviewed by an outside accountant for use in the offering. The use of
forecasts became more limited under regulations adopted by ASIC in early 2001.
We have decided to place plans for SpaceDev Australia on hold for the near term,
but remain optimistic about the potential of the Asian market.

         In September 2001, we were awarded a contract for a proprietary
research program valued in excess of $1 million. As a part of that program, we
will compete with another party to design a space propulsion system. The entire
contract, which will be awarded based upon the submitted designs, is valued at a
total $2.2 million. We believe that the award could lead to a long-term market
for our hybrid propulsion technology if we are successfull in winning the
contract. Due to the highly competitive, confidential and market-sensitive
nature of the contract, we are unable to release more detailed information on
the project until the contract has been awarded in full. However, we do believe
this new contract is indicative of an increased demand for our hybrid motor
technology and expertise in the space industry, and expect the initial work to
have a positive impact on revenues for the first quarter of 2002. Work on this
project generated $328,083 in revenues during the fourth quarter of 2001.

                                       4
<PAGE>

THE COMPANY

         SpaceDev was founded to be a leader in "making commercial space happen"
in the New Millennium. We believe that space will only "happen" as additional
practical ways are found to make a new and wider variety of space activities
profitable. We believe that the more SpaceDev is oriented toward smaller,
innovative, affordable commercial space products, the better it can deliver a
higher value to its customers and shareholders.

         In order to implement our business plan, we intend to use common
commercial business practices at SpaceDev whenever possible, rather than the
government-driven processes that dominate the space industry. For instance, we
will submit fixed-priced bids, as opposed to the traditional methods of
government contracting where bids are often submitted on cost plus fixed fee or
time and materials bases, wherever possible. As an example, the CHIPSat project
is based on a commercial-type contract with no FAR (Federal Acquisition
Regulations) clauses, even though NASA funds the University's CHIPS project
through the auspices of the historic NASA Explorers Program. However, as we will
continue to submit bids directly to government agencies in order to supplement
our operations, we may be forced to continue to bid those contracts on a
non-fixed price basis.

         In addition to using a commercial approach in our bid-submission
process, we seek to avoid "re-inventing the wheel" on each project and instead
intend to rely on our own and existing technologies, used in new standardized
combinations. Existing technologies include products that are readily available
to support space flight missions, such as catalog-type components, where the
vendor offers a product (or products) built to known specifications with
standard available interfaces. Traditionally, technologies needed to support
space missions may have required significant dollar and time investment, thereby
increasing the overall cost. These technologies are associated with higher risk,
higher development costs, higher maintenance costs, and longer schedule
development - whereas the use of existing technologies serves to reduce cost,
schedule, and most importantly, operational risk since these technologies
already have a proven track record.

         Our corporate goal is to increase the intrinsic value of the Company by
providing proprietary, reliable, low-cost access to space through innovative
solutions currently lacking in the marketplace - low cost space-mission
solutions involving micro-satellites (generally less than 250 kg) and even
smaller satellites (less than 50 kg). We intend to define and market proprietary
missions and spacecraft based on open standards. "Open-standard" is a term used
to describe standard hardware or software and their interfaces such as found in
personal computers and operating systems, but applied to small spacecraft. Open
standards often result in less expensive products because, being "open," they
can be produced in larger quantities by a variety of competing sources, as
opposed to proprietary standards that are often available only from limited
sources.

         Our approach is to provide smaller spacecraft - generally 250 kg mass
and less - and compatible small hybrid propulsion space systems to a growing
market of commercial, international, 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 (i.e., black boxes) has allowed overall spacecraft size, mass, and
volume to be reduced over the past 10 to 15 years. For example, SpaceDev's HPX


                                       5
<PAGE>

flight computer takes up only 24 cubic inches compared to a competitor that
requires about 63 cubic inches. Our flight computer provides 300 million
instructions per second ("MIPS") of processing power compared to 10 MIPS for our
competitor. A direct example of the small spacecraft market is evidenced by
smaller lower cost launch vehicles (i.e., rockets) that were not available ten
years ago - specifically, launch vehicles such as Pegasus, Taurus, Athena-I,
Athena-II, and Minotaur. These launch vehicles are significantly smaller than
traditional Titan, Delta, and Atlas classes of launch vehicles, and have been
developed specifically to accommodate the smaller spacecraft market (i.e., less
than 1,000 kg weight class).

         All prior beyond earth orbit and deep space missions to date - U.S. and
foreign - have been government-defined, government funded and relatively
expensive. At the beginning of the space age, all satellites were launched and
operated by governments. After the first commercial communications satellite was
put into service, the private sector became actively involved in designing,
launching and operating communications satellites. Following this trend is the
space telecommunications sector that began decades ago, and more recently, the
space remote-sensing sector (e.g., DigitalGlobe, and Space Imaging) - consisting
of satellites that gather data about weather, crops, terrain elevations,
temperatures, etc.

         Key to our strategy is a strong focus on smaller, capable, affordable
satellites and propulsion systems addressing the deep space and Earth-orbiting
markets. Smaller satellites are also a key element of enabling lower cost
Earth-orbiting missions, for which demand is increasing from both the government
and commercial sectors. NASA has several earth-orbiting programs, including New
Millennium EO-1, SMEX, NPOESS, ESSP, UNEX, and UNESS. NASA's UNEX program
consists of missions in which satellite, experiment, mission development, launch
service, mission operations and data analysis costs are limited to $14 million
total cost to NASA. The high-performance CHIPSat satellite built by SpaceDev,
and delivered to UCB in December 2001, is the first in the UNEX program.
Analogous to the computer field, such small satellites are often called
"microsatellites" or "micro-spacecraft," with their associated "micromissions."

         Another key aspect of our strategy is to develop new commercial markets
through the application of smaller satellite and propulsion technologies. The
ability to streamline business practices, e.g. doing tasks cheaper and simpler,
can be applied to new commercial areas such as the beyond earth orbit and
sub-orbital space tourism markets. Although the Company believes these markets
are viable, there are business risks involved in entering the markets, and the
funding to develop these markets is not yet in place and may never be obtained.

VISION STATEMENT

         SpaceDev remains true to the vision established in 1997. Specifically,
we are driven by the following four principles:

         o        Brand SpaceDev as the market leader in bold, new practical and
                  profitable ways of commercial space exploration and
                  development;
         o        Produce highly profitable, capable and affordable space
                  missions, space products and space services for commercial and
                  government customers and markets;
         o        Leverage our success to create a greater market for SpaceDev
                  products and services by creating a standards-based value
                  chain of newer, smaller, lower cost space technologies; and
         o        Create and build new commercial space markets with strategic
                  partners and investors.

                                       6
<PAGE>

BUSINESS PLAN AND COMPANY STRATEGY

         The SpaceDev strategy is based on the belief that advancements in
technology and the application of standard processes 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 products.

         Our business strategy is summarized below:

         o        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;

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

         o        Bid win and leverage government programs to fund SpaceDev
                  Research and Development (R&D) and product development;

         o        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. The application of these products onto various
                  launch vehicles offers integrated on-orbit data delivery
                  systems and solutions; and

         o        Apply our lower cost space products to new applications and to
                  create new users, new markets and new revenue streams. In
                  conjunction with partners and investors, produce and fly
                  commercial missions throughout the inner solar system and be
                  "first to market" in the commercial beyond earth orbit
                  "space." Also, join or establish a team to build a safe,
                  affordable sub-orbital, man-rated space plane to help initiate
                  the space tourism business.

         We are implementing a strategic thrust to be perceived and regarded as
an experienced and reliable provider of small-satellite launch-integration
services. This allows the Company to identify launch opportunities (whether on
U.S. or foreign launchers), conceive and evaluate small-satellite designs
matched with those opportunities and to support the design, development, test,
integration, launch and operations of these satellites. We intend to offer
end-to-end business solutions, including micro spacecraft, small space
propulsion systems, affordable launch opportunities and launch integration
services. Launch integration services are the engineering tasks needed to insure
that the satellite fits on and is technically compatible with the selected
launch vehicle. This is an important part of our small-space strategy.

         Our customers come from a variety of different markets, but they will
all have the common requirement for low cost small-space systems. That is the
"market niche" that we intend to fill. Customer requirements will emanate from
various needs. Some customers, such as entertainment or Internet content
companies, may want a small satellite to deliver pictures or streaming video
from outer space that can be integrated into theme parks or Internet sites. Some


                                       7
<PAGE>

customers, such as foreign countries, may want to buy small satellites
commercially to be a delivery system for their science instruments as they
explore the inner solar system. Customers such as NASA may want to buy small
satellites as a part of their traditional programs or perhaps buy data from the
satellites on a commercial basis. While other customers, such as universities,
may want to buy satellites as a delivery system for experiments designed by
students and faculty. Finally, some customers, such as the Air Force or the NRO
may want to buy our products to test new technologies in space--sometimes
procured in a traditional manner and sometimes commercially.

         The Company's preferred space-mission implementation approach has the
following attributes:

         o        SpaceDev offers products and services from a "catalog," rather
                  than designs responding to government-supplied specifications.
         o        SpaceDev focuses on "Small Space," involving turnkey mission
                  solutions and application of proven commercial business
                  practices such as offering launch and mission space insurance
                  options, competitive pricing and creative billing arrangements
                  as part of our commercial space mission packages.
         o        SpaceDev uses relatively simple, rather than complex and
                  bulky, programmatic and technical solutions.

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

         o        It 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.
         o        It lowers total project costs and therefore provides greater
                  value and increases return on investment for SpaceDev and its
                  customers.
         o        It creates barriers to entry and competition from competitors.

         Though we prefer to define and execute complete space missions for
clients, we also offer customers space-delivery services (for customer-supplied
science or technology demonstration payloads); integration and launch services
(for a customer-supplied spacecraft); space hardware from commercial price lists
(for customer spacecraft); and science-instrument or technology-demonstration
data-set products (from SpaceDev-supplied payloads). Data sets are end-item
products (e.g., data, photographs) that consist of the results of a science
experiment or technology demonstration, and are used to generate new scientific
knowledge or to describe performance results when new technology is being tested
in space. These features of the Company's business approach place it more into
the template that existed during the early days of the microcomputer technical
revolution rather than into the classical patterns of the existing
government-dominated, limited-profit margin, aerospace industry.

PRODUCTS AND SERVICES

         We believe that the more SpaceDev is oriented toward smaller,
innovative, affordable commercial space products, the better it can deliver
rapid growth and a higher value to its customers and shareholders. We currently
have two primary lines of space hardware on which we are building a sound
foundation for a profitable, cash generating business:

                                       8
<PAGE>

         o        Unmanned earth-orbiting micro-satellites, unmanned deep space
                  micro-spacecraft and micro-satellite subsystems and software
                  systems; and

         o        Space propulsion systems using clean, safe hybrid rocket motor
                  technology

These products are being marketed and sold into domestic and international
government as well as commercial markets.

         In addition to the space hardware business, we are working with
partners to create new markets that in the intermediate term can generate
significant, new space-related service, media, tourism and commercial revenue
streams well beyond the value of the space hardware that we currently build.
While we cannot predict the extent to which we can accomplish this goal with
certainty, we are currently focusing on three markets:

         o        Selling micro-satellites subsystems and micro-propulsion
                  products to provide integrated on-orbit data delivery systems
                  and solutions for government and commercial small payload
                  customers;
         o        Working with industry-leading partners to develop unique
                  enabling technology for the potentially very large sub-orbital
                  manned space plane tourism market; and
         o        Creating a new unmanned Beyond Earth Orbit commercial market
                  with spacecraft derived from our NASA JPL Mars MicroMission
                  mission design contract.

As a natural outgrowth of our existing products and services, we are also
beginning to develop new commercial revenue generating business derived from our
technology. See "New Business Derived From Existing Technology" below.

         Our business is not seasonal to any significant extent; however,
because it is a commercial concern, our business follows normal industry trends
such as increased demand during bullish economic periods, or slow-downs in
demand during recessionary periods.

MICRO SPACECRAFT PRODUCTS AND MISSIONS

         SpaceDev offers commercial, standards-based turnkey spacecraft missions
and products for sale to a variety of customers (U.S. government agencies, other
countries, universities, corporations, consortia, individuals, etc.). We have
three primary lines of spacecraft products--unmanned deep space micro-satellite
products and missions, unmanned earth-orbiting micro-satellite products and
missions as well as micro-satellite components and software systems. These were
the product lines for which SpaceDev was originally formed, particularly in the
deep-space arena. The spacecraft are small satellites, generally less than 250
kg, compared to large commercial communications satellites that can weigh over
5,000 kg.

          Space missions consist of the overall effort, including the design of
the mission and its science, commerce or technology demonstration goals, the
design of an appropriate space vehicle (satellite or spacecraft), 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. Missions can orbit the earth, travel
to another planetary body, or cruise through space taking measurements and
transmitting valuable data back to Earth. We also offer satellites to customers
who do not desire the total mission service.

                                       9
<PAGE>

         DEEP-SPACE MICRO-SATELLITE PRODUCTS AND MISSIONS

         In December 1998, a SpaceDev led team was awarded a contract by NASA's
Jet Propulsion Laboratory ("JPL") to assess the feasibility of sending
MicroMissions to Mars for less than US $50 million total mission cost.
Micro-missions are generally in the few hundred kilogram mass range, and were
popularized by NASA studies in their search for ways to comply with NASA
headquarters' admonitions for missions to be "faster, better and cheaper." These
missions would cost approximately one-third to one-fifth of recent Mars-mission
costs. An extensive final report was submitted by SpaceDev to JPL the following
March. This work formed the basis for redefining our proposed NEAP mission to be
smaller and lower cost than the previous baseline, and also prompted us to offer
low-cost commercial lunar orbiter and Mars probe-carrier missions employing a
similar design.

         On February 1, 2000, we announced that SpaceDev had teamed with Boeing
to investigate opportunities of mutual interest in the commercial deep-space
arena. The purpose of the agreement is to investigate a variety of small,
low-cost, deep space mission initiatives formulated by SpaceDev that are based
on SpaceDev's commercial micro-mission work. During 2000, technical and
corporate staff from Boeing and SpaceDev further refined and advanced SpaceDev's
concept of commercial missions to the Moon, Mars and near-Earth asteroids,
involving micro-spacecraft of 250 kg mass. The effort also included a global
assessment of the market potential for such missions, and a technical and
programmatic assessment of lower cost launch vehicle options for such missions.
We are now in the process of marketing a Lunar Orbiter Mission to sponsors and
customers. To date, we have not been successful in securing the funding needed
to proceed with this project.

         On February 9, 2001, the Company purchased all rights to the name
"ExploreSpace" and the Website www.explorespace.com in exchange for options to
purchase a total of 80,000 common shares of SpaceDev for $1.00 per share in an
isolated transaction under section 4(2) of the Securities Act. We have obtained
a registered trademark on the name and plan to use both the name and the website
in conjunction with the Lunar Orbiter Mission. There can be no assurance that we
will be able to obtain the sponsorship or funding necessary to complete the
Lunar Orbiter Mission.

         EARTH-ORBITING MICRO-SATELLITE PRODUCTS AND MISSIONS

         A natural by-product of SpaceDev's focus on small, affordable
spacecraft for commercial deep-space missions is the in-house capability to
design, build, market and sell similar concepts for Earth-orbiting applications.

         In November 1999, the Space Missions Division was awarded a turnkey
mission contract by SSL at the University of California, Berkeley ("UCB").
SpaceDev was competitively selected by UCB/SSL's Dr. Mark Hurwitz to design,
build, integrate, test and operate a small NASA science research spacecraft
called CHIPSat. The 68-kg micro-spacecraft will carry one science instrument,
the Cosmic Hot Interstellar Plasma Spectrometer, or CHIPS. CHIPS facilitates the
observation and diagnosis of the astrophysical environment in the void outside
our solar system and between the nearby stars in our galaxy. Dr. Hurwitz, the
CHIPS principal investigator, and his team are responsible for the overall
CHIPSat mission, designing and building the CHIPS instrument and performing the
science-data analysis.

                                       10
<PAGE>

         CHIPSat is the first mission of NASA's UNEX program to be approved for
the implementation phase. We started work on the CHIPSat project in November
1999, with initial integration and testing of the spacecraft's components
planned at our headquarters in Poway in 2001. CHIPSat was delivered to UCB in
December 2001, and launch from Vandenberg Air Force Base on a Boeing Delta II is
expected in late 2002. Launch will be followed by one year of mission operations
to be controlled at our Mission Control Center in Poway, California. The launch
date has been delayed due to delays in the primary satellite that is scheduled
for this mission; the launch is now scheduled for late 2002.

         We believe that the CHIPSat contract establishes the Company as a
significant competitor in the smaller-satellite arena, and we expect this
perception to spread rapidly among NASA, Due on Demand ("DoD"), university/R&D,
and foreign and commercial customer bases during the next several months. At the
time CHIPSat was awarded to SpaceDev, it was the largest and first significant
competition we had participated in and we believe this win helped establish our
credentials as being able to successfully compete with older and more
established companies. Winning the UNEX mission has helped to create a market
`niche' for SpaceDev and demonstrates NASA's confidence in SpaceDev to take on
the responsibility for design and development of low-cost science missions.

         MICRO-SATELLITE COMPONENTS AND SOFTWARE SYSTEMS

         As a part of the CHIPSat program, we have developed a number of highly
capable, yet versatile subsystems and software systems. For example, we have
developed a miniature, high-performance HPX-21 single board space computer
product that is now being marketed to the space industry. We are also developing
its MST-21 S-band variable power transceiver product that is about one-half the
size and weight of competing products. The HPX-21 serves as the brains of the
satellite and runs the satellite operating system. The MST-21 receives the
signals from the ground and transmits the data back to the ground. The CHIPSat
satellite "bus" (similar to a fully integrated automobile chassis) is now being
offered by SpaceDev as a standard spacecraft suitable for Boeing Delta II launch
vehicles. The Delta II is the most widely used launch vehicle for secondary
payloads like CHIPSat. Finally, we have also developed a modular power
conditioning and distribution subsystem for micro-satellites.

         On the software side, we have developed a layered and modular MicroSat
Operating System ("MS-OS") similar to a microcomputer operating system. The
SpaceDev-developed Mission Control and Operations Package ("MC-OP") is uniquely
Internet-based and allows the operation of missions from anywhere in the world
that has access to the Internet.

HYBRID PROPULSION SPACE PRODUCTS

         We are performing test firings, design analyses and computer
simulations of various concepts for MTVs, man-rated rocket engines, sounding
rockets and launch vehicles that primarily use hybrid-propulsion technology
(based in part on the AMROC intellectual property). Hybrid rocket technology
represents a mating of solid and liquid rocket technologies. In a hybrid rocket,
an oxidizer is passed through a cylinder of hydrocarbon fuel, uniting the
densely packed power of a solid rocket with the precision of a liquid engine.
While there are disadvantages to hybrid technology for launching large
satellites, it may be well suited for launching small satellites, on-orbit
applications and small manned space planes. These are the markets upon which we
are focused. SpaceDev has two primary lines of hybrid products -- small
satellite hybrid motors and hybrid rocket motors for sub-orbital space planes.

                                       11
<PAGE>

         SMALL SATELLITE HYBRID MOTORS

         Hybrid applications are cheaper and simpler to design, as well as safer
to store and transport, than liquid rockets. They are cheaper, safer, and
environmentally benign compared to solid-fueled rockets. They are also
"throttle-able" and "restart-able", characteristics that no solid-fueled rocket
can accomplish. This technology can be used for both small launch vehicles that
get the payload off the ground, and orbital transfer vehicles that can maneuver
payloads into a final orbit once they have been placed into a preliminary orbit
by a launch vehicle.

         In mid-1999, SpaceDev competitively won an R&D contract from the
National Reconnaissance Office ("NRO") to study the feasibility of building
three sizes of small, hybrid-based micro kick-motors for small-satellite
applications. As a result, we created a MTV family, which utilizes micro-kick
motor concepts, has a multitude of possible on-orbit uses and is now being
marketed by SpaceDev as a part of its growing product line. In July 2000, the
NRO granted SpaceDev two separate, follow-on awards of $400,000 each for further
hybrid rocket engine design and development. These contracts have been
successfully completed.

         Under the NRO contracts and a $105,000 award from the California Space
& Technology Alliance ("CSTA"), we have performed hybrid motor test firings and
evaluation. Hybrid motors could be a critical technology for on-orbit maneuvers
and orbital transfers, and long-term on-orbit storage for SpaceDev and its
government and commercial customers. We will also develop specific mission and
utility analyses to support NRO objectives.

         We are developing a commercial product line of affordable small space
vehicles with broad range capabilities, called orbital MTVs. This product line
uses hybrid motors, and currently consists of three MTV designs from 25 kg to
100 kg in size. For each size, there are three degrees of intelligence, from the
low-end "dumb" micro-kick motor, to the high-end intelligent version which
includes our highly capable HPX-21 single board space computer product, our
MST-21 S-band variable power transceiver product, and such features as three
axis stabilization - i.e., the satellite is stable in space in all three axis.
Current MTV versions fit the Shuttle and most commercial launch vehicles
designed to carry small secondary spacecraft to earth orbit and beyond. We plan
to include larger hybrid engines and orbital maneuvering vehicles for commercial
customers and government missions. We have submitted proposals to the Air Force
for additional funding for these products. There can be no assurance that such
funding will be obtained.

HYBRID ROCKET MOTORS FOR SUB-ORBITAL SPACE PLANES

         SpaceDev's hybrid motor fuel is solid, inert, and safe. The oxidizer is
gaseous, non-toxic and self-pressurizes at room temperature, which eliminates
the need for complex and expensive pumps and separate pressurization systems.
This elegantly simple and comparatively inexpensive motor design includes only
one moving part, a valve, and supports a major mission benefit: long-term,
non-toxic storability on the ground and on-orbit. Our hybrid motor technology is
non-explosive, restartable and relatively clean burning because its fuel and
oxidizer are primarily hydrocarbons, nitrogen, and oxygen.

         We have developed several sound conceptual designs for a
moderately-sized, clean, safe, affordable hybrid rocket motor for manned,
sub-orbital use. Nineteen organizations have officially registered as
contestants for the X-Prize (www.xprize.org), a competition in which the US $10
million prize will be awarded to the first privately funded and built spacecraft
capable of lifting three humans to a sub-orbital altitude of 62 miles twice in
two weeks. We have performed conceptual hybrid rocket motor designs for
designers of airframes believed capable of winning the $10 million X-Prize
competition for reusable manned launch vehicles.

                                       12
<PAGE>

         While winning the X-Prize is not a SpaceDev objective, winning
contracts to develop propulsion systems for one or more credible teams would
increase revenues and could create favorable publicity and the potential of
raising additional capital as we meet our rocket motor development milestones.
We believe that a hybrid rocket engine is critical to building a safe,
affordable space plane to enter this market in the near term, and one of our
goals is to be a significant supplier of rocket motors for manned space planes.

NEW BUSINESSES DERIVED FROM EXISTING TECHNOLOGY

         We are focused on three primary areas in which to develop new
commercial markets. Due to the number of factors involved and the Company's need
for commercial or government revenue, there can be no assurance that any of
these markets will be developed. In order to accomplish these goals, the Company
may require partner commitments and investor funding, and there can be no
assurance that we will be successful in achieving such support.

         THE SUB-ORBITAL MANNED SPACE PLANE TOURISM MARKET

          There is growing international recognition that low Earth-orbit travel
will soon be possible for businesses and individuals. For example, Japan's
long-range space program calls for advanced transportation technology enabling
the average person to fly into space, and allowing nations to take advantage of
the plentiful resources of space.

         A large number of people are paying over $25,000 apiece for exotic
vacations, and one space travel company (Space Adventures in Arlington,
Virginia) claims it has about $2 million escrowed for prepaid sub-orbital space
tourism flights. Public space transportation has the potential for commercial
revenues as true commercial consumer markets for space tourism become a reality.
Before this happens, basic issues about the feasibility and economics of
commercial human space travel must be addressed. X-Prize competitors will
demonstrate the technical and operational capability needed by vehicles that
would carry customers into space.

         Based on understanding the needs of a wide variety of space plane
designers and manufacturers from the above project, we intend to create
preliminary designs for a family of hybrid rocket motors that feature long life,
a reusable fuel core, easily replaceable parts, high reliability, low
maintenance and high operability. Our hope is that the three motor sizes will be
attractive to a variety of space plane companies, positioning SpaceDev as the
first to market and the supplier of choice.

         As a next step, we have created final and detailed engineering designs,
work breakdown analyses, and cost and revenue estimates for the hybrid rocket
motor business. We are also planning to build and test fire full-size hybrid
rocket motors designed for use in manned space planes.

         UNMANNED BEYOND EARTH-ORBIT COMMERCIAL MARKET BEGINNING WITH THE LUNAR
         ORBITER PROJECT

         SpaceDev worked with funding from Boeing beginning in February 2000, to
investigate the launch of the world's first commercial Beyond Earth Orbit
mission, the "Lunar Orbiter." The Lunar Orbiter is designed to provide an
historic and unique stream of live High Definition Television ("HDTV") video of
moonscape and earth views never before seen by the public. The lunar satellite


                                       13
<PAGE>

would be based on a design prepared by SpaceDev as part of JPL's Mars
MicroMission program. Outside consultants have projected that this dramatic
lunar content would be viewed on earth through network, cable, and pay TV, as
well as the Internet.

         The mission itself would launch upon raising the funds required to
complete the project. The program would last for up to eighteen months. Project
revenues would be generated by the sale of sponsorships, media rights, science
data, educational programs, and movie and game rights and from a variety of
other, smaller sources. A key component of the mission is planned to be a
comprehensive educational program for elementary and high school students around
the world. As part of this educational tie-in, we would create and distribute
educational material to schools and provide live updates on its website. To
date, we have been unable to obtain funding for the Lunar Orbiter Mission,
although we continue to market the mission to potential sponsors.

         INTEGRATED SMALL ON-ORBIT DATA DELIVERY SYSTEMS

         In order for the small satellite market to grow, it is in our long-term
strategic interest to assist the market in finding such affordable launch
opportunities. We are working with several launch providers to identify and
market these opportunities and to provide customers with a complete on-orbit
data delivery service that can combine our spacecraft and hybrid propulsion
products. These innovative, low-cost, turnkey launch solutions would enable 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 will perform all the
tasks required for the customer to get to orbit and to get their data.

         We are working in three areas to develop this capability: an expansion
of the work done on the CHIPSat program, design of a system combining a reusable
first stage and hybrid expendable rocket vehicles and MTVs, and the use of a
large launch system for secondary payloads.

         Our design and development experiences of making CHIPSat for a Boeing
Delta-II launch vehicle will enable us to expand on that technology. CHIPSat has
unique capabilities to accommodate up to 30 kg of pure technology payload mass.
Our concept is based on the work we have done with Boeing to integrate the
NASA/UC Berkeley CHIPSat mission. The CHIPSat satellite supports about 30 kg of
payload technologies to low Earth-orbit (500-700 km). CHIPSat is currently
scheduled to launch in late 2002. There are also six to seven missions
manifested on Delta-II launches each year over the next five years, providing an
ongoing source of launches for our affordable satellites.

         Under a grant from the California Space Authority ("CSA"), we have
helped fund the Sea Launch company (headquartered in Long Beach, California and
40% owned by Boeing), to participate in a study program to analyze the business
opportunities for providing assured, affordable and timely access to space for
secondary payloads. Working with Sea Launch to explore frequent and reliable
rides for micro-satellites and secondary payloads is potentially a major step to
providing more rides for small payloads. This initiative could open up a whole
new market for domestic commercial, science, exploration, and technology
demonstration missions, not to mention increased demand for the kinds of
micro-satellites we build. This study effort will be concluded in the early
summer of 2002, at which time a decision will be made by SpaceDev and Sea Launch
whether or not to initiate this business.

                                       14
<PAGE>

MARKET STRATEGIES

         MICRO SPACECRAFT PRODUCTS AND MISSIONS

         By conducting successful earth-orbit and deep space missions, the
Company will prove its viability and establish itself as a premier commercial
space-exploration and development company. Once we have established our
capabilities for insured, high-quality, fast-turnaround and low-cost systems and
missions, we believe SpaceDev will be able to effectively compete, develop new
markets and expand existing markets for space exploration and other
applications.

         We believe that our lower-cost commercial missions can provide unique
information content (i.e., not limited to science and/or technology data) to
non-traditional space-mission customers such as entertainment media, e-commerce
organizations and larger aerospace companies that endeavor to enter the
commercial space market. The unique service that we can provide is the ability
to host payloads and instruments that are geared for producing data for the
purposes of generating advertising revenue and public appeal, in addition to
science data. In particular, we are actively seeking strategic partners and
customers who share SpaceDev's vision of the convergence of commercial
deep-space activities with selected Internet, media, entertainment, and
education activities such at the Lunar Orbiter.

         DEEP-SPACE PRODUCTS AND MISSIONS. Since all deep-space missions to date
world-wide have been defined and executed by various government agencies, our
plan for defining and executing such missions as a commercial venture places the
Company at the forefront of a new way of doing business in this arena. Under
such conditions, questions naturally arise within the space community about
whether the Company and its partners are capable of successfully performing in
this arena. Our approach is two-fold: (1) selectively compete for deep-space
related government funded work (R&D studies and development efforts as well as
missions) against established space-systems companies, and (2) define, develop
and execute space missions independently of government agencies, as evidenced by
our concerted effort to define and cultivate alternative sponsors for these
missions, such as other commercial companies, research and technology consortia,
non-U.S. space interests, etc.

         EARTH-ORBITING PRODUCTS AND MISSIONS. The market situation in this
arena has similarities to the deep-space arena, but there are more competitors
and a wider variety and greater number of missions to consider as marketing
targets. The challenge here, as in the deep-space arena, is for the Company to
rapidly establish credibility by selectively competing for and winning R&D
studies and development efforts as well as missions. We believe that the
successful completion of the CHIPSat mission is important to this goal.

         The Company's commercial focus works more easily with government-funded
efforts if it performs the work on a commercial basis for a Principal
Investigator ("PI") or program manager. The PI is the central person in charge
of each mission with full responsibility for its scientific integrity. A task
manager interfaces directly with the government sponsor(s). NASA rules permit
the PI to use his/her own management methods to the fullest extent possible to
accomplish the goals of the scientific investigation.

         For non-governmental sponsors, we prefer to deal directly with
customers. Currently, our biggest satellite customer in terms of dollar revenue
is the University of California Berkeley on the CHIPSat mission.

                                       15
<PAGE>

         SMALL HYBRID PROPULSION SPACE PRODUCTS

         Small spacecraft are produced by government agencies, universities and
commercial companies throughout the United States, Europe and Japan. These
spacecraft represent significant science and technology-demonstration
opportunities that require exposure to the space environment to fulfill their
mission objectives. Annual launch rates for such spacecraft are limited
principally by the high cost of current launch vehicles. These conditions result
in many valuable experiments and payloads being left on the ground.

         Recognizing this problem, the government and commercial industries have
been performing research and development in an attempt to reduce the cost per
kilogram (or pound) to orbit for small spacecraft. In the near term, the only
alternative for low cost launches for small spacecraft is to find an alternative
path to space using a secondary ride system such as the Ariane Structure for
Auxiliary Payloads (ASAP) or a low-cost launch system yet to be developed. We
are working with a variety of partners to develop more affordable launch
opportunities for small spacecraft. We believe that this will increase the
market for micro-spacecraft as well as small hybrid propulsion systems.

         We have prepared business plans for the development of a family of
small hybrid orbital transfer vehicles. The small orbital transfer vehicle has
been partially funded by the U.S. government through our contracts with the NRO.
To fully develop the family of orbital transfer vehicles would require over $5
million. The funds needed to fully develop this family of vehicles have not yet
been secured and there is no guarantee that these funds can be raised.

COMPETITION

         We believe that competition for sales of our products and services is
based on price, performance/technical features, contracting approach,
reliability, availability, customization, and in some situations, geography.

         The primary domestic competition for micro-spacecraft product missions
in our targeted markets comes from such companies as One-Stop Satellite Shop,
Orbital Sciences Corporation, Space Dynamics Laboratory and AeroAstro. The clear
competitor in the international arena is Surrey Satellite Technology Limited
(SSTL) in the United Kingdom. Swedish Space Corporation is also able to compete
in the small-satellite arena; they were named in November 1999 as the prime
contractor for the European Space Agency's (ESA) SMART-1
technology-demonstration spacecraft to the Moon.

         In addition to private companies there are certain universities in the
United States that have the capability to produce reasonably simple satellites
such as Weber State in Utah and Arizona State University (ASU) in Phoenix.
Within the industry it is generally known which companies participate in what
kinds of projects, both by dollar range and type of mission. Catalog Indefinite
Delivery Indefinite Quantity (IDIQ) contracts that now exist within NASA and DoD
have additionally provided insight into various aerospace contractors' cost and
capabilities envelopes. Some of the Company's competitors compete across many of
its product lines, while others do not offer as wide a breadth of solutions.
Several of our current and potential competitors have greater resources,
including technical and engineering resources, than the Company.

                                       16
<PAGE>

         We believe that the Company has made substantial and significant
progress in defining business models and in pursuing sales in the smaller,
emerging commercial deep-space and Earth-orbiting markets. Over the past three
and a half years, SpaceDev employees and principals have participated in dozens
of space conferences (e.g., American Institute of Aeronautics & Astronautics,
American Astronomical Society, Utah Smallsat Conference) both as members of the
audience and, in a majority of cases, as presenters. These conferences are
well-established and well-attended annual space conferences where industry
representatives give presentations and papers on a wide variety of topics
including small, inexpensive satellites and deep space missions.

         At these conferences, and in many private conversations with space
industry colleagues, space customers, and senior space officials, we have not
become aware of any established companies such as TRW, Lockheed, Boeing or
Loral, which have expressed corporate goals to design and build inexpensive
micro spacecraft for commercial deep space missions or for any other missions
which would be in direct competition with SpaceDev.

         We believe SpaceDev is the only company that has publicly declared the
availability of commercial deep space missions as products.

         We are not aware of any current direct and credible competition in the
field of commercial deep space exploration and development. Firms such as those
mentioned above and other R&D laboratories (e.g., JPL, Applied Physics
Laboratory, ISAS in Japan) have the technical knowledge and experience to design
and execute missions similar to NEAP and CHIPSat, but they are primarily
government agencies, Federally Funded Research & Development Centers (FFRDCs) or
foreign competitors, where in each case, there exists some level of government
restriction on competing within the commercial industry.

         We believe that government-driven programs pose only a small threat of
competing on the basis of price alone, although governments have considerably
greater experience, and substantially greater financial, workforce and
facilities resources. We also believe that governments and their legislatures
will increasingly encourage and support private, routine commercial space
exploration due to budgetary pressures, private-sector job creation and
tax-revenue considerations.

            We firmly believe that a truly reusable launch small satellite
launch system will ultimately provide the low cost means of enabling the
repeatability and reliability necessary to support access to space in the years
to come. The DARPA RASCAL program is one such effort currently under study to
provide such a system.

REGULATION

         The Company's 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 U.S. Air Force, maintain Export Control Offices to ensure that any
disclosure of scientific and technical information (STI) complies with the
Export Administration Regulations and the International Traffic in Arms
Regulations (ITAR). Exports of the Company's products, services, and technical
information require either Technical Assistance Agreements (TAAs) or licenses
from the U.S. Department of State, depending on the level of technology being
transferred. This includes recently published regulations restricting the
ability of U.S.-based companies to complete offshore launches, or to export
certain satellite components and technical data to any country outside the
United States. The export of information with respect to ground-based sensors,
detectors, high-speed computers, and national security and missile technology
items are controlled by the Department of Commerce. The government is very
strict with respect to compliance and has served notice that failure to comply


                                       17
<PAGE>

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 above-mentioned
regulations could have serious adverse effects as dictated by the rules
associated with compliance to the ITAR regulations. Our conservative position is
to consider any material beyond standard marketing material to be regulated by
ITAR regulations.

         In addition to the standard local, state and national government
regulations that all businesses must adhere to, the space industry has specific
regulations. Command and telemetry frequency assignments for space missions are
regulated internationally by the International Telecommunications Union (ITU),
and in the U.S. by the Federal Communications Commission (FCC) and National
Telecommunications Information Agency (NTIA). All launch vehicles that are
launched from a launch site in the United States must pass certain launch range
safety regulations that are administered by the U.S. Air Force. In addition, all
commercial space launches that the Company would perform require a license from
DOT. Satellites that are launched must obtain approvals for command and
frequency assignments. For international approvals, the FCC and NTIA obtain
these approvals from the ITU. These regulations have been in place for a number
of years to cover the large number of non-government commercial space missions
that have been launched and put into orbit in the last 15 to 20 years. Any
commercial deep space mission that we would perform would be subject to these
regulations. Presently, we are not aware of any additional or unique government
regulations related to commercial deep space missions.

         The Company is 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.

         It is anticipated that we may need to utilize the Deep Space Network
(DSN) on some of its missions. The DSN is an international NASA network of
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 (TMOD)
manages the program within JPL. Coordination for the use of this facility is
arranged with the Telecommunications and Mission Operations Command (TMOC).

         The failure of the Company to comply with any of the above-mentioned
regulations could have serious adverse effects.

EMPLOYEES

         As of the date of this annual report, the Company employs approximately
twenty-seven (27) persons full and part-time, most of whom are aerospace,
mechanical and electrical engineers. We expect to hire other personnel as
necessary for product development, quality assurance, sales and marketing and


                                       18
<PAGE>

administration. In addition, due to the nature of our business, we anticipate
that it may become necessary to lay off employees whose work is no longer
required by the Company to maintain operations in order to prevent cost
overruns. SpaceDev does not have any collective bargaining agreements with its
employees and believes its employee-relations are good.

         The Company was actively engaged in new product development for the
Office of Space Launch in 2001. Research and development expenditures relating
to possible future products were expensed as incurred. Research and development
expenses for 2001 were $198,400.

INTELLECTUAL PROPERTY

         We rely in part on patents, trade secrets and know-how to develop and
maintain its competitive position and technological advantage. We intend to
protect our intellectual property through a combination of license agreements,
trademark, service mark, copyright, trade secret laws and other methods of
restricting disclosure and transferring title. There is no guarantee that such
applications will be granted. We have and intend to continue entering into
confidentiality agreements with our employees, consultants and vendors; entering
into license agreements with third parties; and generally seeking to control
access to and distribution of our intellectual property.

         In August 1998, we acquired a license to intellectual property
(including patents and trade secrets) from an individual who had acquired them
from the former AMROC, 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 its Common Stock over the next 10 years,
depending on the Company's annual revenues related to sales of hybrid
technology-based products. To date, we have issued warrants to purchase a total
of 100,000 shares of common stock under the agreement.

ITEM 2.  DESCRIPTION OF PROPERTY

         SpaceDev owns over 25,000 square feet of office, engineering and
manufacturing space in Poway, California. In December 1998, the Company
purchased its headquarters facility in the Poway Industrial Park complex and
proceeded to invest $300,000 in modifications and improvements before moving in
mid-May. By late 1999, the Company had defined plans for outfitting the building
with a 1,800 square foot clean-room facility to support spacecraft integration
and additional space for testing, an avionics test area, machine shop and
shipping/receiving area. All of these improvements, except the clean-room, were
completed in 2000. The clean-room was completed in 2001. Key uses of the Poway
facility are program and project conferences and meetings, engineering design,
engineering analysis, spacecraft assembly, avionics labs and software labs and
media outreach.

         The Company also has plans for a Mission Control Center in the Poway
building and expects this to be completed in 2001 prior to the CHIPSat launch in
2002. Avionics systems may be built up from components and undergo system-level
tests at this location prior to shipment to other facilities. Because these
improvements depend on the Company obtaining adequate funding, there can be no
assurance that they will be completed as scheduled.

                                       19
<PAGE>

         On December 21, 1998, the Company borrowed $1,300,000 from a lender to
finance the purchase of its facility in Poway, California. The note called for
monthly payments and a balloon payment on December 21, 1999. At December 31,
1999, the outstanding balance on this loan was $1,298,921. Upon its maturity,
the note continued on a month-to-month basis until it was paid in full on
February 23, 2000.

         On February 23, 2000, the Company signed a $1,330,000 note with a new
lender to refinance the aforementioned debt. The note calls for 300 monthly
payments of approximately $10,000, which include principal and interest at prime
plus 1.5% on December 31, 2001 the interest rate on the note was 6.25% with an
outstanding balance of $1,307,488. The note matures in February 2025.

         In December 1998, the Chief Executive Officer (the "CEO") of the
Company entered into a $500,000 loan agreement with another lender to finance
additional costs of its new facility. This liability was assigned to the Company
and called for 59 monthly interest payments at 12.00% and a balloon payment of
$505,000, including interest, in December 2003. At December 31, 2001 and 2000,
the outstanding balance on this loan was $499,671.

         In 1999, the Company entered into a second loan agreement with this
lender. The $460,000 loan called for 59 monthly interest payments at 10.5% and a
balloon payment of $464,000, including interest, in March 2004. At December 31,
2001 and 2000, the outstanding balance on this loan was $458,609. The Chief
Executive Officer of the Company personally guarantees the notes.

ITEM 3.  LEGAL PROCEEDINGS

         In March 1999, Space Innovations Limited ("SIL"), a then subsidiary of
SpaceDev, won a contract to build the satellite bus (structural chassis and some
avionics) for an Australian domestic spacecraft project, FedSat. SIL was to
deliver the bus to the Cooperative Research Center for Satellite Systems
("CRCSS") in early 2000, and FedSat was intended to be launched as a secondary
or "piggyback" satellite on a National Space Development Agency of Japan
("NASDA") H-IIA rocket in November 2000. In connection with the CRCSS agreement,
SIL was required to provide a performance bond and, as SIL's parent corporation,
SpaceDev obtained a performance bond from Technical & General Guarantee Company
Limited, an English company ("T&G"). In conjunction with that guarantee,
SpaceDev was required to enter into a Deed of Counter Indemnity with T&G
providing for the indemnification of T&G against any losses, costs, damages,
expenses and demands arising out of SIL's actual and contingent liability under
the performance bond.

         On December 17, 1999, the Company's Board of Directors entered into a
Mutual Release and Rescission of Agreement (Release Agreement) to rescind the
original acquisition of SIL, effective October 1, 1998. SIL has since filed for
bankruptcy under the laws of England. On or about September 5, 2000, SpaceDev
received a demand from T&G under the Deed of Counter Indemnity for $300,000
Australian Dollars (approximately $150,000 United States Dollars) based on SIL's
alleged failure to perform under the contract. SpaceDev is in the process of
negotiating a settlement with T&G, which would convert the claim into long-term
debt of the Company.

         On June 18, 2001, SpaceDev entered into a relationship with two
individuals (doing business as EMC Holdings Corporation ("EMC")) whereby EMC was
provide certain consulting and advisory services to the Company. Pursuant to
such relationship, EMC would receive certain equity and cash compensation in
exchange for their services. Due to fundamental misunderstandings and
disagreements between the Company terminated its relationship with EMC. The


                                       20
<PAGE>

second installment of 400,000 shares, which would have been due to EMC on
November 18, 2001, was not issued. Pursuant to a demand for arbitration filed on
November 7, 2001, the Company sought the return of all or a portion of the
shares issued to EMC in its first installment of 500,000 shares on June 26,
2001. EMC filed a its own claim with the American Arbitration Association on
November 13, 2001, alleging that the Company owed EMC $118,000 in fees under a
purported contract, plus damages to be proven at arbitration.

         Based upon certain misrepresentations in the subscription agreement
originally submitted to SpaceDev by EMC upon issuance of the shares, SpaceDev
dismissed its claim in arbitration and filed a complaint with the Superior Court
of California, Orange County, on January 23, 2002 alleging intentional
misrepresentation, conversion, unfair business practices and interference with
prospective economic advantage against EMC. The Company requests injunctive and
declaratory relief with respect to the shares issued to EMC by the Company, as
well as 50,000 shares of common stock issued to EMC by our Chief Executive
Officer, James W. Benson, as a condition to EMC entering into the agreements.
EMC has not withdrawn its own arbitration claim. A telephonic conference was
held with the arbitrator on March 6, 2002 to address the possible dismissal of
that claim. The arbitrator's ruling is still pending as of March 25, 2002. To
avoid potentially unnecessary costs, a motion for a preliminary injunction to
stay the arbitration was continued pending the ruling by the arbitrator. All
defendants in the Superior Court action filed by the Company have been served,
but no responsive pleading will be filed by EMC or the individual defendants
until after the arbitrator's ruling is issued.

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

         No matters were submitted to a vote of our shareholders during the
fourth quarter of its fiscal year ended December 31, 2001.

                                       21
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

         The Company's Common Stock has been traded on the Over-the-Counter
Bulletin Board since August 1998 under the symbol "SPDV." The following table
sets forth the trading history of the Common Stock on the Over the Counter
Bulletin Board for each quarter as reported by Dow Jones Interactive. The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.

 QUARTER ENDING            QUARTERLY HIGH                   QUARTERLY LOW
 --------------            --------------                   -------------
     3/31/2000                     $2.00                         $0.78125
     6/30/2000                    $1.875                            $0.50
     9/30/2000                 $1.703125                            $0.75
     12/31/2001                    $1.25                           $0.875
     3/31/2001                  $1.03125                           $0.625
     6/30/2001                  $0.96875                        $0.453125
     9/30/2001                 $1.015625                          $0.6875
     12/30/2001                $0.859375                         $0.34375
     3/24/2002*                 $0.65625                        $0.484375

*Reflects partial period.

HOLDERS

         As of March 15, 2002, there were approximately 202 holders of record of
the Company's common stock. The Board of Directors believe that the number of
beneficial owners 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

         The Company has never paid a cash dividend on its common stock. Payment
of 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 dividends in the foreseeable future.

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


                                       22
<PAGE>

financial information appearing elsewhere in this document. In addition to
historical information, the following discussion and other parts of this
document contain forward-looking information that involves risks and
uncertainties. Actual results could differ materially from those anticipated by
such forward-looking information due to a number of factors beyond the Company's
control.

         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 litigation, claims and other actions,
and potential litigation, claims and other actions by or against us, including,
but not limited to, the litigation that has been filed by and against EMC
Holdings Corporation; technological changes and introductions of new competing
products; the current recession; terrorist attacks or acts of war, particularly
given the acts of terrorism against the United States on September 11, 2001 and
subsequent military responses by the United States; 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 are products.

         Given these uncertainties, investors are cautioned not to place too
much weight on such statements. We are not currently obligated to update these
forward-looking statements.

OVERVIEW

         The Company formulated and began to implement its current business plan
in 1997. 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
("ISS"). The ISS employee base acquired upon acquisition was largely made up of
former General Dynamics personnel and enlarged our then current employee base to
20 employees. ISS was purchased for a total of $3,625,000, paid in Rule 144
restricted common shares of SpaceDev. An excess in the calculated purchase price
of approximately $164,000 of net assets acquired was capitalized as goodwill and
was to be amortized over a period of 60 months.

         As a result of a change in corporate focus, on November 15, 2001, we
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 the government), the engineering
service contracts had expired and, therefore, would not be producing revenue or
cash flow to support future operations. It was determined that all future
business, contracts, and proposals would be sought after only in the SpaceDev
name, making it a more efficient way for the Company to manage and track
multiple contracts and work on many different business ventures at the same time
within the same operating segment.

         In November 1999, SpaceDev was awarded a $4,995,868 turnkey mission
contract by the Space Sciences Laboratory ("SSL") at University of California,
Berkeley ("UCB"). SpaceDev was competitively selected by UCB/SSL to design,
build, integrate, test and operate for one year a small scientific,


                                       23
<PAGE>

Earth-orbiting spacecraft called CHIPSat. In 2000, the Company reviewed the
contract status at year-end and determined that the total estimated costs at the
end of the program will exceed the likely revenue. As a result, the Company has
accrued a loss of $861,000.Included in the review was a $600,000 modification to
the scope of the contract which was signed on June 15, 2001. On November 28,
2001 a second contract modification was signed with UCB which added $1,201,132
to the contract as well as an increase in contract scope. This increased the
total contract revenue to $6,797,000. At December 31, 2001, the Company reviewed
the contract again and with the contract modifications and added scope, the
total estimated loss was reduced by $397,238 to approximately $463,000. As of
December 31, 2001, approximately 77% of the total contract costs had been
expended and the remaining loss on the balance sheet at year-end totaled
approximately $102,000. The CHIPSat contract is expected to conclude on December
31, 2003. Revenues for 2001 were $3.2 million and are expected to be
approximately $1.2 million in 2002. The Company receives monthly payments on the
contract according to a preset payment schedule detailed in the contract.

         On February 1, 2000, we announced that SpaceDev had teamed with Boeing
to investigate opportunities of mutual interest in the commercial deep-space
arena. The purpose of the agreement is to investigate a variety of small,
low-cost, deep space mission initiatives formulated by SpaceDev that are based
on SpaceDev's commercial micro-mission work. During 2000, technical and
corporate staff from Boeing and SpaceDev further refined and advanced SpaceDev's
concept of commercial missions to the Moon, Mars and near-Earth asteroids,
involving micro-spacecraft of 250 kg mass. The effort also included a global
assessment of the market potential for such missions, and a technical and
programmatic assessment of lower cost launch vehicle options for such missions.
We are now in the process of marketing a Lunar Orbiter Mission to sponsors and
customers. To date, we have not been successful in securing the funding needed
to proceed with this project.

         In July 2000, the Company was awarded two contracts from the Office of
Space Launch of the National Reconnaissance Office totaling approximately
$800,000. These contracts were completed during the second quarter of 2001. This
work was a continuation of a previous contract concerning the development of
hybrid space propulsion technology.

         In April 2001, we announced that, as part of a Boeing-led team that was
awarded one of four $1 million contracts from NASA's Jet Propulsion Laboratory
in Pasadena, California, we would participate in a study of the options for a
potential Mars sample return mission in 2011. The contract ran from April
through October 2001.

         In September 2001, the Company was awarded a contract for a proprietary
research program valued in excess of $1 million. As a part of that program, we
will compete with another party to design a space propulsion system. The entire
contract, which will be awarded based upon the submitted designs, is valued at a
total $2.2 million. We believe that the award could lead to a long-term market
for our hybrid propulsion technology if we are successfully in winning the
contract. Due to the highly competitive, confidential and market-sensitive
nature of the contract, we are unable to release more detailed information on
the project until the contract has been awarded in full. However, we do believe
this new contract is indicative of an increased demand for our hybrid motor
technology and expertise in the space industry, and expect the amount of revenue
to be generated in 2002 to be approximately $824,000 to $1.8 million. Work on
this project generated $328,083 in revenues during the fourth quarter of 2001.

                                       24
<PAGE>

RESULTS OF OPERATIONS

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

         YEAR ENDED DECEMBER 31, 2001 -VS.- YEAR ENDED DECEMBER 31, 2000

         During the year ended December 31, 2001, the Company had net sales of
$4.1 million as compared to net sales of $3.9 million in 2000. Sales in 2001
were comprised of $3.2 million from the CHIPSat program, $328,000 from a
contract for a proprietary development program, $228,000 from research and
development performed for the Office of Space Launch ("OSL"), $216,000 from the
Boeing Mars Sample Return and Mars Assent Vehicle projects, and $164,000 from
all other programs. In 2000, sales were comprised of $2.1 million from CHIPSat,
$844,000 from OSL, $250,000 from The Boeing Company for a joint study of beyond
Earth Orbit commercial missions and $700,000 from all other programs.

         For the year 2001, the Company had cost of sales (direct and allocated
costs associated with individual contracts) of $2.4 million as compared to $3.2
million in 2000. This decrease was primarily due to the reduction of $397,238
from the original estimated loss on the CHIPSat contract. The original loss of
$861,000 was reduced to $463,000 for the entire contract. As a result of the
contract modification discussed above and the continued work performed on the
project, the estimated loss to complete the contract as of December 31, 2001 was
approximately $102,000.

         We experienced an increase in operating expenses from $1.7 million in
2000 to $3.2 million for 2001. Operating expenses include general and
administrative expenses, research and development expenses, as well as a
non-cash loss of $923,000 related to the impairment of the unamortized balance
of goodwill from the ISS acquisition. General and administrative expenses
consisted primarily of salaries for administrative personnel, fees for outside
consultants, goodwill amortization up to the loss on impairment, insurance,
legal and accounting fees and other overhead expenses. The increase was
primarily attributable to four non-cash items (1) the loss on the impairment of
goodwill, $923,000; (2) the issuance of 550,000 shares of common stock to EMC
Holdings Group, Inc. ("EMC") pursuant to a Consultant Agreement with the
Company, $500,500; (3) an expense for the contingent liability due to Technical
& General Guarantee Company Limited (T&G) as referenced in the consolidated
financial statements, $150,000; and (4) the stock options issued for the
acquisition of Explorespace.com, $67,000. A detailed discussion of these four
non-cash items is presented below:

o    On November 15, 2001, management determined that the unamortized balance of
     goodwill from the ISS acquisition, which was approximately $923,000, became
     impaired and was written off. The Company announced that it had been
     awarded a contract for a proprietary research program valued in excess of
     $1 million that could lead to a total value of $2.2 million. We believe
     this new contract is indicative of an increased demand for its hybrid motor
     technology and expertise in the space industry. As a result of this
     contract and the continuing ChipSat contract, all available resources of
     SpaceDev would be utilized. While the ISS segment did provide small hybrid
     propulsion space systems and engineering services on separate contracts
     (mainly with the government), the engineering service contracts expired
     and, therefore, would not be producing revenue or cash flow to support
     future operations. As a result, the unamortized goodwill of approximately
     $923,000 became impaired and was written off.

                                       25
<PAGE>

o    Management has decided that all future business, contracts, and proposals
     would be sought after only in the SpaceDev name. All new contracts will be
     between SpaceDev and "the customer." This is a more efficient way for the
     Company to manage and track multiple contracts and work on many different
     business ventures at the same time within the same operating segment. This
     action is consistent with the gradual decline of sales and new business in
     the ISS Operating Segment. As a result of these trends, the US government
     security clearance was not renewed for ISS. In the future, if the Company
     finds it necessary to bid those contracts in which a security clearance for
     the company is necessary then the Company will be applying and maintaining
     a security clearance in the corporate name, SpaceDev. This change in focus
     allows the Company to market our multiple product lines in a more
     integrated manner.

o    EMC was retained to render certain advisory services to the Company in
     exchange for a total of 1,200,000 shares of the Company's common stock in
     three installments (the "Consultant Agreement"). EMC received the first
     installment of 500,000 shares on June 26, 2001. We brought a claim in
     arbitration through the American Arbitration Association on or about
     November 7, 2001 to recover 500,000 shares of stock transferred to EMC
     Holdings Corporation ("EMC") pursuant to what were then believed to be
     valid contracts. We are seeking the recovery of 500,000 shares of its stock
     that it transferred to EMC. See "Legal Proceedings." Total expense for the
     initial stock issuance through December 31, 2001 was $455,000. Also, on
     June 26, 2001, our Chief Executive Officer, on behalf of the Company issued
     50,000 shares of his own personal stock holdings of the Company to EMC. The
     total expense for this transaction was $45,500. This was expensed in
     accordance with the SEC's Staff Accounting Bulletin number 79, where a
     principle stockholder transfers a portion of his shares to benefit the
     Company.

o    Other increases included $150,000 for the contingent liability due to
     Technical & General Guarantee Company Limited as referenced in "Legal
     Proceedings."

o    An issuance of 80,000 stock options that had a value of $67,000 for the
     acquisition of Explorespace.com was expensed as advertising.

         The Company also expended $198,000 in research and development expenses
during the year ended 2001, to build a prototype hybrid-propulsion-based orbital
transfer vehicle. There were no expenses in research and development expenses
during the same period of 2000.

         Interest expense for the periods ending December 31, 2001 and 2000 was
approximately $303,000 and $326,000, respectively.

         The gross margin percentage for the year ended December 31, 2001 was
41% as compared to 17% for the same period in 2000. The increase was due to the
reduction of the anticipated loss on the CHIPsat program. The total amount of
the loss recorded in the year ended December 31, 2000 was $861,000, which
reduced the margin in 2000. In 2001, the total loss of the program was reduced
by approximately $397,000 to $463,000 due to contract changes for the total
program, which increased the 2001 gross margin. The loss remaining on the
balance sheet for the remainder of the program at December 31, 2001 was $102,000
a total reduction of approximately $361,000 due to the ongoing work that was
done to the project.

                                       26
<PAGE>

         During the year ended December 31, 2001, the Company had a net loss of
$1,856,000, compared to a net loss of $1,405,000 for the same period in 2000.
The increase in the net loss was due to the Company's operating expenses
increasing by $1,516,000. As indicated above, this increase was primarily
attributable to non-cash expenses, including impairment of the un-amortized
balance of goodwill from ISS, stock issued to EMC, the note payable to T&G (see
"Legal Proceedings"), the stock options issued for the acquisition of
Explorespace.com, and research and development costs.

CRITICAL ACCOUNTING STANDARDS

         The Company's revenues are derived primarily from fixed price contracts
and are recognized using the percentage-of-completion method of contract
accounting based on the ratio of total costs incurred to total estimated costs.
Losses on contracts are recognized when they become known and reasonably
estimable (see Note 10(c) of 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. Billings in excess of costs incurred and estimated earnings
represent the excess of amounts billed in accordance with the contractual
billing terms. Deferred revenue represents amounts collected from customers for
services to be provided at a future date.

         In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company adopted SFAS 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 SFAS 123 has been utilized. See Note 8(d) of
the Consolidated Financial Statements. 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.

         Fixed assets are depreciated over their estimated useful lives of
three-to-thirty years using the straight-line method of accounting. Goodwill and
other intangible assets were created upon the acquisition of the Company's
subsidiaries. Intangible assets are amortized over their assets' estimated
future useful lives on a straight-line basis over three to five years. Goodwill
and other intangibles are periodically reviewed for impairment based on an
assessment of future operations to ensure they are appropriately valued in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Effective November 2001 there will be no more amortization of goodwill (see
note 3 of the Consolidated Financial Statements).

LIQUIDITY AND CAPITAL RESOURCES

         The Company's auditors have expressed a formal auditors' opinion that
the Company's December 31, 2001 financial position raises substantial doubt
about its ability to continue as a going concern. The opinion is based on net
losses incurred by the Company for the years ended December 31, 2001 and 2000 of
$1,855,871 and $1,405,395, respectively, and working capital deficits of
$1,002,390 and $1,559,791, respectively, for those years. Although the reduction
of the working capital deficit was significant, the Company's ability to
continue as a going concern depends upon our ability to continue reducing the


                                       27
<PAGE>

working capital deficit, consummating additional funding and obtain profitable
new business. The funding as well as new business can come from a variety of
sources, including public or private equity markets, state and federal grants
and government and commercial customer program funding. However, there can be no
assurance that we will be able to obtain such funding as needed. 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 will operate.

         RECENT ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the assets. SFAS
No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. The Company is required to adopt the
provisions of SFAS No. 143 for the first quarter of 2002. Management believes
the adoption of SFAS No. 143 will not have a material impact on the Company.

         In July 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that
the purchase method of accounting be used for all business combinations
subsequent to June 30, 2001 and specifies criteria for recognizing intangible
assets acquired in a business combination. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. Intangible assets with
definite useful lives will continue to be amortized over their respective
estimated useful lives. The Company plans to adopt the provisions of SFAS No.
141 and 142 effective January 1, 2002. Management believes the adoption of SFAS
No. 141 and 142 will not have a material impact on the Company.

         In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," for long-lived assets to be disposed of by sale, and resolves
significant implementation issues related to SFAS 121. The Company is currently
assessing the impact of SFAS NO. 144 on its operating results and financial
condition. The Company is required to adopt SFAS No. 144 no later than the first
quarter of 2002.

         CASH POSITION FOR YEAR ENDED DECEMBER 31, 2001 -VS.- YEAR ENDED
         DECEMBER 31, 2000

         Net decrease in cash during the year ending December 31, 2001 was
($47,986), compared to a net increase of $156,736 for the same period in 2000.
Net cash provided by operating activities totaled $68,471 for the year ending
December 31, 2001, a decrease of $861,373 as compared to $929,844 provided by
operating activities during the same period in 2000. This is attributable
primarily to the increased costs on the CHIPSat project for the ongoing work
toward completion of the program and a significant reduction in accounts payable
from 2000.

                                       28
<PAGE>

         Net cash used in investing activities totaled ($42,624) for the year
ended December 31, 2001, compared to ($353,744) used during the same period in
2000. The decrease in cash used of $311,120 is attributable to a decrease in the
purchase of fixed assets and capitalized software costs in 2001. Net cash used
in financing activities totaled ($73,833) for the year ended December 31, 2001
which showed a reduction of $345,531 from the $ 419,364 used in financing
activities during the same period on 2000. This improvement is primarily
attributable to generating more cash from sales of common stock in 2001 of
$120,000 versus $25,000 in 2000, and the use of funds to pay off the line of
credit in 2000 of approximately $241,000.

         At December 31, 2001, the Company's cash, which includes cash reserves
and cash available for investment, was $211,637 as compared to $259,623 at
December 31, 2000, a decrease of $47,986. At December 31, 2001, the Company had
accounts receivable of $290,615, of which $228,000 was from a single source, and
accounts payable of $397,914.

         As of December 31, 2001, the Company's backlog of funded and non-funded
business was approximately $3.4 million, as opposed to approximately $2.9
million as of fiscal year end 2000. During 2001, the Company won a commercial
program valued at up to $ 2.2 million, negotiated increases of $1.8 million to
the CHIPSat program and added several contracts with Boeing for Mars related
work.

         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 $2,036,000 consisted primarily of the income
tax benefits from net operating loss carryforwards, amortization of goodwill and
research and development credit carryforwards. 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 decrease
approximately $130,000 during 2001, from $2,166,000 at December 31, 2000 to
$2,036,000 at December 31, 2001.

         Please refer to the consolidated financial statements, which are a part
of this report for further information regarding the liquidity and capital
resources of the Company.

         FORWARD-LOOKING STATEMENTS

         The Company has sustained itself over the last two years with a mix of
government and commercial contracts. The Company can continue to grow and
execute certain parts of its strategy without additional equity funding by
identifying, bidding and winning new commercial and government funded programs.
During the first two months of 2002, the Company submitted five bids for
government programs, has worked with the US Congress to identify directed
funding for its programs and is actively working to win several significant
commercial programs. The win of some of these programs would enable SpaceDev to
continue to grow and broaden its business base. At this time, the Company has
been notified that one government customer intends to award the Company a
contract for one of these programs that would ultimately lead to almost $2
million of new business over the next 18 months. We have no firm information on
any other of these current projects.

         To date, we have maintained a mix of government and commercial
business. In 2001, we had about 80% government or government related work. In
2002, we expect the ratio to be about 70% 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 60% for the next several
years as we increase our government marketing efforts for both our product
lines.

                                       29
<PAGE>

         While we do not expect a reduction of government sales, we are
continuing to aggressively market our products to the commercial market,
particularly for manned sub-orbital space planes, and are marketing our micro
spacecraft to a variety of commercial customers. Our business model does
anticipate the win of contracts in both market segments. Based on current trends
and proposals, we believe that we can offset fluctuations in one market segment
with contract wins from the other; however, our inability to win business in
both markets would have a negative effect on the Company business operations and
financial condition.

         We are forecasting a modest growth in sales for 2002. At this time,
about 50% of the forecasted sales are under contract, but there is no guarantee
that we will win enough new business to achieve this growth. We will not need to
make significant capital expenditures to achieve this modest increase in sales.

         As it relates to the CHIPSat program, the Company will receive total
fixed compensation on the CHIPSat project in a total amount of $6,797,000, of
which about $3.2 million was generated in 2001. The contract calls for payments
of $1,789,000 in 2002 and $138,000 in 2003. As outlined above, the Company
reviewed the contract again in late 2001 and the total loss was reduced from
$861,000 to approximately $463,000. As the project is completed, the loss is
reduced as costs become realized. At this time, we do not expect any additional
losses from or increases to the contract. The launch of CHIPSat is currently
scheduled for late 2002. A delay in the launch would have no significant
financial effects on the Company in the near term, but would negatively impact
our marketing efforts and our ability to raise additional equity funding.

         We expect payments of about $1.5 million in 2002 from a commercial
contract won last November. This effort could lead to follow-on contracts from
the same customer later this year or in 2003, but at this time we cannot assess
the probability of winning or the value of those contracts.

         The Company's broad, overall, higher growth business strategy, requires
significant development and capital expenditures. The Company will incur a
substantial portion of these expenditures before it generates significantly
higher sales. Combined with operating expenses, these capital expenditures will
result in a negative cash flow until we can establish an adequate
revenue-generating customer base. We expect losses through 2002 and do not
expect to generate net positive cash flow from operations sufficient to fund
both operations and capital expenditures until the launch of our first
commercial spacecraft - expected the end of 2002. There is no assurance,
however, that the Company will achieve or sustain any positive cash flow or
profitability thereafter.

         During the years ended December 31, 2001 and December 31, 2000, we
raised approximately $145,000 through private sales of stock. To execute the
Company's total strategy of small, capable, low-cost micro satellites, hybrid
propulsion products and new commercial revenue sources, we require significant
funding and/or the win of both significant government and commercial programs.
The current estimate of investor or customer funding is over $20 million, which
could come from a combination of private and/or public equity placements or
government and commercial customers. At this time, we do have an ongoing private
placement to generate up to $1 million of private equity, but do not have a
commitment from any placement agent or underwriter to implement any additional
public or private offering.

                                       30
<PAGE>

         The Company may also need to raise additional capital if, for example,
(i) significant delays occur in deploying its first space mission due to
technical difficulties, launch, or satellite failure, or other reasons; (ii) the
Company does not enter into agreements with customers on the terms the Company
anticipates; (iii) the Company's net operating deficit increases because it
incurs significant unanticipated expenses; or (iv) the Company incurs additional
costs from modifying its satellite products or its proposed hybrid-related
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.
A substantial shortfall in funding would delay or prevent deployment of the
hybrid-related systems, a Lunar Orbiter or a NEAP-like system.

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

         Our business partially depends on activities regulated by various
agencies and departments of the U.S. government and other companies that rely on
the government. Recently, in response to terrorists' activities and threats
aimed at the United States, transportation, mail, financial, and other services
have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial, or other services could have a material adverse
effect on our business, results of operations, and financial condition.
Furthermore, we may experience a small increase in operating costs, such as
costs for transportation, insurance, and security as a result of the activities
and potential activities. The U.S. economy in general is being adversely
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 the Company to offer solutions to the government that may address some of
the problems that the country faces at this time.

ITEM 7.  FINANCIAL STATEMENTS

         Please see the Company's audited financial statements for the period
ended December 31, 2001 as compared to the period ended December 31, 2000
attached hereto.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         During its last fiscal year and as of the date of this report, the
Company has had no changes in or disagreements with its principal independent
accountant regarding any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, nor has the Company's
principal accounting firm resigned or declined to stand for re-election.

                                       31
<PAGE>

                                    PART III

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

         The management and directors of the Company's business activities are
under the control of its Board of Directors. Our Chief Executive Officer, James
W. Benson, and Chief Operating Officer, Charles H. Lloyd, manage the Company's
daily operations. Our Board currently consists of six directors. General Howell
M. Estes, III (USAF Retired), and Retired Congressman Robert S. Walker were
added to the Board of Directors in 2001. Below are the executive officers and
directors of the Company.

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

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

Charles H. Lloyd                                Director, Chief Operating and
13855 Stowe Drive                               Financial Officer
Poway, California 92064

Susan Benson                                    Secretary
13855 Stowe Drive
Poway, California 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

     *   Denotes Independent Director

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

                                       32
<PAGE>

         JAMES W. BENSON, age 56, is the founder of the Company, and has served
as its Chief Executive Officer and Chairman since inception. Mr. Benson is also
a Director of the Company, a position he has held since October 1997. In 1984,
Mr. Benson founded Compusearch Corporation (later renamed Compusearch Software
Systems), in McLean, Virginia. The company was based on use of personal
computers to create full text indexes of massive government procurement
regulations and to provide fast 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 LLC,
which was acquired by the Company 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 a
member of the American Society of Civil Engineers subcommittee on Near Earth
Object Impact Prevention and Mitigation.

         CHARLES H. LLOYD, age 51, a Director of the Company, has been the
Company's Chief Financial Officer since November 3, 1999. He was also appointed
the Company's Chief Operating Officer on July 20, 2001. Mr. Lloyd was formerly
the CEO and President of International Launch Services (ILS), a joint venture of
Lockheed Martin Corporation, Khrunichev State Research and Production Space
Center and RSC Energia. During his tenure at ILS from 1993 to 1998, he was
responsible for the development, expansion, and ongoing operation of the joint
venture. Mr. Lloyd aggressively marketed product lines globally, not only by
overcoming cultural barriers, but also by structuring the organization to
support multiple product and management requirements. He is credited with
developing strategic international relationships between the United States and
Russia, and with setting the industry standard for strict controls in the
transfer of technology. Mr. Lloyd and his team at ILS generated over a billion
dollars in new contracts and developed competitive markets in Asia, Europe, and
North America, all of which have provided increased revenues. He has close to 20
years of senior management experience in high technology, international service
and manufacturing environments, with most of that time in positions focused on
operations management, marketing and finance and administration. Prior to his
employment with Lockheed and ILS, Mr. Lloyd held several management positions at
General Dynamics (GD) from 1980 to 1993. He was Vice President and Managing
Director, and responsible for the management and operations of General Dynamics
Commercial Launch Services. Prior to that, he was Vice President of Finance and
Controller of GD Space Systems, and Vice President of Finance and Administration
of GD Services Company. Mr. Lloyd began his career as a Senior Financial
Planning Analyst at Ford Motor Company in 1975. Mr. Lloyd holds a Masters of
Business Administration from the University of Michigan and earned his Bachelor
of Arts Degree in Finance from Virginia Polytechnic Institute and State
University.

         SUSAN BENSON, age 56, has served as the Company's Secretary since its
inception. She is the wife of James W. Benson. Ms. Benson was the Customer
Support Manager for Compusearch Software Systems in McLean, Virginia from 1986
through 1995.

         WESLEY T. HUNTRESS, age 58, was elected to the Company's Board of
Directors as an Independent Director at the Company's annual shareholder meeting
held June 30, 1999. 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


                                       33
<PAGE>

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 43, was appointed to the Board on September 5,
2000. 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 sale of controlling interest in Starwave
Corporation to Disney/ABC (NYSE:DIS). 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
(now NASDAQ:ADBE) 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
(Nasdaq:MSFT) 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.

         GENERAL HOWELL M. ESTES, III (USAF RETIRED), age 59, was appointed to
the Company's Board of Directors on April 2, 2001. 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


                                       34
<PAGE>

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 59, was appointed to the Company's Board of
Directors on April 2, 2001. 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 DCH
Technology, Inc. and Aerospace Corporation, positions held since January 1999
and March 1997, respectively. DCH Technology, Inc. is subject to the reporting
requirements of the Securities Exchange Act of 1934. 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 2001, the Company incurred consulting fees with
Hill and Knowlton, Inc., an affiliate of Wexler & Walker, in an aggregate amount
of $36,493.13.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Based upon a review on the Forms 3 and 4 furnished to the Company with
respect to its most recent fiscal year, each of the Directors and/or Executive
Officers each timely filed his initial Form 3 and Forms 4 under Section 16(a) of
the Securities and Exchange Act of 1934 during 2001 with the following
exception: James W. Benson failed to timely file a Form 4 on 50,000 shares
transferred to EMC Holdings Corporation in June 2001 without compensation as an
inducement to their entering into a contract relationship with the Company. Mr.
Benson has now filed a Form 5 with respect to that transaction.

                                       35
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

REMUNERATION PAID TO EXECUTIVES

         The following table sets forth the remuneration to the Company's
executive officers for the past three fiscal years:

<TABLE>
                                          SUMMARY COMPENSATION TABLE
<CAPTION>
                                                            ---------------------------------------
                                                                    Long Term Compensation
                        ----------------------------------- ---------------------------------------
                               Annual Compensation                    Awards            Payouts
                        ----------------------------------- --------------------------- -----------
                                                  Other     Restricted   Securities                     All
Name and                                         Annual        Stock     Underlying     LTIP            Other
Principal               Salary                Compen-sation  Award(s)    Options/       Payouts     Compensation
Position        Year    ($)        Bonus ($)      ($)           ($)      SARs (#)          ($)         ($)
--------------- ------- ---------- ---------- ------------- ------------ -------------- ----------- ----------
<S>             <C>       <C>              <C>           <C>  <C>           <C>                  <C>        <C>
James W.        1999            -          -             -            -              -           -          -
Benson, CEO     2000       42,946          -             -            -              -           -          -
(1)             2001      147,923          -             -            -         10,000           -          -

Charles H.      1999        8,077          -             -            -        450,000           -          -
Lloyd, COO &    2000       77,770          -             -            -     750,000(2)           -          -
CFO             2001      200,000          -             -            -         10,000           -          -

Stanley         1999            -          -             -            -              -           -          -
Dubyn,          2000      125,192          -             -            -     100,000(3)           -          -
President       2001       92,844          -             -    45,170(3)              -           -          -

David (4)       1999            -          -             -            -              -           -          -
Smith, CTO &    2000       62,308          -             -            -              -           -          -
VP              2001       94,545          -             -            -              -           -          -

(1)      James W. Benson was awarded 10,000 options as a part of an annual award
         of options to employees of the Company.
(2)      200,000 of these options were performance-based options, which
         terminated on December 31, 2000. Mr. Lloyd was awarded 10,000 options
         as a part of an annual award of options to employees of the Company.
(3)      50,000 of the Year 2000 options were performance-based options, which
         terminated on March 4, 2001. The 2001 restricted stock award
         represented 50,000 shares. Mr. Dubyn is no longer an officer or
         director of the Company.
(4)      David Smith is no longer an officer of the Company.
</TABLE>

         During the last fiscal year and as of December 31, 2001, the Company
granted stock options to executive officers as set forth in the following table:

                                       36
<PAGE>
<TABLE>
                    OPTION/SAR GRANTS ENDED DECEMBER 31, 2001
<CAPTION>

                                  Individual Grants
---------------------------------------------------------------------------------------------
                    Number of        % of Total
                    Securities       Options/SARs
                    Underlying       Granted to
                    Options/SARs     Employees in      Exercise of Base
Name                Granted (#)      Fiscal Year       Price ($/Sh)        Expiration Date
----                -----------      -----------       ------------        ---------------
<S>                     <C>                <C>                <C>              <C>
James W. Benson         10,000             1.54%              .9469            8/27/06
Charles H. Lloyd        10,000             1.54%              .8609            8/27/07

</TABLE>

         The following table is intended to provide information as to the number
of stock options exercised by each of the executive officers listed above, the
value realized upon exercise of such options, and the number and value of any
unexercised options still held by such individuals.

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

                      Shares Acquired                            Exercisable/          Exercisable/
Name                  on Exercise (#)     Value Realized ($)     Unexercisable         Unexercisable(1)
--------------------- ------------------- ---------------------- --------------------- ----------------------
<S>                                    <C>                    <C>          <C>                        <C>
James W. Benson                        0                      0              500,000/                 0/0
                                                                           2,010,000

Charles H. Lloyd                       0                      0            1,000,000/                 0/0
                                                                              10,000
</TABLE>

(1)  For purposes of determining whether options are "in-the-money," the Company
     defined fair market value as the five-day trading average of the Company's
     common stock on the Over-The-Counter Bulletin Board as of March 15, 2002,
     or $0.52 per share. None of the options listed on the table are
     "in-the-money."

REMUNERATION PAID TO DIRECTORS

         The following table sets forth the remuneration paid to the Company's
directors during its fiscal year ended December 31, 2001.

                                       37
<PAGE>
<TABLE>
<CAPTION>

--------------------- ------------------------------------------------------ ---------------------------------
                                        Cash Compensation                            Security Grants
                      ------------------------------------------------------ ---------------------------------
                                                                                            Number of
                                                                                            Securities
                      Annual Retainer                    Consulting          Number of      Underlying
Name                  Fees              Meeting Fees     Fees/Other Fees     Shares         Options/SARs
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
<S>                                  <C>              <C>            <C>                 <C>           <C>
James W. Benson                      -                -                   -              -                  -
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Charles H.
Lloyd                                -                -                   -              -                  -
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Wesley T. Huntress                   -                -                   -                            20,000
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Curt Dean Blake                      -                -              $1,473              -             30,000
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
General Howell M.                    -                -                   -              -             26,667
Estes, III(1)
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Robert S. Walker(1)                  -                -                   -              -             26,667
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
</TABLE>

(1) Pursuant to its policy regarding compensation of independent directors, the
Company issued Mr. Estes III and Mr. Walker options to purchase a total of
$10,000 in common shares, or 13,334 shares at a per share price of $.75, upon
acceptance of their positions as directors for the Company. The exercise price
of the shares represents the fair market value on April 16, 2001, the date of
issuance. The options vest at a rate of 50% on April 16, 2002 and the remaining
50% on April 16, 2004. Mr. Estes III and Mr. Walker also received options to
purchase 20,000 shares each on April 18, 2001, July 20, 2001 and October 17,
2001 for their attendance at two telephonic meetings and one in person meeting
of the Company's Board of Directors. These options vest as follows: 50% on the
one-year anniversary of the grant date and 50% on the two-year anniversary of
the grant date.

EMPLOYMENT AGREEMENTS

         On November 21, 1997, the Company entered into a five-year employment
agreement with its President, James W. Benson. This agreement provides for
compensation of salary and stock as well as stock options. This agreement also
prohibits Mr. Benson from competing with the Company, disclosing any
confidential information, or soliciting any employees or customers of the
Company for one year after termination of employment. The SpaceDev Board of
Directors amended the Employment contract for Mr. James Benson at its meeting on
July 16, 2000. The amended agreement provides for the grant of options to
purchase up to 4,000,000 shares of the Company's common stock upon the
occurrence of certain events. Such options would be immediately exercisable upon
grant.

         On November 1, 1999, the Company, through ISS, entered into an
employment agreement with its Chief Executive Officer, Charles H. Lloyd. The
agreement automatically renews for one-year periods until terminated by written
notice of either Mr. Lloyd or ISS. This agreement provides for compensation of
salary and options to the employee. The agreement also prohibits the employee
from competing with ISS or the Company for one (1) year after termination of
employment. In November 1999, Mr. Lloyd was appointed as Chief Financial Officer
of SpaceDev pursuant to a provision in the agreement allowing Mr. Lloyd to serve
as an officer of the parent company. In October 2001, Mr. Lloyd was also
appointed to the position of Chief Operating Officer of SpaceDev.

                                       38
<PAGE>

EMPLOYEE BENEFITS

         At the Company's Stock Option Plan of 1999, the shareholders adopted an
Incentive Employee Stock Option Plan under which its Board of Directors may
grant employees, directors and affiliates of the Company Incentive Stock
Options, Supplemental 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 of the Company, 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 the Company's plan, the exercise price for the Supplemental Stock
Options will not be less than 85% of the fair market value of the stock on the
date the option is 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 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. No adjustment was made by the Board at its annual meeting in
2001, as a determination was made that the number of shares then available under
the Plan was sufficient to meet the Company's needs. As of December 31, 2001,
4,184,698 shares were authorized for issuance under the Plan, 2,142,000 of which
were subject to outstanding options and awards. The Stock Option Plan of 1999
has been registered with the U.S. Securities & Exchange Commission on Form S-8.

         During the fourth quarter of fiscal year 2001, we issued options to
purchase 275,282 shares to our employees under the Plan, including non-statutory
options to purchase 70,000 shares issued to one individual as part of our
agreement to purchase all right, title and interest to Explorespace.com. In
addition, we issued non-statutory options to purchase 5,000 shares each to our
independent directors for attendance at our October 17, 2001 Board of Directors
meeting.. No options were issued to officers of the Company during the fourth
quarter.

         In addition to the Stock Option Plan of 1999, our shareholders adopted
the 1999 Employee Stock Purchase Plan, which authorized the Company's Board of
Directors to make twelve consecutive offerings of our common stock to employees
of the Company. The 1999 Employee Stock Purchase Plan has been instituted. To
date, no employees have purchased any shares of common stock under the Plan.

         The Company also offers a variety of health, dental, vision and life
insurance benefits to its employees. The Company also offers a 401(k) program to
its employees.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table provides information as March 15, 2001 concerning
the beneficial ownership of the Company's common stock by (i) each director,
(ii) each named executive officer, (iii) each shareholder known by the Company
to be the beneficial owner of more than 10% of its 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.

                                       39
<PAGE>
<TABLE>
<CAPTION>
------------------------------ ----------------------------------- ---------------------------- --------------------
                                 Name and Address of Beneficial       Amount and Nature of       Percent of Class
Title of Class                              Owner(2)                  Beneficial Ownership
------------------------------ ----------------------------------- ---------------------------- --------------------
<C>                            <C>                                                <C>                 <C>
$.0001 par value common stock  James W. Benson, CEO and                           9,578,413(3)        68%(1)
                               President and
                               Susan Benson, Secretary
                               13855 Stowe Drive
                               Poway, California 92064

$.0001 par value common stock  Charles H. Lloyd
                               Chief Financial Officer
                               13855 Stowe Drive
                               Poway, California 92064                                  25,000         7%(1)

$.0001 par value common stock  Curt Dean Blake, Vice President
                               13855 Stowe Drive
                               Poway, California 92064                                      --         <0.1

$.0001 par value common stock  Wesley T. Huntress Jr., Director
                               13855 Stowe Drive
                               Poway, California  92064                                  8,868         <0.1%

$.0001 par value common stock  General Howell M. Estes, III,
                               Director
                               13855 Stowe Drive
                               Poway, California  92064                                     --         <0.1%

$.0001 par value common stock  Robert S. Walker, Director
                               13855 Stowe Drive
                               Poway, California  92064                                     --         <0.1%

$.0001 par value common stock  Officers and Directors as a group                    9,6712,281        65%(1)
</TABLE>

(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 15, 2001, 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 14,817,580 on March 15, 2001.
(2)  Represents 186,000 shares held directly by James W. and Susan Benson;
     8,895,000 shares held by SD Holdings, LLC, an entity controlled by James W.
     Benson; and 497,413 shares recently transferred from SD Holdings, LLC to
     Space Development Institute, a 501(c)(3) corporation.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         James W. Benson, the Company's Chief Executive Officer and Chairman of
the Board of Directors, and Susan Benson, the Company's Secretary, are husband
and wife.

                                       40
<PAGE>

         Mr. Benson has personally guaranteed the loans for the purchase of the
Company's new headquarters; the loans are in the amount of $2,265,768.

         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. During
2001, the Company incurred consulting fees with Hill and Knowlton, Inc., an
affiliate of Wexler & Walker, in an aggregate amount of $36,493.13.

         In December 2001, the Company entered into a consulting agreement with
one of its independent directors, Curt D. Blake, pursuant to which Mr. Blake
agreed to prepare a business plan for the Company and identify and qualify
significant investors and potential acquisition targets for SpaceDev. Under the
agreement, Mr. Blake would receive the following compensation for preparation of
the business/marketing plan:

         -        $500 per day compensation --based on $120,000 per year rate,
         -        1/3 in cash,
         -        1/3 in deferred cash, payable when SpaceDev obtains $2 million
                  or more in additional business (or investment), or if that
                  event does not occur within six months, then the payment will
                  be made in common stock,
         -        1/3 in common stock, payable monthly in Rule 144 restricted
                  shares, and
         -        non-statutory stock options for 20,000 shares upon completion
                  and acceptance of the marketing/business plan.

In addition, Mr. Blake will receive a finder's fee equal to 3% of all monies
raised as a result of introductions made by him, 80,000 common shares per
million dollars raised.

                                       41
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits:

    ITEM                                                                EXH. NO.
    ----                                                                --------

    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* 3.4 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
    Form of Warrant(1)                                                     4.5
    1999 Stock Option Plan(1)                                              4.6
    First Amendment to 1999 Stock Option Plan                              4.7
    1999 Employee Stock Purchase Plan(1)                                   4.8
    Form of Warrant from November 2, 2000 Private Placement (4)            4.9
    Common Stock Purchase Warrant-Phillips Aerospace(4)                    4.10
    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
    Consent of Independent Auditor                                         23.1

(b)      Reports on Form 8-K:

One Report on Form 8-K has been filed by the Company since fiscal year ended
December 31, 2000. This report, dated February 27, 2001, disclosed the formation
and funding of the Company's majority-owned Australian subsidiary.

(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.

                                       42
<PAGE>


                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES
                                                                        CONTENTS

================================================================================




REPORT OF INDEPENDENT AUDITORS'                                              F-2


FINANCIAL STATEMENTS

           Consolidated Balance Sheets                                F-3 to F-4

           Consolidated Statements of Operations                             F-5

           Consolidated Statements of Stockholders' 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-30

                                      F-1
<PAGE>


REPORT OF INDEPENDENT AUDITORS'


To the Board of Directors of
SPACEDEV, INC.

We have audited the accompanying consolidated balance sheets of SPACEDEV, INC.
AND SUBSIDIARIES (see Note 1(c) to the consolidated financial statements) as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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, based on our audits the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2001
and 2000, and the consolidated results of their operations and their cash flows
for each of the years then ended, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(b) to
the consolidated financial statements, the Company incurred net losses of
$1,855,871 and $1,405,395 for the years ended December 31, 2001 and 2000,
respectively, and had working capital deficits of $1,002,390 and $1,559,791 as
of December 31, 2001 and 2000, respectively. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1(b). The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


/s/ Nation Smith Hermes Diamond

Nations Smith Hermes Diamond
Accountants & Consultants, APC
San Diego, California
February 20, 2002

                                      F-2
<PAGE>
                                                                  SPACEDEV, INC.
                                                                             AND
                                                                    SUBSIDIARIES

                                                                    CONSOLIDATED
                                                                  BALANCE SHEETS

 DECEMBER 31,                                      2001                 2000
--------------------------------------------------------------------------------

 ASSETS (Note 4)

 CURRENT ASSETS
     Cash (Note 10(a))                         $   211,637          $   259,623
     Accounts receivable (Note 10(b))              290,615              316,348
     Other current assets                            6,974                6,974
--------------------------------------------------------------------------------

 Total current assets                              509,226              582,945

 FIXED ASSETS - NET (NOTES 1(G) AND 2)           2,180,569            2,263,457


 INTANGIBLE ASSETS - NET (NOTES 1(G) AND 3)              -            1,502,585

 CAPITALIZED SOFTWARE  COSTS (NOTE 1(E))           207,016              207,016


 PREPAIDS AND OTHER ASSETS                         116,840               80,651
--------------------------------------------------------------------------------

                                              $  3,013,651         $  4,636,654
================================================================================

                                      F-3
<PAGE>
<TABLE>

                                                                                            SPACEDEV, INC.
                                                                                                       AND
                                                                                              SUBSIDIARIES

                                                                                              CONSOLIDATED
                                                                                            BALANCE SHEETS
<CAPTION>

 DECEMBER 31,                                                                       2001              2000
-----------------------------------------------------------------------------------------------------------
 <S>                                                                        <C>                 <C>
 LIABILITIES AND STOCKHOLDERS' DEFICIT

 CURRENT LIABILITIES
    Current portion of notes payable (Note 5(a))                            $     61,761        $   13,000
    Current portion of capitalized lease obligations (Note 9(a))                  31,130            52,290
    Notes payable - related party (Note 5(b))                                     80,000            80,000
    Accounts payable and accrued expenses                                        397,914           490,249
    Accrued payroll, vacation and related taxes                                  158,252           160,174
    Customer deposits and deferred revenue (Note 1(f))                           227,721           152,871
    Billing in excess of costs incurred and estimated earnings
      Note 1(f))                                                                 302,553           333,445
    Provision for anticipated loss (Note 10(c))                                  102,285           860,707
    Other accrued liabilities (Note 9(b))                                        150,000                 -
-----------------------------------------------------------------------------------------------------------

 Total current liabilities                                                     1,511,616         2,142,736

 NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 5(a))                            2,374,096         2,267,608

 CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(a))               26,942            87,465

 NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 5(b))              585,232           611,966

 DEFERRED REVENUE (NOTE 1(f))                                                      5,000             5,000
-----------------------------------------------------------------------------------------------------------

 Total liabilities                                                             4,502,886         5,114,775

 COMMITMENTS AND CONTINGENCIE (NOTES 9)

 STOCKHOLDERS' DEFICIT
    Convertible preferred stock, $.0001 par value, 10,000,000 shares
      authorized no shares issued or outstanding (Note 8(a))                           -                 -
    Common stock, $.0001 par value; 50,000,000 shares authorized, and
      14,817,580 and 14,005,229 shares issued and outstanding,
      respectively (Note 8(b))                                                     1,481             1,400
    Additional paid-in capital                                                 8,204,831         7,360,155
    Additional paid-in capital - stock options (Note 8(d))                       750,000           750,000
    Deferred compensation (Note 8(d))                                           (250,000)         (250,000)
    Accumulated deficit                                                      (10,195,547)       (8,339,676)
-----------------------------------------------------------------------------------------------------------

 Total stockholders' deficit                                                  (1,489,235)         (478,121)
-----------------------------------------------------------------------------------------------------------

                                                                           $   3,013,651      $  4,636,654
===========================================================================================================
</TABLE>

                        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                                 CONSOLIDATED FINANCIAL STATEMENTS.

                                                F-4
<PAGE>
<TABLE>
                                                                                  SPACEDEV, INC.
                                                                                AND SUBSIDIARIES
                                                                                    CONSOLIDATED
                                                                                   STATEMENTS OF
                                                                                      OPERATIONS
<CAPTION>

 YEARS ENDED DECEMBER 31,                                            2001              2000
------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>
 NET SALES                                                      $  4,099,094       $  3,893,271

 Cost of sales                                                     2,808,028          2,385,444
 Anticipated loss on uncompleted contract (Note 10( c ))            (397,238)           860,707
------------------------------------------------------------------------------------------------

 TOTAL COST OF SALES                                               2,410,790          3,246,151

 GROSS MARGIN                                                      1,688,304            647,120

 OPERATING EXPENSES
    General and administrative (including stock-based
        compensation of $635,873 and $95,909, respectively)
           (Note 1(l))                                             2,118,592          1,725,147
    Impairment of goodwill (Note 3(a))                               922,932                  -
    Research and development (Note 1(h))                             198,400                  -
------------------------------------------------------------------------------------------------

 TOTAL OPERATING EXPENSES                                          3,239,924          1,725,147

------------------------------------------------------------------------------------------------

 LOSS FROM OPERATIONS                                             (1,551,620)        (1,078,027)

------------------------------------------------------------------------------------------------

 OTHER EXPENSE
 Interest expense                                                   (302,651)          (325,768)
------------------------------------------------------------------------------------------------

 LOSS BEFORE INCOME TAXES                                         (1,854,271)        (1,403,795)
 Income tax provision (Notes 1(h) and 6)                               1,600              1,600
------------------------------------------------------------------------------------------------

 NET LOSS                                                       $ (1,855,871)      $ (1,405,395)
================================================================================================
 NET LOSS PER SHARE:
     Net loss                                                   $      (0.13)      $      (0.10)
------------------------------------------------------------------------------------------------

     Weighted-Average Shares Outstanding                          14,440,354         13,956,796
================================================================================================
</TABLE>

                        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                                 CONSOLIDATED FINANCIAL STATEMENTS.

                                                F-5
<PAGE>
<TABLE>

                                                                                                          SPACEDEV, INC.
                                                                                                        AND SUBSIDIARIES

                                                                                              CONSOLIDATED STATEMENTS OF
                                                                                                   STOCKHOLDERS' DEFICIT
<CAPTION>
                                                                         Convertible
                                                                        Preferred Stock                Common Stock
                                                                      --------------------          --------------------
                                                                      Shares        Amount          Shares        Amount
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>      <C>         <C>            <C>
BALANCE AT JANUARY 1, 2000                                                 -        $    -      13,879,945     $   1,388

Common stock issued for cash (Note 8(b))                                   -             -          25,000             2
Common stock issued for services (Note 8 (b))                              -             -          60,284             6
Common stock issued to former employee (Note 8 (b))                        -             -          40,000             4
Options issued for services (Note 8(c))                                    -             -               -             -
Warrants issued for acquisition of intangible assets (Note 3(b))           -             -               -             -

   Net loss                                                                -             -               -             -
-------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2000                                               -             -      14,005,229         1,400

Common stock issued for cash (Note 8(b))                                   -             -         156,752            16
Common stock issued for services (Note 8 (b))                              -             -         605,599            60
Common stock issued to former employee (Note 8 (b))                        -             -          50,000             5
Common stock exchanged by related party for services (Note 8(b))           -             -               -             -
Options issued for services (Note 8(c))                                    -             -               -             -
Warrants issued for acquisition of intangible assets (Note 3(b))           -             -               -             -

    Net loss                                                               -             -               -             -
-------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2001                                               -        $    -      14,817,580     $   1,481
=========================================================================================================================
</TABLE>

                            THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                                     CONSOLIDATED FINANCIAL STATEMENTS.


                                                    F-6
<PAGE>
<TABLE>
                                                                                          SPACEDEV, INC.
                                                                                        AND SUBSIDIARIES

                                                                                            CONSOLIDATED
                                                                                           STATEMENTS OF
                                                                                   STOCKHOLDERS' DEFICIT
<CAPTION>

                                                                       Additional
                                              Additional                 Paid-In
                                                 Paid-in               Capital -                Deferred
                                                 Capital           Stock Options            Compensation
---------------------------------------------------------------------------------------------------------
<S>                                     <C>                      <C>                    <C>
                                        $      7,155,077         $       750,000        $      (250,000)

                                                  24,998                       -                       -

                                                  77,832                       -                       -

                                                  54,560                       -                       -

                                                  18,071                       -                       -

                                                  29,617                       -                       -


Net loss                                               -                       -                       -
---------------------------------------------------------------------------------------------------------


                                               7,360,155                 750,000               (250,000)

                                                 119,984                       -                       -

                                                 545,047                       -                       -

                                                  45,165                       -                       -

                                                  45,500                       -                       -

                                                  67,055                       -                       -

                                                  21,925                       -                       -


 Net loss                                              -                       -                       -
---------------------------------------------------------------------------------------------------------

                                        $      8,204,831         $       750,000        $      (250,000)
=========================================================================================================
</TABLE>

                            THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                                     CONSOLIDATED FINANCIAL STATEMENTS.

                                                    F-7
<PAGE>
<TABLE>

                                                                                                               SPACEDEV, INC.
                                                                                                             AND SUBSIDIARIES

                                                                                                                 CONSOLIDATED
                                                                                                                STATEMENTS OF
                                                                                                        STOCKHOLDERS' DEFICIT
<CAPTION>
                                                                                                 Accumulated
                                                                                                       Other
                                                                            Accumulated        Comprehensive
                                                                                Deficit               Income            Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                       <C>                <C>
BALANCE AT JANUARY 1, 2000                                          $       (6,934,281)       $            -     $    722,184

Common stock issued for cash (Note 8(b))                                              -                    -           25,000
Common stock issued for services (Note 8 (b))                                         -                    -           77,838
Common stock issued to former employee (Note 8 (b))                                   -                    -           54,564
Options issued for services (Note 8(c))                                               -                    -           18,071
Warrants issued for acquisition of intangible assets (Note 3(b))                      -                    -           29,617

    Net loss                                                                (1,405,395)                    -      (1,405,395)
------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2000                                                (8,339,676)                    -        (478,121)

Common stock issued for cash (Note 8(b))                                              -                    -          120,000
Common stock issued for services (Note 8 (b))                                         -                    -          545,107
Common stock issued to former employee (Note 8 (b))                                   -                    -           45,170
Common stock exchanged by related party for services (Note 8(b))                      -                    -           45,500
Options issued for services (Note 8(c))                                               -                    -           67,055
Warrants issued for acquisition of intangible assets (Note 3(b))                                                       21,925

    Net loss                                                                (1,855,871)                    -      (1,855,871)
------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2001                                        $      (10,195,547)       $            -    $ (1,489,235)
==============================================================================================================================
</TABLE>

                            THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                                     CONSOLIDATED FINANCIAL STATEMENTS.

                                                    F-8
<PAGE>
<TABLE>

                                                                                SPACEDEV, INC.
                                                                              AND SUBSIDIARIES
                                                                                  CONSOLIDATED
                                                                            STATEMENTS OF CASH
                                                                                         FLOWS
<CAPTION>

 YEARS ENDED DECEMBER 31,                                             2001             2000
-----------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>
 CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                    $(1,855,871)      $(1,405,395)
     Adjustments to reconcile net loss to net cash
       provided by operating activities:
       Depreciation and amortization                                 710,245           836,056
       Impairment of goodwill                                        922,932                 -
       Common stock issued for compensation and services             702,832            95,909
       Change in operating assets and liabilities:
         Accounts receivable                                          25,733            47,567
         Other assets                                                 (2,032)          (24,842)
         Accounts payable and accrued expenses                        38,349           229,011
         Accrued payroll, vacation and related taxes                  (1,922)           98,602
         Customer deposits and deferred revenue                       74,851           133,704
         Billings in excess of costs incurred and estimated
           earnings                                                  (30,892)           58,525
         Provision for anticipated loss                             (758,422)          860,707
         Accrued interest - related party                             53,266                 -
         Other accrued liabilities                                   189,402                 -
-----------------------------------------------------------------------------------------------
 NET CASH PROVIDED BY OPERATING ACTIVITIES                            68,471           929,844
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
     Capitalized software costs                                            -          (207,016)
     Purchases of fixed assets                                       (42,624)         (146,728)
-----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                (42,624)         (353,744)
-----------------------------------------------------------------------------------------------
 CASH FLOWS FROM FINANCING ACTIVITIES
     Net decrease in bank line of credit                                   -          (241,415)
     Principle payments on notes payable                             (14,840)          (31,392)
     Principal payments on capitalized lease obligations             (98,993)          (29,547)
     Payments on notes payable - related party                       (80,000)         (142,010)
     Proceeds from issuance of common stock                          120,000            25,000
-----------------------------------------------------------------------------------------------
 NET CASH USED IN FINANCING ACTIVITIES                               (73,833)         (419,364)
-----------------------------------------------------------------------------------------------
 Net increase (decrease) in cash and cash equivalents                (47,986)          156,736
-----------------------------------------------------------------------------------------------
 CASH AT BEGINNING OF YEAR                                           259,623           102,887
-----------------------------------------------------------------------------------------------
 CASH AT END OF YEAR                                             $   211,637       $   259,623
===============================================================================================
</TABLE>

                        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                                 CONSOLIDATED FINANCIAL STATEMENTS.

                                                F-9
<PAGE>
<TABLE>

                                                                            SPACEDEV, INC.
                                                                          AND SUBSIDIARIES

                                                                              CONSOLIDATED
                                                                        STATEMENTS OF CASH
                                                                                     FLOWS
<CAPTION>

 YEARS ENDED DECEMBER 31,                                        2001                 2000
-------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the year for:
       Interest                                           $   249,385          $   280,577
       Income Taxes                                       $     1,600          $     1,600
</TABLE>

 NONCASH INVESTING AND FINANCING ACTIVITIES:
 During 2001 and 2000, the Company acquired $17,310 and $140,195, respectively,
 of fixed assets under capital lease agreements.

 During 2001 and 2000, the Company issued 655,599 and 60,284 shares of
 restricted common for consulting services with a fair value of approximately
 $590,000 and $78,000, respectively. The fair value of the shares was calculated
 using the average closing price surrounding the issuance date. See Note 8(b)).

 During 2001, the Company issued options to purchase 80,000 shares of common
 stock for services. These options were valued in accordance with SFAS 123 for
 fair value of approximately $67,000.

 During 2000, the Company issued warrants to purchase 28,236 shares of common
 stock for the acquisition of an intangible asset. These warrants were valued
 in accordance with SFAS 123 for fair value of approximately $18,000.

 In August 2001 and 2000, the Company issued warrants to purchase 25,000 shares
 of restricted common stock to acquire certain technology. These warrants were
 valued in accordance with SFAS 123 for fair value of approximately $22,000 and
 $30,000, respectively.




              THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
                       CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-10
<PAGE>

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") was incorporated under the laws of Colorado on
December 23, 1996 as Pegasus Development Group, Inc. (PDGI). The Company,
through its two business segments, is engaged in the commercial development of
low-cost satellites and their subsystems, as well as providing engineering
technical services to major aerospace companies.

PDGI was originally formed for the purpose of entering the real estate industry.
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"). 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. (See Notes 8(a) and 8(b)).

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 Company's common stock
for net assets of $1,232.

(b)   LIQUIDITY/GOING CONCERN
The accompanying consolidated financial statements as of December 31, 2001 have
been prepared assuming the Company will continue as a going concern. However,
the Company had working capital deficits of approximately $1,002,000 and
$1,560,000 as of December 31, 2001 and 2000, respectively, and incurred net loss
of $1,855,871 and $1,405,395 for the years ended December 31, 2001 and 2000,
respectively. Although there was a significant reduction in the working capital
deficit, items remain that raise substantial doubt about the Company's ability
to continue as a going concern. Subsequent to December 2001, management intends
to continue to raise additional financing through a combination of public and
private equity placements, commercial project financing and government program
funding to fund future operations and commitments. There is no assurance that
additional debt and equity financing needed to fund operations will be
consummated or obtained in sufficient amounts necessary to meet the Company's
needs.

                                      F-11
<PAGE>

(b)   LIQUIDITY/GOING CONCERN, CONT'D
The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern.

(c)   PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Integrated Space Systems Inc. (ISS) (a California
Corporation), and its inactive subsidiary, SpaceDev Australia.

(d)   USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Although management believes that the estimates and
assumptions used in preparing the accompanying consolidated financial statements
and related notes are reasonable in light of known facts and circumstances,
actual results could differ from those estimates.

(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 capitalizes the direct costs and allocated overhead
associated with the development of software products. Initial costs are charged
to operations as research prior to the development of a detailed program design
or a working model. Costs incurred subsequent to the product release, and
research and development performed under contract are charged to operations.
During 2000, the Company capitalized approximately $207,000 of costs related to
the development of satellite communications software. These costs will be
amortized over the expected number of units to be produced in the future.

(f)   REVENUE RECOGNITION
The Company's revenues are derived primarily from fixed price contracts and are
recognized using the percentage-of-completion method of contract accounting
based on the ratio of incurred costs to total estimated costs. Losses on
contracts are recognized when they become known and reasonably estimable (see
Note 10(c)). 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.

                                      F-12
<PAGE>

(f)      REVENUE RECOGNITION, CONT'D
Billings in excess of costs incurred and estimated earnings represent the excess
of amounts billed in accordance with the contractual billing terms.

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

(g)   DEPRECIATION AND AMORTIZATION
Fixed assets are depreciated over their estimated useful lives of
three-to-thirty years using the straight-line method of accounting.

Fixed assets, goodwill and other intangible assets were created upon the
acquisition of the Company's subsidiaries. Intangible assets are amortized over
their assets' estimated future useful lives on a straight-line basis over three
to five years. Fixed assets, goodwill and other intangibles are periodically
reviewed for impairment based on an assessment of future operations to ensure
they are appropriately valued in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." Effective November 2001
there will be no more amortization of goodwill (see note 3).

(h)   RESEARCH AND DEVELOPMENT
The Company was actively engaged in new product development for the Office of
Space Launch in 2001. Research and development expenditures relating to possible
future products were expensed as incurred. Research and development expenses
were $198,400.

(i)   ADVERTISING
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was approximately $67,000 in 2001 for the
acquisition of explorespace.com.

(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.

                                      F-13
<PAGE>

(k)   NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) normal use of the assets. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset. The Company is required to adopt the
provisions of SFAS No. 143 for the first quarter of 2002. Management believes
the adoption of SFAS No. 143 will not have a material impact on the Company

In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the
purchase method of accounting be used for all business combinations subsequent
to June 30, 2001 and specifies criteria for recognizing intangible assets
acquired in a business combination. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. Intangible assets with
definite useful lives will continue to be amortized over their respective
estimated useful lives. The Company plans to adopt the provisions of SFAS No.
141 and 142 effective January 1, 2002. Management believes the adoption of SFAS
No. 141 and 142 will not have a material impact on the Company

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes a single accounting
model, based on the framework established in SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
for long-lived assets to be disposed of by sale, and resolves significant
implementation issues related to SFAS No. 121. The Company is currently
assessing the impact of SFAS No. 144 on its operating results and financial
condition. The Company is required to adopt SFAS No. 144 no later than the first
quarter of 2002.

(l)   STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The Company adopted SFAS 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 Opinion 25, "Accounting for
Stock Issued to Employees" and has provided pro forma disclosures as if the fair
value based method prescribed SFAS 123 has been utilized. See Note 8(d).

                                      F-14
<PAGE>

(m)   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.

(n)   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.

(o)   FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, capital leases and notes payable. These financial instruments are
stated at their respective carrying values, which approximate their fair values.

(p)   SEGMENT REPORTING
The Company's reportable segments are as follows: Space Missions Division (SMD)
and ISS, there is a third inactive subsidiary, SpaceDev Australia. The Space
Missions Division is in the process of developing unmanned earth-orbiting
micro-satellites, unmanned deep space science exploration satellites and hybrid
propulsion systems. ISS provided engineering services and became inactive in
2002. The Company follows the requirement of SFSA No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131").

2.    FIXED ASSETS

      Fixed assets consisted of the following:
      DECEMBER 31,                                  2001                  2000
      -------------------------------------------------------------------------
      Building and improvements             $  2,191,136          $  2,186,637
      Capital leases                             224,721               207,411
      Computer equipment                         251,158               200,033
      Furniture and fixtures                      18,445                18,445
      -------------------------------------------------------------------------
                                               2,685,460             2,612,526
      Less accumulated depreciation
         and amortization                       (504,891)             (349,069)
      -------------------------------------------------------------------------
                                            $  2,180,569          $  2,263,457
      =========================================================================

Depreciation and amortization expense for fixed assets was approximately
$156,000 and $127,000 for the 2001 and 2000, respectively.

                                      F-15
<PAGE>

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

(a)   ISS
On February 7, 1998, the Company issued 2,000,000 shares of restricted common
stock and acquired all of the outstanding shares of common stock of Integrated
Space Systems, Inc. ("ISS"). ISS provides engineering and technical services
related to space-based systems, primarily launch vehicle integration. The fair
value of the shares issued was $1.8125 per share, calculated using the average
daily closing prices for a period surrounding the acquisition date. The
acquisition price was not reduced for the Rule 144 restrictions on the shares of
common stock. The total purchase price was valued at $3,625,000. The calculated
purchase price in excess of the approximately $164,000 of net assets acquired
was capitalized as goodwill was to be amortized over sixty months. On November
15, 2001, management determined that the unamortized balance of goodwill from
the ISS acquisition of approximately $923,000 became impaired and was written
off.

Goodwill from the ISS acquisition consisted of the following:

DECEMBER 31,                                    2001              2000
------------------------------------------------------------------------
Goodwill                                 $ 3,461,000       $ 3,461,000
Less accumulated amortization             (2,538,068)       (2,018,918)
Less impairment loss                        (922,932)                -
------------------------------------------------------------------------
                                         $         -       $ 1,442,082
========================================================================

Amortization expense was approximately $519,000 and $692,000 for 2001 and 2000,
respectively.

(b)   AMROC
On August 14, 1998, the Company entered the Agreement for License and Purchase
of Technology (AMROC) with an unrelated individual. The technology acquired was
hybrid rocket technology that will 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.

                                      F-16
<PAGE>

(b)   AMROC, CONT'D
For the three years following the Agreement date, the seller received warrants
to purchase the greater of 25,000 shares of restricted common stock or a number
of shares to be determined based on revenue generated from the acquired
technology as defined below. In the fourth through tenth year following the
Agreement date, the seller will receive a warrant to purchase a number of shares
based on the amount of revenue 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 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.

The Company valued the warrants using the fair value method as prescribed by
SFAS 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. On August 14, 2001 and 2000, the Company issued
warrants to purchase 25,000 shares of restricted common stock with fair value of
$21,925 and $29,617, respectively, using the same valuation method. This amount
was capitalized as an additional acquisition of intangible assets and will be
amortized over the remaining four years of the estimated useful life of the
assets. All warrants are immediately exercisable after issuance and expire on
the fifth anniversary of their issuance. No value is given to the future
issuance of warrants, as the strike price is unknown at this time.

Other intangible assets consisted of the following:

DECEMBER 31,                                        2001             2000
---------------------------------------------------------------------------
Other intangibles                            $   116,292      $    94,367
Less accumulated amortization                    (65,415)         (33,864)
---------------------------------------------------------------------------
                                             $    50,877      $    60,503
===========================================================================

Amortization expense was approximately $32,000 and $17,000 for 2001 and 2000,
respectively.

                                      F-17
<PAGE>

4.    LINE OF CREDIT
In November 1998, the Company (through ISS) obtained a bank line of credit in
the amount of $250,000 which matured in November 1999 and was renewed for one
year. At December 31, 1999, $241,415 was outstanding on the line of credit. The
agreement expired in November 2000 and the balance was paid in full.

5.    NOTES PAYABLE
(a)   BUILDING AND SETTLEMENT NOTES
On December 21, 1998, the Company borrowed $1,300,000 from a lender to finance
the purchase of its facility in Poway, California. The note called for monthly
payments and a balloon payment on December 21, 1999. At December 31, 1999, the
outstanding balance on this loan was $1,298,921. Upon its maturity, the note
continued on a month-to-month basis until it was paid in full on February 23,
2000.

On February 23, 2000, the Company signed a $1,330,000 note with a new lender to
refinance the aforementioned debt. The note calls for 300 monthly payments of
approximately $10,000, which include principal and interest at prime plus 1.5%.
On December 31, 2001 the interest rate on the note was 6.25% with an outstanding
balance of $1,307,488. The note matures in February 2025.

In December 1998, the Chief Executive Officer (the "CEO") of the Company entered
into a $500,000 loan agreement with another lender to finance additional costs
of its new facility. This liability was assigned to the Company and called for
59 monthly interest payments at 12.00% and a balloon payment of $505,000,
including interest, in December 2003. At December 31, 2001 and 2000, the
outstanding balance on this loan was $499,671.

In 1999, the Company entered into a second loan agreement with this lender. The
$460,000 loan called for 59 monthly interest payments at 10.5% and a balloon
payment of $464,000, including interest, in March 2004. At December 31, 2001 and
2000, the outstanding balance on this loan was $458,609.

In 2001, the Company entered into three settlement loan agreements with various
vendors. The total of $171,402 for all three loans called for payment between 24
and 50 months with interest that ranges from 0% to 8%. At December 31, 2001, the
outstanding balances on these notes were $170,089.

                                      F-18
<PAGE>

(a)   BUILDING AND SETTLEMENT NOTES, CONT'D
Future minimum principal payments on notes payable, building and settlement
notes are as follows:

------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
              2002                        $   61,761
              2003                           561,432
              2004                           499,489
              2005                            46,000
              2006                            18,500
              Thereafter                   1,248,675
------------------------------------------------------
                                          $2,435,857
======================================================

(b)   RELATED PARTIES
The Company had notes payable to the CEO. At December 31, 2001 and 2000, the
balances were $665,232 and $691,966, 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%.

Future minimum principal payments on notes payable, related parties are as
follows:

YEAR ENDED DECEMBER 31,
----------------------------------------------------------
               2002                             $ 80,000
               2003                               80,000
               2004                               80,000
               2005                               80,000
               2006                               80,000
               Thereafter                        265,232
----------------------------------------------------------
                                                $665,232
==========================================================

Interest expense on these notes was $53,266 and $54,137 for 2001 and 2000,
respectively.

                                      F-19
<PAGE>

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 $2,036,000 and $2,166,000 as of December 31, 2001 and
2000, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance decreased approximately
$130,000 in 2001 from $2,166,000 at December 31, 2000 to $2,036,000 at December
31, 2001.

At December 31, 2001, the Company has federal and state tax net operating loss
and capital loss carryforwards of approximately $3,777,000 and $1,313,000,
respectively. The federal and state tax loss carryforwards will expire through
2020, unless previously utilized.

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

      YEARS ENDED DECEMBER 31,                          2001          2000
      -----------------------------------------------------------------------
      Statutory U.S. federal rate                        34%           34%
      State income taxes - net of federal benefit         5%            5%
      Net operating loss for which no tax
         Benefit is currently available                 (39%)         (39%)
      -----------------------------------------------------------------------
                                                           -             -
      =======================================================================

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

      DECEMBER 31,                                     2001            2000
      ----------------------------------------------------------------------
      Deferred tax assets:
         Loss carryforwards                      $1,866,000     $ 1,699,000
         Temporary differences                      120,000         425,000
         Research and development credits            50,000          42,000
      ----------------------------------------------------------------------
      Gross deferred tax assets                   2,036,000       2,166,000

      Valuation allowance                        (2,036,000)     (2,166,000)
      ----------------------------------------------------------------------
                                                 $        -     $        -
      ======================================================================

                                      F-20
<PAGE>

7.    Employee Benefit Plan
(a)   PROFIT SHARING 401(K) PLAN
During 1997, the Company adopted a 401(k) retirement savings plan for its U.S.
employees which allows each eligible employee to voluntarily make pre-tax salary
contributions up to 15% of their compensation. The Company may elect to make a
matching contribution. The total Company contribution and participant salary
reduction may not exceed 25% of the compensation of eligible participants.
During 2001 and 2000, the Company did not contribute to the Plan.

(b)   INCENTIVE STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
At its 2000 Annual Stockholder Meeting, the Company adopted an Incentive
Employee Stock Option Plan under which the Board of Directors may grant
employees, directors and affiliates of the Company opportunities to purchase
Incentive Stock Options, Supplemental Stock Options and to receive stock bonuses
or rights to purchase restricted stock of the Company. Incentive Stock Options
will only be available to employees, including officers, and affiliates of the
Company; they will not be available to non-employee directors. The exercise
price of the Incentive Stock Options shall not be less than 100% of the fair
market value of the stock subject to the option on the date the option is
granted. The exercise price for the Supplemental Stock Options will not be less
than 85% of the fair market value of the stock subject to the option on the date
the option is granted. The Company will be required to reserve an amount of
common shares equal to the number of shares which may be purchased as a result
of such stock awards. See Note 8(d).

8.    STOCKHOLDERS' EQUITY
(a)   CONVERTIBLE PREFERRED STOCK
On November 4, 1997, 82,450 shares of $.001 par value convertible preferred
stock were issued to SD Holdings, LLC in exchange for 8,245,000 common shares of
the Company that were issued on October 22, 1997 (see Notes 1(a) and 8(b)). Each
share of convertible preferred stock was convertible, at the option of the
holder, into 100 shares of common stock. The conversion ratio was subject to
certain anti-dilution adjustments, and the holder of each share of preferred
stock was entitled to one vote for each share of common stock into which it
would convert. These shares were converted into 8,245,000 shares of common stock
on May 11, 1999.

(b)   COMMON STOCK
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, the name of the Company was changed to SPACEDEV, INC.
On November 4, 1997, these common shares were exchanged for 82,450 shares of
convertible preferred stock. See Note 8(a). On May 11, 1999, the Company issued
8,245,000 shares of common stock upon the conversion of the preferred shares.

                                      F-21
<PAGE>

(b)   COMMON STOCK, CONT.
The Company entered into agreements with current employees, legal professionals,
contracted services, investor relations and public relations firms to perform
services and reach certain milestones for the Company. In connection with these
agreements, the Company issued 655,599 and 60,284 shares of its common stock and
recorded expense of approximately $590,000 and $78,000 for 2001 and 2000,
respectively. The fair value of the shares issued was calculated using the
average closing price surrounding the issuance dates. Of the 655,599 shares
issued in 2001, 500,000 shares of common stock were issued to EMC Holdings
Group, Inc. ("EMC") pursuant to a Consultant Agreement with the Company. EMC was
retained to render certain advisory services to the Company in exchange for a
total of 1,200,000 shares of the Company's common stock, in three installments.
EMC received the first installment on June 26, 2001. In November 2001, the
Company filed a claim to terminate the agreement and rescind the issuance of the
shares. As a result, the Company expensed the fair value of the share issuance
of approximately $455,000.

In connection with the signing of the agreement, the Company's majority
shareholder issued 50,000 shares of common stock to EMC with a fair value of
approximately $45,000. The shares were recorded as a contribution of capital and
additional expense related to the EMC agreement in accordance with the SEC's
Staff Accounting Bulletin number 79.

On April 27, 2000, the Company issued 40,000 shares of common stock to a former
key employee pursuant to a Separation and Release Agreement. The stock was
issued in full settlement of back-salary claims of approximately $55,000.

On November 5, 2000, the Company issued a private placement memorandum (PPM)
offering a maximum of 1,000,000 shares of the Company's $0.0001 par value common
stock and one re-pricing warrant to purchase one additional share of common
stock. The offering price for the common stock is a five-day average of the bid
and ask prices on the date of issuance with a minimum of $1.00 per share. The
re-pricing warrants allow the holder to acquire additional shares at $0.50 above
the offering price of the shares.

On March 2, 2001, the PPM offering price was amended to a five-day average of
the high bid prices on the date of issuance with no minimum per share price and
the warrants allow the holder to acquire additional shares at the same price as
the shares acquired.

The Company sold 156,752 and 25,000 shares of its common stock under the PPM
during 2001 and 2000, respectively. The Company also issued matching warrants to
the investors under the PPM agreement. The Company received $120,000 and $25,000
for the shares of common stock sold under the PPM during 2001 and 2000.

                                      F-22
<PAGE>

(c)   WARRANTS
On August 14, 2001 and 2000, the Company issued warrants to purchase 25,000
shares of common stock at 50% of their fair market value on the date of
issuance, in return for the exclusive royalty-free right to use, sell and apply
patents and other technology developed by an individual (see Note 3(b)). The
individual will receive warrants to purchase a minimum of 25,000 additional
shares and a maximum of 3,000,000 shares of common stock at 50% of their fair
market value on the date of issuance. The number of shares varies with revenue
generated by the technology on specific dates.

On October 30, 2000, the Company issued warrants to purchase 28,236 shares of
common stock at $1.44 per share in return for services. The fair value of the
warrants was approximately $18,000.

(d)   STOCK OPTIONS
On November 21, 1997, the Company entered into a five-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 $.0001 par value
restricted common stock.

The options are subject to the following vesting conditions, which were amended
on January 21, 2000, at the exercise prices set forth:

                                                                       Exercise
        Number                                                         price per
      of shares                     Vesting Conditions                   share
      --------------------------------------------------------------------------
        500,000   Currently vested                                         $1.00
        500,000   Obtaining $6,500,000 additional equity capital           $1.50
        500,000   Financing and executing a definitive space launch
                  agreement                                                $2.00
        500,000   Launching of first lunar or deep-space mission           $2.50
        500,000   Successful completion of first lunar or deep-space
                  mission                                                  $3.00
        250,000   Upon the Company's market capitalization reading $250
                  million                                                  $5.00
        500,000   Upon the Company's market capitalization reading $500
                  million                                                 $10.00
        750,000   Upon the Company's market capitalization reading $1
                  billion                                                 $20.00
      --------------------------------------------------------------------------

All options expire five years from date of amendment.

                                      F-23
<PAGE>

(d)   STOCK OPTIONS, CONT'D
In accordance with APB 25, the Company recognized $500,000 of compensation
expense and $250,000 of deferred compensation in 1997. The options 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 at the exercise price of $.9469 per share with a set
vesting schedule of 3,333 per year after issuance with the third year having
3,334 options vest. These options expire five years from grant date.

During 1998, the Company granted options to three key employees to purchase up
to 300,000 shares of restricted common stock with exercise prices between $1.00
and $3.50 per share.

                                                                       Exercise
          Number                                                      price per
        of shares                     Vesting Conditions                share
      --------------------------------------------------------------------------
           60,000   Successful completion of the first space craft       $1.00
           60,000   Upon ISS generating $750,000 in pre-tax profits      $1.50
           60,000   Upon launch of the first space craft                 $2.00
           60,000   Upon rendezvous of space craft with NEAP target      $2.50
           60,000   Upon reaching 17% profit for two years               $3.50
      --------------------------------------------------------------------------

All options expire five years from the date of issuance.

In 2000, as part of separation agreements with these three individuals, all of
these options were canceled.

On November 1, 1999, the Company (through ISS) entered into an employment
agreement with its Chief Financial Officer (the "CFO"). The agreement
automatically renews for one-year periods until terminated by written notice of
either the Company or the CFO. In addition to annual salary levels, the
agreement allows the CFO to participate in the Company's Incentive Stock Option
Plan (the "ISO Plan") and qualify for stock option bonuses based on certain
events occurring.

                                      F-24
<PAGE>

(d)   STOCK OPTIONS, CONT'D
Under the terms of the employment agreement with ISS, the Company, as the parent
corporation, agreed to grant stock options to purchase 250,000 shares of the
Company's common stock pursuant to the Company's Stock Option Plan upon
execution of the employment agreement. These options began vesting three months
after the date of grant. On February 1, 2000, the Company issued options to
purchase an additional 250,000 shares of common stock at a per share price of
$1.44 (the then fair market value) pursuant to the agreement. The CFO received
additional options to purchase 500,000 stock options shares at a rate of 250,000
per quarter during the remainder of his first year of employment with ISS.
Additionally, the Company agreed to issue non-qualified stock options to
purchase up to 200,000 common shares, which will vest upon ISS raising and
acquiring a minimum equity financing of $10,000,000, with options to purchase
20,000 common shares for each $1,000,000 of equity financing obtained. These
200,000 options have since expired in 2000. All options will be exercisable at
the fair market value of the common stock on the date the option was granted and
will expire ten years from the date of issuance.

On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted at the exercise price of $.8609 per share with a set
vesting schedule of 3,333 per year after issuance with the third year having
3,334 options vest. These options expire six years after grant date.

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

                                                                      Weighted
                                                      Options          Average
                                                  Outstanding  Exercise Prices
      -------------------------------------------------------------------------
      Balance at January 1, 2000                    3,252,222             1.95
           Granted                                  1,009,331             1.27
           Exercised                                       -                 -
           Expired                                   (500,000)            1.63
      -------------------------------------------------------------------------

      Balance at December 31, 2000                  3,761,553            $1.81
           Granted                                    648,609              .83
           Exercised                                       -                 -
           Expired                                    (50,000)            1.28
      -------------------------------------------------------------------------

      Balance at December 31, 2001                  4,360,162            $1.67
      =========================================================================

The weighted average fair value of options granted to employees under the plan
during 2001 and 2000 was $.83 and $1.23, respectively. At December 31, 2001 and
2000, there were 1,834,475 and 1,625,147 options exercisable at a weighted
average exercise price of $.94 and $1.21 per share, respectively. The weighted
average remaining life of outstanding options under the plan at December 31,
2001 was 4.68 years.

                                      F-25
<PAGE>

(d)   STOCK OPTIONS, CONT'D
<TABLE>
<CAPTION>
                                         Weighted-Average
          Range of        Number of          Remaining         Number of    Weighted-Average
          Exercise         Shares        Contractual Life        Shares       Exercisable
           Price         Outstanding   of Shares Outstanding  Exercisable        Price
      --------------------------------------------------------------------------------------
      <S>                  <C>              <C>                   <C>               <C>
      $0.584-0.99            534,309        4.18 years               85,975         $0.7925
        1.00-1.99          2,323,631        6.54 years            1,746,278            1.25
        2.00-2.99          1,002,222        4.39 years                2,222            2.25
        3.00-3.50            500,000        4.39 years                   -             3.00
      --------------------------------------------------------------------------------------
                           4,360,162        4.68 years            1,834,475           $1.01
      ======================================================================================
</TABLE>

As of December 31, 2001, the Company had warrants outstanding that allow the
holders to purchase up to 309,988 shares of common stock at prices between $.435
and $1.44 per share. The warrants may be exercised any time within five years of
issuance.

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 2001 and 2000 using the minimum value
method as prescribed by SFAS 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.

If the Company had accounted for these options in accordance with SFAS 123, the
total value of options granted during 2001 and 2000 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:

      YEARS ENDED DECEMBER 31,                      2001            2000
      --------------------------------------------------------------------
      Net loss:
        As reported                          $(1,855,871)    $(1,405,395)
        Pro forma                            $(2,002,481)    $(2,821,467)
      --------------------------------------------------------------------
      Loss per Share:
        As reported                                $(.13)          $(.10)
        Pro forma                                  $(.14)          $(.20)
      ====================================================================

                                      F-26
<PAGE>

(d)   STOCK OPTIONS, CONT'D
On February 9, 2001, the Company purchased all rights to the name "ExploreSpace"
and the Website www.explorespace.com in an isolated transaction under section
4(2) of the Securities Act. The Company purchased all of the outstanding common
stock of ExploreSpace.com, Inc. in exchange for options to purchase a total of
80,000 common shares of SpaceDev for $1.00 per share.

9.    COMMITMENTS AND CONTINGENCIES
      (a) CAPITAL LEASES
The Company leases certain equipment under non-cancelable capital leases, which
are included in fixed assets as follows:

      DECEMBER 31,                                  2001             2000
      --------------------------------------------------------------------
      Computer equipment                     $   224,721      $   207,411
      Less accumulated depreciation              (94,890)         (58,014)
      --------------------------------------------------------------------
                                             $   129,831      $   149,397
      ====================================================================

Future minimum lease payments are as follows:

      YEAR ENDING DECEMBER 31,
      ---------------------------------------------------------------------
                2002                                    $     38,539
                2003                                          25,183
                2004                                           4,868
      ---------------------------------------------------------------------
      Total minimum lease payments                            68,590
      Amount representing interest                           (10,518)
      ---------------------------------------------------------------------
      Present value of minimum lease payments           $     58,072
      =====================================================================

      Total obligation                                  $     58,072
      Less current portion                                   (31,130)
      ---------------------------------------------------------------------
      Long-term portion                                 $     26,942
      =====================================================================

                                      F-27
<PAGE>

(b)   OTHER ACCRUED LIABILITIES
In June 2001, the Company accrued a $150,000 contingent liability related to its
guarantee on a performance bond on behalf of Space Innovations Limited ("SIL"),
which was then a subsidiary of the Company. In 1999, the Company was required to
guarantee a performance bond on behalf of SIL in connection with a contract to
build a satellite bus for an Australian domestic spacecraft project. SIL was
unable to perform on the contract and subsequently declared bankruptcy. The
Company is currently in settlement negotiations with the bonding company,
Technical & General Guarantee Company Limited ("T&G"), with a focus on extending
the payment terms and/or reducing the amount of the claim for 300,000 Australian
Dollars.

10.   CONCENTRATIONS AND CONTINGENCIES
(a)   CREDIT RISK
The Company maintains cash balances at various financial institutions primarily
located in San Diego. 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. Management believes that the Company is not exposed
to any significant credit risk on cash.

(b)   CUSTOMER
During 2001 and 2000, the Company had a major customer that accounted for sales
of approximately $3,163,000 and $2,051,000 or 77% and 53% of consolidated
revenue, respectively. At December 31, 2001 and 2000, the amount receivable from
this customer was approximately $228,000 and $188,000, respectively.

(c)   CONTRACT
In November 1999, the Space Missions Division was awarded a turnkey mission
contract by the Space Sciences Laboratory (SSL) at University of California,
Berkeley (UCB) worth as of December 31, 2001 approximately $6.8 million,
including a $1.2 million change order signed on November 28, 2001. This contract
represented 77% of the Company's revenue in 2001. The contract will conclude on
December 31, 2003. The payments on the contract are made on a monthly basis
according to a preset payment schedule and resulted in billings in excess of
costs incurred and estimated earnings of approximately $286,000. At December 31,
2001 the total costs estimated to complete the contract was approximately
$7,260,000.

11.   Operating Segments
The Company's operating structure included two operating segments for 2001 and
2000.

                                      F-28
<PAGE>

(a)   SEGMENT PRODUCTS AND SERVICES
The Company's reportable segments are as follows: Space Missions Division (SMD)
and ISS. The Space Missions Division is in the process of developing unmanned
earth-orbiting micro-satellites, unmanned deep space science exploration
satellites and hybrid propulsion systems and ISS provided engineering services
and became inactive in 2002.

The following is a summary of operating results and assets by segment.

      FOR THE YEAR ENDED DECEMBER 31, 2001
      ---------------------------------------------- ------------- ------------
      (IN THOUSANDS)                             SMD           ISS       Total
      ------------------------------------------------ ------------ ------------
      Net revenue from external
        Customers                             $3,749      $   350      $ 4,099
      Intersegment revenues                        -            -            -
      Depreciation and
        Amortization expense                    (181)        (529)        (710)
      Impairment loss                                        (923)        (923)
                                          --------------------------------------
      Segment loss                            $ (473)     $(1,383)     $(1,856)
                                          ======================================

      Total segment assets                    $3,140      $    38      $ 3,178
      Less intersegment assets                  (164)           -         (164)
                                          --------------------------------------
      Net segment assets                      $2,976      $    38      $ 3,014
                                          ======================================

      FOR THE YEAR ENDED DECEMBER 31, 2000
      (IN THOUSANDS)                              SMD           ISS       Total
      ------------------------------------------------ ------------ ------------
      Net revenue from external
        Customers                             $2,595      $ 1,298      $ 3,893
      Intersegment revenues                        -            -            -
      Depreciation and
        Amortization expense                    (144)        (692)        (836)
      Segment loss                            $ (237)     $(1,168)     $(1,405)
                                          ======================================

      Total segment assets                    $3,106      $ 1,695      $ 4,801
      Less intersegment assets                  (164)           -         (164)
                                          --------------------------------------
      Net segment assets                      $2,942      $ 1,695      $ 4,637
                                          ======================================

                                      F-29
<PAGE>

(b)   METHOD OF DETERMINING SEGMENT PROFIT OR LOSS
Management evaluates the performance of its operating segments separately to
individually monitor the different factors affecting financial performance.
Segment profit or loss includes substantially all of the segment's costs of
production, distribution and administration. The Company manages income taxes on
a global basis. Thus, management evaluates segment performance based on profit
or loss before income taxes, exclusive of any significant gains or losses on the
disposition of investments or other assets. The Company typically manages and
evaluates equity investments and related income or loss on a segment level.

                                      F-30
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.


                                         SPACEDEV, INC.



Date: March 29, 2002                     By: /S/ James W. Benson
                                             -----------------------------------
                                             James W. Benson, Chief Executive
                                             Officer



Date: March 29, 2002                     By: /S/ Charles H. Lloyd
                                             -----------------------------------
                                             Charles H. Lloyd, Chief Operating
                                             Officer and Chief Financial Officer