<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: $3,370,118

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 21, 2003 was $0.465, based on the last
sale price of $0.45 as reported by the NASD Over the Counter Bulletin Board.

As of March 21, 2003, Registrant had outstanding 15,338,907 shares of common
stock, its only class of common equity outstanding.

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

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                                TABLE OF CONTENTS
PART I.........................................................................1
   ITEM 1.       DESCRIPTION OF BUSINESS.......................................1
      Forward Looking Statements...............................................1
      General..................................................................1
      Business Strategy........................................................4
      Products and Services; Market............................................4
         Our Products..........................................................5
         Our Subsystem Products................................................6
         Our Services..........................................................7
      Components and Raw Materials.............................................7
      Competition..............................................................8
      Regulation...............................................................8
      Employees................................................................9
      Intellectual Property....................................................9
   ITEM 2.       DESCRIPTION OF PROPERTY......................................10
   ITEM 3.       LEGAL PROCEEDINGS............................................10
   ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........11
PART II.......................................................................12
   ITEM 5.         MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...12
      Market Information......................................................12
      Holders.................................................................12
      Dividends...............................................................12
   ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                 AND RESULTS OF OPERATIONS....................................13
      Overview................................................................13
      Results of Operations...................................................15
      Liquidity and Capital Resources.........................................16
      Critical Accounting Standards...........................................18
      Recent Accounting Pronouncements........................................18
      Forward-Looking Statements and Risk Analysis............................19
   ITEM 7.       FINANCIAL STATEMENTS.........................................21
   ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS................21
PART III......................................................................22
   ITEM 9.       DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                 PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT...22
      Significant Employees...................................................26
      Section 16(a) Beneficial Ownership Reporting Compliance.................26
   ITEM 10.        EXECUTIVE COMPENSATION.....................................27
      Remuneration Paid to Executives.........................................27
      Remuneration Paid to Directors..........................................28
      Employment Agreements...................................................29
      Employee Benefits.......................................................29
   ITEM 11.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                   MANAGEMENT.................................................31
   ITEM 12.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............32
   ITEM 13.         EXHIBITS AND REPORTS ON FORM 8-K..........................34
   ITEM 14.  CONTROLS AND PROCEDURES..........................................35
SIGNATURES....................................................................36
CERTIFICATION OF CHIEF EXECUTIVE OFFICER......................................37
CERTIFICATION OF CHIEF FINANCIAL OFFICER......................................39
CONSOLIDATED FINANCIAL STATEMENTS.............................................41

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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

FORWARD LOOKING STATEMENTS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. Readers are also urged to
carefully review and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without limitation the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
our General Registration Statement on Form 10SB12G/A filed January 28, 2000.

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

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

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

GENERAL

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

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

We have been awarded, have successfully concluded or are successfully concluding
contracts from such esteemed government, university and commercial customers as
the Air Force Research Laboratory ("AFRL"), Boeing, the California Space
Authority ("CSA"), the Jet Propulsion Laboratory ("JPL"), Lockheed Martin, the
National Reconnaissance Office ("NRO"), and the University of California at
Berkeley ("UCB") via NASA.

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

In February 1998, we 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 in San
Diego. As SpaceDev employees, they primarily develop products based on hybrid
rocket motor technology.

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

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

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

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In November 1999, we won a US $4.9 million mission contract by the Space
Sciences Laboratory ("SSL") at University of California, Berkeley ("UCB"). We
were competitively selected to design, build, integrate, test and operate, for
one year, a small NASA-sponsored scientific, Earth-orbiting spacecraft called
CHIPSat. CHIPSat is the first mission of NASA's low-cost University-Class
Explorer ("UNEX") series. 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 $1.2 million on November 28,
2001, bringing the total contract value for design and build to approximately
$6.8 million. An extension of the original contract based on our successful
launch and orbit status in the amount of approximately $400,000 was awarded to
us for one year of satellite operations. CHIPSat launched as a secondary payload
on a Delta-II rocket on January 12, 2003. The satellite achieved 3-axis
stabilization, meaning it was pointing and tracking properly, with all
individual components and systems successfully operating and is continuing to
work well in orbit. The CHIPSat program generated approximately $2.1 million,
$3.2 million and $1.7 million of revenue in 2000, 2001 and 2002, respectively.

On March 22, 2000, the California Spaceport Authority and the California Space
and Technology Alliance ("CSTA") notified us that we had been awarded a grant of
approximately $100,000 to be used for test firing our hybrid rocket motors.
California's Western Commercial Space Center also awarded us approximately
$200,000 to help build and equip its satellite and space vehicle manufacturing
facilities. These facilities were completed in January 2001.

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

         o        a family of small versatile orbital Maneuver and Transfer
                  Vehicles ("MTVs") using clean, safe hybrid rocket propulsion
                  technology; and,
         o        a protoflight hybrid propulsion module for a 50-kg class
                  micro-satellite.

Both of those contracts were successfully completed.

In September 2001, we were awarded a contract for a proprietary hybrid
propulsion research program valued in excess of $1 million. As a part of that
program, we are competing with another party to design a space propulsion
system. The entire contract, which will be awarded based upon the submitted
designs, is valued at approximately $2.2 million. We believe that the award
could lead to a long-term market for our hybrid propulsion technology. 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. Work on this project generated
approximately $300,000 and $1.2 million of revenue in 2001 and 2002,
respectively.

On April 4, 2002, SpaceDev, Inc., an Oklahoma corporation, was formed for the
purpose of investigating and developing commercial space products in the state
of Oklahoma. Plans for development of this business in Oklahoma are currently
on-hold.

On April 30, 2002, the Company was awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for AFRL. We anticipate receiving an award
for Phase II of the contract by the second quarter of 2003 and will use the
project to further expand our product line and to satisfy commercial and
government space transportation requirements. The first two phases of the
contract are estimated to be valued at approximately $2.5 million, of which
$100,000 was awarded for Phase I. Phase II is expected to be awarded by spring
2003. Congress has already appropriated money for this project.

                                       3
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BUSINESS STRATEGY

Our 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 to:

         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 our Research
                  and Development ("R&D") and product development efforts;

         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;

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

         o        Produce and fly commercial missions, in conjunction with
                  partners and investors, throughout the inner solar system and
                  be "first to market" in the commercial beyond earth orbit
                  "space"; and

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

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

         o        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        Lowers total project costs and therefore provides greater
                  value and increases return on investment for us and our
                  customers; and

         o        Creates barriers to entry and competition from competitors.

PRODUCTS AND SERVICES; MARKET

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

         o        Our Products - Microsatellites & Nanosatellites, BD-II
                  Spacecraft Bus, MTV (orbital maneuvering and transfer vehicle)
                  and Hybrid Propulsion Systems;

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         o        Our Subsystem Products - MFC (miniature flight computer),
                  MS-VOS (micro space vehicle operating system), PC-DS (power
                  conditioning and distribution system) and MTS (miniature
                  S-band transponder); and,

         o        Our Services - Mission Analysis and Design, Spacecraft
                  Subsystem Design, Microsatellite and Nanosatellite Launches
                  and Mission Control and Operations.

These products and services are being marketed and sold directly into domestic
and international government, university and commercial markets. Our business is
not seasonal to any significant extent; however, our business follows normal
industry trends such as increased demand during bullish economic periods, or
slow-downs in demand during periods of recession.

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

Our Products
------------

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

BD-II (Boeing Delta-II compatible) spacecraft bus - We have a qualified
microsatellite bus available to sell as a standard, fixed-price product to
government and commercial customers needing an affordable satellite for small
payloads. We developed this product in 1999, when we were selected as the
mission designer, spacecraft bus provider, integrator and mission operator of
the University of California, Berkeley ("UCB") Space Sciences Laboratory's
("SSL") Cosmic Hot Interstellar Plasma Spectrometer ("CHIPS") mission. CHIPSat
was launched at 4:45 PM PST on January 12, 2003 from Vandenberg Air Force Base
in California. The satellite achieved 3-axis stabilization with all individual
components and systems successfully operating and continues to work well in
orbit.

Orbital Maneuvering and Transfer Vehicle ("MTV") - Our MTV system is a family of
small, affordable, elegantly simple, throttleable, and restartable propulsion
and integrated satellite products. Our MTV can be used as a standard propulsion
module to transport a customer's payload. The MTV provides the change in
velocity and maneuvering capabilities to support a wide variety of applications
for on-orbit maneuvering, proximity operations, rendezvous, inspection, docking,
surveillance, protection, inclination changes and orbital transfer.

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

Our Subsystem Products
----------------------

Miniature Flight Computer ("MFC") - Our MFC is a high performance 300 million
instructions per second ("MIPS") general-purpose flight computer for a wide
variety of space vehicles. It is cost-effective, has about ten times the
performance-to-power ratio of current flight computers and only uses 2 to 6
watts of power, depending on its tasks. Our MFC has successfully passed
manufacturing and environmental testing for low earth orbit ("LEO") missions and
is ready for civil, military and commercial spacecraft and launch vehicle
applications.

Micro Space Vehicle Operating System ("MS-VOS") - Our MS-VOS is a small, fast,
modular and layered operating system, similar to the operating systems of
microcomputers. The modular nature of our MS-VOS and our other space products
allow us to design and build affordable space solutions for our customers. We
use industry-standard interfaces to increase reliability while reducing cost.
Our MS-VOS combines standard protocols like TCP/IP, software components like
VxWorks(R) and application software to effect real time command and control,
scriptable autonomous vehicle control, scriptable data acquisition and
telemetry.

Mission Control and Operations Software ("MC-OS") - Our MC-OS performs satellite
command and control and data acquisition. The MC-OS satellite command and
control is managed via user commands, batched command scripts and timed command
scripts. Data acquisition is accomplished by mapping the input data stream
(bytes, words or floats) to MC-OS variables. The mapping is accomplished by
selecting a frame offset and data type for each MC-OS variable. Other MC-OS
components include file transfer protocol ("FTP") for file transfer between the
ground station and satellite, a system security module which assigns users a
password, command level and logs all user commands to disk, and a status window
for monitoring MC-OS status.

Power Conditioning and Distribution System ("PC-DS") - Our PC-DS controls
critical failsafe spacecraft functions, including battery charge control, bus
voltage regulation, load power switching, current monitoring & limiting for the
spacecraft and individual loads, and hardware load-shedding protection for
spacecraft contingency management, and allows direct ground control of power
switches. Our PC-DS is capable of keeping the spacecraft alive independent of
any other spacecraft computers.

Our Miniature S-Band Transmitter ("MST") and Miniature S-Band Receiver ("MSR")
are a cost-effective solution for low cost and low mass spacecraft. The MST and
MSR feature lightweight state-of-the-art electronic circuitry designed to meet
today's requirements for power efficient space-based communications hardware.
The weight of the transmitter and receiver are 2.5-oz and 32-oz, respectively.
These units leverage years of communications design heritage and have been in
orbit since the January 12, 2003 launch of CHIPSat, the first mission to be
funded through NASA's University-Class Explorer ("UNEX") Program. The MST and
MSR designs provide flexibility to meet customer requirements and options. Both
units are designed to operate in most present day thermal, launch, and
on-station low-Earth-orbit ("LEO") spacecraft environments.

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Our Services
------------

Mission Analysis and Design - We provide end-to-end mission design and analysis,
including the design of the mission and its science, commerce or technology
demonstration goals, the design of an appropriate space vehicle (satellite or
spacecraft), prototype development, construction and testing of the spacecraft,
integration of one or more payloads (instruments, experiments or technologies)
into the spacecraft, integration of the spacecraft onto the launch vehicle
(rocket), the launch and the mission control and operations during the life of
the mission. Many of our products and services are now qualified and capable to
assist with missions that orbit the earth, travel to another planetary body, or
cruise through space taking measurements and transmitting valuable data back to
Earth.

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

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

Mission Control and Operations - Our mission control and operations package is
uniquely Internet-based and allows for the operation and control of missions
from anywhere in the world that has access to the Internet. The Cosmic Hot
Interstellar Plasma Spectrometer Satellite ("CHIPSat") is the first U.S. mission
to use end-to-end satellite operations with TCP/IP and FTP. While this concept
has been analyzed and demonstrated by the NASA OMNI team, CHIPSat is the first
to implement the concept as the only means of satellite communication. A
formation flying cluster or constellation of TCP/IP-based microsatellites can be
designed to communicate directly with each other. Providing any one
satellite/node in this network is in line-of-sight with any ground station at
any given time, the entire constellation would always maintain ground station
connectivity, thus creating a network on orbit and on the web, a direct
extension of CHIPSat's elegantly simple TCP/IP mission operations architecture.

COMPONENTS AND RAW MATERIALS

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

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COMPETITION

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

The primary domestic competition for unmanned earth-orbiting micro-satellites,
unmanned deep space micro-spacecraft and micro-satellite subsystems as well as
software systems comes from other small companies such as AeroAstro or MicroSat
Systems. The most established international competitor is Surrey Satellite
Technology Limited ("SSTL") in the United Kingdom. Swedish Space Corporation is
also able to compete in the small-satellite arena, particularly in the European
market. In addition to private companies, there are a limited number of
universities in the United States that have the capability to produce reasonably
simple micro-satellites. These include Weber State in Utah and Arizona State
University ("ASU") in Phoenix.

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

REGULATION

Our business activities are regulated by various agencies and departments of the
U.S. government and, in certain circumstances, the governments of other
countries. Several government agencies, including NASA and the 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 with the ITAR and/or the
Commerce Department regulations may subject guilty parties to fines of up to $1
million and/or up to 10 years imprisonment per violation. The failure of the
Company to comply with any of the foregoing regulations could have serious
adverse effects as dictated by the rules associated with compliance to the ITAR
regulations. Also, our ability to successfully market and sell into
international markets may be severely hampered due to ITAR regulation
requirements. Our conservative position is to consider any material beyond
standard marketing material to be regulated by ITAR regulations.

In addition to the standard local, state and national government regulations
that all businesses must adhere to, the space industry has specific regulations.
In the U.S., command and telemetry frequency assignments for space missions are
primarily regulated by the Federal Communications Commission ("FCC") for our
domestic commercial products. Our products geared toward domestic government


                                       8
<PAGE>

customers are regulated by the National Telecommunications Information Agency
("NTIA") and any of our products sold internationally, if any, are regulated by
the International Telecommunications Union ("ITU"). All launch vehicles that are
launched from a launch site in the United States must pass certain launch range
safety regulations that are administered by the U.S. Air Force. In addition, all
commercial space launches that we might 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 might perform would be subject to these regulations.
Presently, we are not aware of any additional or unique government regulations
related to commercial deep space missions.

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

We may need to utilize the Deep Space Network ("DSN") on some of our missions.
The DSN is an international 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 ("JPL"). 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").

EMPLOYEES

At December 31, 2002, we employed approximately twenty-four (24) 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, finance and 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 to maintain operations in order
to prevent cost overruns. We do not have any collective bargaining agreements
with our employees and we believe our employee-relations are good.

INTELLECTUAL PROPERTY

We rely in part on patents, trade secrets and know-how to develop and maintain
our competitive position and technological advantage. We intend to protect our
intellectual property through a combination of license agreements, trademarks,
service marks, copyrights, trade secrets and other methods of restricting
disclosure and transferring title. There can be no assurance that such
applications will be granted. We have and intend to continue entering into
confidentiality agreements with our employees, consultants and vendors; enter
into license agreements with third parties; and, generally, seek to control
access to and distribution of our intellectual property.

                                       9
<PAGE>

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 our common stock over ten years beginning at the
inception of the agreement, depending on our 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 our common stock under the agreement.


ITEM 2.  DESCRIPTION OF PROPERTY

Subsequent to year-end, we entered into a 25,000 square foot lease for our
facility in Poway, California that includes a small Spacecraft Assembly and Test
facility ("SAT") with an 1,800 square foot Class 100,000 clean room, avionics
development lab, machine shop, mechanical assembly lab, and mission operations
center. 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. We also have a Mission
Control Center in the Poway building, which is currently being used to monitor
the CHIPSat mission. Our facility allows for efficient design, assembly and test
of our products, thereby providing us a cost effective means to produce quality,
low cost products.

We purchased our headquarter facility, which houses our engineering,
manufacturing and administration, in the Poway Industrial Park complex in
December 1998. We subsequently sold our facility on January 31, 2003, wherein we
entered into a long-term leaseback of the facility. [See Notes 2 and 9(c) to our
consolidated financial statements for additional information.] The selling price
of the facility was $3.2 million. The total debt repayment from the transaction
was approximately $2,407,000. The approximate net proceeds to us for working
capital purposes was $636,000. Mr. Benson provided a guarantee for the
leaseback. [See Subsequent Events note in our consolidated financial
statements.]


ITEM 3.  LEGAL PROCEEDINGS

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

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

Because collection of the attorney and arbitration fees award is not assured, we
expensed all of our fees related to this matter. Any recovery of fees will be
recorded as income in the period they are received. The return of the 500,000
shares, as provided in the interim award issued on July 17, 2002, was recorded
in the third quarter of 2002 as a reversal of the original expense recorded. See
"Results of Operations" below.

                                       10
<PAGE>


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 our fiscal year ended December 31, 2002.



                                       11
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Our common stock has been traded on the Over-the-Counter Bulletin Board
("OTCBB") since August 1998 under the symbol "SPDV." The following table sets
forth the trading history of our common stock on the OTCBB 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
       --------------              --------------             -------------
         3/31/2001                      $1.03                      $0.63

         6/30/2001                      $0.97                      $0.45

         9/30/2001                      $1.01                      $0.69

         12/31/2001                     $0.86                      $0.35

         3/31/2002                      $0.65                      $0.48

         6/30/2002                      $0.64                      $0.43

         9/30/2002                      $0.52                      $0.30

         12/31/2002                     $0.50                      $0.29

         3/7/2003*                      $0.55                      $0.36

*Reflects partial period.

HOLDERS

As of March 7, 2003, there were approximately 200 holders of record of our
common stock. We estimate the total number of beneficial owners of our common
stock to be in excess of 2,500 holders. We believe that the number of beneficial
owners is substantially greater than the number of record holders because a
significant portion of our outstanding common stock is held in broker "street
names" for the benefit of individual investors.

DIVIDENDS

We have never paid a cash dividend on our Common Stock. 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.

                                       12
<PAGE>

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

The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. 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 our control. (See Item 1. Forward Looking Statements.)

OVERVIEW

We are engaged in the conception, design, development, manufacture, integration
and operations of space technology systems, products and services. We are
currently focused on the commercial development of low-cost micro-satellites,
nanosatellites and related subsystems, hybrid rocket propulsion as well as the
associated engineering technical services to government, aerospace and other
commercial enterprises. Our products and solutions are sold directly to these
customers and include sophisticated micro- and nanosatellites, hybrid
rocket-based orbital Maneuvering and orbital Transfer Vehicles ("MTVs") as well
as safe sub-orbital and orbital hybrid rocket-based propulsion systems. We are
also developing commercial hybrid rocket motors and small high performance space
vehicles and subsystems.

We were incorporated under the laws of the State of Colorado on December 23,
1996 as Pegasus Development Group, Inc. ("PDGI") and subsequently changed our
name to "SpaceDev." We became a publicly traded company in October 1997 and are
trading on the Nasdaq Over-the-Counter Bulletin Board ("OTCBB") under the symbol
of "SPDV."

In February 1998, our operations were expanded with the acquisition of
Integrated Space Systems, Inc. ("ISS"), a California corporation founded for the
purpose of providing engineering and technical services related to space-based
systems. The ISS employee base, acquired upon acquisition, largely consisted of
former General Dynamics personnel and enlarged our then current employee base to
20 employees. ISS was purchased for approximately $3.6 million, paid in Rule 144
restricted common shares of SpaceDev. Goodwill of approximately $3.5 million was
capitalized and was to be amortized over a period of 60 months, based on the
purchase price exceeding the net asset value of approximately $164,000. As a
result of a change in corporate focus, on November 15, 2001, we determined that
the unamortized balance of goodwill from 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. We determined that all future business, contracts, and
proposals would be sought after only in the SpaceDev name, making it a more
efficient way for us to manage and track multiple contracts and work on many
different business ventures at the same time within the same operating segment.

In November 1999, we were awarded a $4.9 million turnkey mission contract by the
Space Sciences Laboratory ("SSL") at University of California, Berkeley ("UCB").
We were competitively selected by UCB/SSL to design, build, integrate, test and
operate for one year a small scientific, Earth-orbiting spacecraft called
CHIPSat. In 2000, we reviewed the contract status at year-end and determined
that the total estimated costs at the end of the program would exceed the likely
revenue. As a result, we accrued a loss of approximately $860,000 based on the
expected contract modification of $600,000, which was approved on June 15, 2001.
On November 28, 2001, a second contract modification was signed with UCB, which


                                       13
<PAGE>

added approximately $1.2 million to the contract as well as an increase in
contract scope. This increased the total contract revenue to approximately $6.8
million and reduced the total expected loss on the contract to approximately
$460,000. During 2002, an additional contract modification for approximately
$400,000 was signed, which also increased the contract value and scope to the
current value of the CHIPSat project of approximately $7.2 million, further
reducing the total expected loss on the contract to approximately $430,000. As
of December 31, 2002, approximately 97% of the total contract costs were
expended and the remaining loss on the balance sheet at year-end totaled
approximately $11,000. The CHIPSat contract is expected to conclude in January
2004. Revenues for 2002 were approximately $1.7 million and are expected to be
approximately $200,000 in 2003. We are currently receiving monthly payments on
the contract according to a preset payment schedule detailed in the contract.

In April 2001, we were awarded one of four $1.0 million contracts from NASA's
Jet Propulsion Laboratory in Pasadena, California. As part of a Boeing-led team,
we participated in a study of the options for a potential Mars sample return
mission in 2011. The contract ran from April through October 2001. Our revenue
from this contract in 2002 and 2001 was approximately $7,000 and $216,000,
respectively.

In September 2001, we were awarded a contract for a proprietary propulsion
research program valued in excess of $1.0 million. As a part of that program, we
are competing with another party to design a space propulsion system. The entire
contract, which will be awarded based upon the submitted designs, is valued at
approximately $2.2 million. We expect this contract to generate revenue in 2003
of approximately $240,000. Work on this project generated approximately $1.2
million in revenues during 2002. To date, we have recognized approximately
$19,000 of gross margin on this contract. We reviewed the contract status in the
fourth quarter of 2002, to evaluate changes to the total estimated costs to
complete the contract due to schedule delays. Further discussion of the impacts
of the contract delay is included under "Liquidity and Capital Resources -
Forward Looking Statements and Risk Analysis" below.

On April 30, 2002, we were awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for the Air Force Research Lab ("AFRL"). We
anticipate receiving an award for Phase II of the contract in early 2003, and
will use the project to further expand our product line to satisfy commercial
and government space transportation requirements. The first two phases of the
contract (including an additional add-on option) are worth up to approximately
$2.5 million, of which $100,000 was awarded for Phase I. Although we expect
Phase II to be awarded to us shortly, there can be no assurance that Phase II
will actually be awarded to us. Congress has appropriated money to this project
and, as of the date of this report, we have submitted a proposal for Phase II.
Our success in winning this next phase of the program will depend on our ability
to meet the AFRL's objectives and their approval of our submitted Phase II
proposal. AFRL Phase II is anticipated to be a cost-plus contract.

On June 18, 2001, we entered into a relationship with two individuals (doing
business as EMC Holdings Corporation ("EMC")) whereby EMC was to provide certain
consulting and advisory services to us. EMC received the first installment of
500,000 shares of our common stock on June 26, 2001. Total expense for the
initial stock issuance through September 30, 2001 was approximately $455,000.
Pursuant to a demand for arbitration filed by us on November 7, 2001, we sought
the return of all or a portion of the shares issued to EMC. Following a
three-day arbitration in May and June 2002, on July 17, 2002, an interim award
was issued in favor of us against EMC, ordering the return of the initial
installment of our 500,000 shares and denying EMC's own claim for $118,000. On
October 22, 2002, a tentative final award was issued in our favor including an
award of approximately $83,000 in attorney and arbitration fees to us. The
tentative final ruling became effective on October 29, 2002, and has been
submitted to the Superior Court of California, Orange County, for entry of
judgment.

                                       14
<PAGE>

Because collection of the attorney and arbitration fees award is not assured, we
expensed all of our fees related to this matter. Any recovery of the fees will
be recorded as income in the period they are received. The return of our 500,000
shares, as provided in the interim award issued on July 17, 2002, was recorded
in the third quarter of 2002 as a reversal of the original expense recorded.
Because the original expense was not recorded as an extraordinary item, the
reversal of the expense did not qualify as an extraordinary item. See "Results
of Operations" below.

RESULTS OF OPERATIONS

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

         YEAR ENDED DECEMBER 31, 2002 -VS.- YEAR ENDED DECEMBER 31, 2001

During the year ended December 31, 2002, we had net sales of $3.4 million as
compared to net sales of $4.1 million in 2001. Sales in 2002 were comprised of
approximately $1.7 million from the CHIPSat program, approximately $1.2 million
from a contract for a proprietary propulsion development program, approximately
$300,000 from the completion of our outstanding State Grants, approximately
$70,000 from Phase I of the AFRL project and approximately $130,000 from all
other programs. In 2001, sales were comprised of approximately $3.2 million from
the CHIPSat program, approximately $328,000 from a contract for a proprietary
propulsion development program, approximately $228,000 from research and
development performed for the Office of Space Launch ("OSL"), approximately
$216,000 from the Boeing Mars Sample Return and Mars Assent Vehicle projects,
and approximately $164,000 from all other programs.

For the year 2002, we had costs of sales (direct and allocated costs associated
with individual contracts) of approximately $3.3 million as compared to
approximately $2.4 million in 2001. This increase was primarily due to
additional project costs as a result of project delays and scope changes. The
gross margin percentage for the year ended December 31, 2002 was 2% as compared
to 41% for the same period in 2001. The decrease was due to additional project
costs due to contract delays and an allocation of certain G&A expenses to cost
of goods sold.

We experienced a decrease in operating expenses from approximately $3.2 million
in 2001 to approximately $66,000 for 2002. Operating expenses include general
and administrative expenses and research and development expenses. General and
administrative expenses consisted primarily of salaries for administrative
personnel, fees for outside consultants, insurance, legal and accounting fees
and other overhead expenses. The reduction of approximately $3.1 million in the
operating expenses was due in part to the arbitration ruling reversal of the EMC
stock issuance of 500,000 shares and a resulting credit of $455,000 in 2002 that
was expensed in 2001. See "ITEM 3. Legal Proceeding" above. Other issues
involving the reduction in operating expenses can be attributed to a reduction
of research and development costs from $198,400 in 2001 to none for the same
period in 2002, a write-off of $923,000 in 2001 related to the impairment of the
unamortized balance of goodwill from the ISS acquisition, the amortization
expense related to goodwill for ISS of $520,000 incurred in 2001 compared to
none in 2002, the expense of $150,000 for a contingent liability due to
Technical & General Guarantee Company Limited expensed in 2001 compared to none
in 2002, an issuance of 80,000 stock options that had a value of $67,000 for the
acquisition of Explorespace.com that was expensed as advertising in 2001
compared to no equivalent expense in 2002, as well as, a reduction in salaries
of approximately $190,000 from 2001 to 2002 due to changes in personnel. In
addition, we began a system of more fully absorbing costs into projects,
effectively shifting approximately $600,000 of expenses that were recorded as
operating expenses in 2001 to cost of goods sold in 2002.

                                       15
<PAGE>

Interest expense for the periods ending December 31, 2002 and 2001 was
approximately $263,000 and $303,000, respectively. We paid interest expense on
certain capital leases and mortgages. In addition, we accrued interest expense
related to our related party notes and convertible debentures. In 2002, we
accrued a convertible debt discount related to warrants that accompanied the
convertible debt issue of approximately $475,000, of which $125,000 was expensed
in 2002 and the remainder will be amortized over the remaining life of the
notes.

During the year ended December 31, 2002, we incurred a net loss of approximately
$400,000, compared to a net loss of approximately $1.9 million for the same
period in 2001. The decrease in the net loss was due to our reduction in
operating expenses by approximately $3.2 million. As discussed above, the
decrease was primarily attributable to non-cash expenses, including impairment
of the un-amortized balance of goodwill from ISS, goodwill expense in 2001,
stock issued to EMC in 2001 and then recovered by us in 2002, the note payable
to T&G, the stock options issued for the acquisition of ExploreSpace.com, and
research and development costs.

LIQUIDITY AND CAPITAL RESOURCES

Our auditors have expressed a formal auditors' opinion that our December 31,
2002 financial position raises substantial doubt about our ability to continue
as a going concern. The opinion is based on net losses incurred by us for the
years ended December 31, 2002 and 2001 of approximately $400,000 and $1.9
million, respectively, and working capital deficits of approximately $200,000
and $1.0 million, respectively, for those years. Although there was a
significant reduction in the working capital deficit, items remain that raise
substantial doubt about our ability to continue as a going concern.

On January 31, 2003, we closed escrow on the sale of our facility in Poway,
California and entered into a ten-year lease for the same facility. The selling
price of the facility was $3.2 million. The total debt repayment from the
transaction was approximately $2.4 million. The approximate net proceeds to us
for working capital purposes was approximately $636,000. However due to
continuing delays and schedule slips with our commercial propulsion project and
further delays in obtaining new contract business, we remain in a cash crisis.

From October 14, 2002 through November 14, 2002, we raised $475,000 from certain
of our directors and officers by issuing 2.03% convertible debentures. The
convertible debentures entitle the holder to convert the principal and unpaid
accrued interest into our common stock when the note matures. The original
maturity on the notes was six (6) months from issue date and were subsequently
extended to twelve (12) months from issue date on March 19, 2003. The
convertible debentures are exercisable into a number of our common shares at a
conversion price that equals the 20-day average asking price less 10%, which was
established when the note was issued, or the initial conversion price.
Concurrent with the issuance of the convertible debentures, we issued to the
subscribers, warrants to purchase 1,229,705 shares of our common stock. These
warrants are exercisable for three (3) years from the date of issuance at the
initial exercise price which equals to the 20-day average asking price less 10%
which was established when the note was issued, or the initial conversion price.
There can be no assurance that additional funds will be raised and if raised,
will be under the same or more favorable terms than the convertible debentures.

We have sustained ourselves over the last few years with a mixture of government
and commercial contracts. In particular, we anticipate receiving an award for
AFRL Phase II in early 2003. AFRL Phase II is a cost-plus contract, which will
require us to incur certain costs in advance of regular contract reimbursements
from AFRL. Although we will need a certain amount of cash to fund advance
payments on the contract, we will be entitled, as a small business concern, to
recover our costs on a weekly basis.

                                       16
<PAGE>

We can continue to grow and execute certain parts of our strategy without
additional equity funding by identifying, bidding and winning new commercial and
government funded programs. We expect to obtain new commercial and government
contracts; however, depending on the timing of those contracts, we may need to
seek additional and possibly immediate financing through a combination of public
and private debt or equity placements, commercial project financing and
government programs to fund future operations and commitments. There is no
assurance that new contracts or additional debt or equity financing needed to
fund operations will be available or obtained in sufficient amounts necessary to
meet our needs. The likelihood of our success must be considered in light of the
expenses, difficulties and delays frequently encountered in connection with the
developing businesses, those historically encountered by us, and the competitive
environment in which we operate.


        CASH POSITION FOR YEAR ENDED DECEMBER 31, 2002 -VS.- YEAR ENDED
                               DECEMBER 31, 2001

Net decrease in cash during the year ending December 31, 2002 was approximately
$184,000, compared to a net decrease of $48,000 for the same period in 2001. Net
cash used in operating activities totaled approximately $707,000 for the year
ending December 31, 2002, a decrease of approximately $775,000 as compared to
approximately $68,000 provided by operating activities during the same period in
2001. This is attributable primarily to the increased costs on the CHIPSat
project as well as the contract for a proprietary propulsion research program,
both of which, at December 31, 2002, had costs that exceeded their billings for
the ongoing work toward completion of these programs.

Net cash provided by investing activities totaled approximately $48,000 for the
year ended December 31, 2002, compared to approximately $43,000 of net cash used
in investing activities during the same period in 2001. The increase in cash
used of $91,000 is attributable to a reduction in the purchase of fixed assets
and an advance payment made toward the purchase of our facility in January 2003.
Net cash provided by financing activities totaled approximately $475,000 for the
year ended December 31, 2002, which showed an increase of $549,000 from the
approximately $74,000 used in financing activities during the same period in
2001. This improvement is primarily attributable to generating more cash from
sales of common stock and issuance of convertible debt in 2002 of $550,000
versus $120,000 in 2001.

At December 31, 2002, our cash, which includes cash reserves and cash available
for investment, was approximately $27,000 as compared to approximately $212,000
at December 31, 2001, a decrease of approximately $184,000. At December 31,
2002, our working capital ratio improved to 0.94 compared to 0.34 at December
31, 2001.

As of December 31, 2002, our backlog of funded and non-funded business was
approximately $4.0 million, as opposed to approximately $3.4 million as of
fiscal year end 2001. During 2002, we won AFRL Phase I, negotiated increases of
approximately $500,000 to the CHIPSat program and began a private commercial
propulsion project.

Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of approximately $1.4 million 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
decreased approximately $600,000 during 2001, from $2.0 million at December 31,
2001 to $1.4 million at December 31, 2002. Please refer to our consolidated
financial statements, which are a part of this report for further information
regarding our liquidity and capital resources.

                                       17
<PAGE>

CRITICAL ACCOUNTING STANDARDS

Our 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." We 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. We have valued our stock, stock options and
warrants issued to non-employees at fair value in accordance with the accounting
prescribed in SFAS No. 123, which states that all transactions in which goods or
services are received for the issuance of equity instruments shall be accounted
for based on the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measurable.

Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting in accordance with Statement
of Financial Accounting Standards No. 144. Goodwill and other intangible assets
were created upon the acquisition of our 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. 142. Effective November 2001, there will be no more
amortization of goodwill (see Note 3 of the Consolidated Financial Statements).

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that SFAS, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
Further, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or described their applicability under changed
conditions. This pronouncement requires gains and losses from extinguishment of
debt to be classified as an extraordinary item only if the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," have
been met. Further, lease modifications with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as
sale-leaseback transactions. The provisions of SFAS No. 145 related to the


                                       18
<PAGE>

rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions of SFAS No. 145 related to Statement 13 shall be
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have a material impact on our
consolidated financial position or results of operations for the year ended
December 31, 2002.

In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 requires that a liability for costs associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. We do not expect the adoption of
SFAS 146 to have a material impact on our operating results or financial
position.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Management
is evaluating the adoption of this statement.

FORWARD-LOOKING STATEMENTS AND RISK ANALYSIS

During the first two months of 2003, we submitted five bids for government
programs, worked with the US Congress to identify directed funding for our
programs and are actively working to win several significant commercial
programs. We believe that we will win some of these programs, which would enable
us to continue to grow and broaden our business base, although there can be no
assurance that these contracts will be awarded to us. At this time, we are
awaiting approval of a government contract for one of these programs that would
ultimately lead to over $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 had
about 60% government and government related work. In 2003, 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 and commercial marketing efforts for both of our product lines.
Currently, we are focusing on the domestic U.S. government market, which we
believe is only about one-half of the global government market for our products
and services. Although we are interested in exploring international revenue and
contract opportunities, we are restricted by export control regulations, e.g.,
International Traffic in Arms Regulations ("ITAR"), which may limit our ability
to develop market opportunities outside the United States.

While we do not expect a reduction of government sales, a majority of our
government work is contract related. We are beginning to develop commercial
products and aggressively market our products to the commercial market,
particularly for micro- and nano-satellites and applications of our propulsion
technology and products. We anticipate winning contracts in both market
segments, although there can be no assurance that the contracts will be awarded
to us. If they are not awarded to us, based on current trends and proposals, we
believe that we can offset fluctuations in one market segment with contracts
from the other; however, our inability to win business in both markets would
have a negative effect on our business operations and financial condition.

                                       19
<PAGE>

We are forecasting a modest growth in sales for 2003. At this time, about 50% of
the forecasted sales are under contract or near to contract award, but there is
no guarantee that we will win enough new business to achieve our targeted growth
projection or to achieve a positive cash flow position. We do not believe that
significant capital expenditures will be required to achieve this modest
increase in sales.

As it relates to the CHIPSat program, we will receive total fixed compensation
on the CHIPSat project in an amount of approximately $7.2 million, of which
about $3.1 million was generated in 2001, and $1.2 million was generated in
2002. The contract calls for payments of approximately $450,000 in 2003. As
outlined above, we reviewed the contract again in late 2002 and the total loss
was reduced from $463,000 to approximately $432,000. 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 occurred in January 2003.

We expect payments of about $240,000 in 2003 from a private commercial
propulsion contract. This effort could lead to follow-on contracts from the same
customer later this year, but at this time we cannot assess the probability of
winning the contract or the value of the contract.

Our broad, overall, higher growth business strategy, requires significant
development and capital expenditures. We 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 the first part of 2003 and expect to begin generating net
positive cash flow from operations sufficient to fund both operations and
capital expenditures toward the end of 2003. There is no assurance, however,
that we will achieve or sustain any positive cash flow or profitability
thereafter.

During the years ended December 31, 2002 and 2001, we raised approximately
$145,000 through private sales of stock and approximately $475,000 from our
convertible debt offering. To execute our strategy of small, capable, low-cost
micro- and nano-satellites, hybrid propulsion products and new commercial
revenue sources, we require significant funding and/or the win of both
significant government and commercial programs. We believe investor or customer
funding of $1 to $5 million will be required, which could come from a
combination of private and/or public equity placements or government and
commercial customers. At this time, we do not have any ongoing private or public
equity offerings, although we have agreed to use our best efforts to register
the common stock underlying the warrants issued in our recent private placement
memorandum within four to six months of completing the offering.

We need to raise additional capital. The amount of capital we need to raise is
dependent upon many factors. For example, the need for additional capital will
be greater if (i) we do not enter into agreements with other customers on the
terms we anticipate; (ii) our net operating deficit increases because we incur
significant unanticipated expenses; or (iii) we incur additional costs from
modifying our satellite products or our 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. If additional capital
is not raised, it could have a significant negative effect on our business
operations and financial condition, possibly causing us to take immediate cost
reduction or other actions.

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

                                       20
<PAGE>

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 us 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 our audited financial statements for the period ended December 31,
2002 as compared to the period ended December 31, 2001 attached hereto.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

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


                                       21
<PAGE>

                                    PART III

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

Our management and directors' business activities are under the control of our
Board of Directors. Our Chief Executive Officer, James W. Benson, Vice President
of Product Development & Marketing, Stuart Schaffer and Chief Financial Officer,
Richard B. Slansky, manage the Company's daily operations. Our Board currently
consists of seven directors. General Howell M. Estes, III (USAF Retired), and
Retired Congressman Robert S. Walker were added to the Board of Directors in
2001. Stuart Schaffer and Scott McClendon were added to the Board of Directors
in 2002. Below are our executive officers and directors.

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

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

Stuart Schaffer                                 Director
13855 Stowe Drive                               Vice President, Product
Poway, California 92064                         Development & Marketing

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

J. Mark Grosvenor*                              Director
13855 Stowe Drive
Poway, CA 92064

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

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

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

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

Scott McClendon *                               Director
13855 Stowe Drive
Poway, California 92064

     *   Denotes Independent Director

                                       22
<PAGE>

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

JAMES W. BENSON, age 57, is our founder and has served as our Chief Executive
Officer and Chairman of the Board since inception. 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 us in October 1997. Mr. Benson holds a Bachelor of Science degree in
Geology from the University of Missouri. He founded the non-profit Space
Development Institute and introduced the $5,000 Benson Prize for Amateur
Discovery of Near Earth Objects. He is also Vice-Chairman and private sector
representative on NASA's national Space Grant Review Panel and a member of the
American Society of Civil Engineers subcommittee on Near Earth Object Impact
Prevention and Mitigation.

STUART SCHAFFER, AGE 43, is our vice president of product development and
marketing. From 1998 to 2001, Mr. Schaffer acted as vice president of marketing
for Infocus Corporation, a fully reporting company, where he managed all aspects
of the marketing mix for market-share leading digital projection business
throughout the Americas region. In that position, Mr. Schaffer revitalized the
Proxima brand, managed a multi-million dollar annual advertising, communications
and program budgets, directed multiple outside and in-house agencies, led
product marketing teams in defining and delivering both mobile and conference
room digital projector product lines, developed channel strategies and programs
for both value-added and volume channels, served as primary press spokesperson
for the company, established a market intelligence structure focused on
developing customer and industry knowledge and spearheaded merger teams to
ensure the smooth transition of the merger between the Infocus and Proxima
marketing organizations. Prior to Infocus, Mr. Schaffer worked for the
Hewlett-Packard Company from 1985 to 1998, where he held various positions in
Business Development, Marketing and Business Planning. Mr. Schaffer has worked
with the Leukemia & Lymphoma Society, on a volunteer basis, as an Assistant
Coach and Mentor. Mr. Schaffer has an MBA from Harvard University and a BS
degree in physics from Harvey Mudd College.

RICHARD SLANSKY, AGE 45, Is our chief financial officer and corporate secretary
and joined us on February 10, 2003. Mr. Slansky served as interim chief
executive officer and chief financial officer of Quick Strike Resources, Inc.,
an IT training, services and consulting firm, from July 2002 to February 2003.
Previously, Mr. Slansky served as chief financial officer, vice president of
finance, administration and operations and corporate secretary for Path 1
Network Technologies, Inc., a company focused on merging broadcast and cable
quality video transport with IP networks from May 2000 to July 2002. Before his
tenure at Path 1, Mr. Slansky served as president, chief financial officer and
member of the Board of Directors of Nautronix, Inc., a marine
electronics/engineering services company, from January 1999 to May 2000. Prior
to Nautronix, Mr. Slansky served as Chief Financial Officer of Alexis
Corporation, an international pharmaceutical research products technology


                                       23
<PAGE>

company, from August 1995 to January 1999. He also served as President and Chief
Financial Officer of C-N Biosciences, formerly Calbiochem, from July 1989 to
July 1995. Mr. Slansky is currently serving on the Board of Directors of two
privately held high technology companies and one closely held, private real
estate company. Mr. Slansky earned a bachelor's degree in economics and science
from the University of Pennsylvania's Wharton School of Business and a master's
degree in business administration in finance and accounting from the University
of Arizona.

J. MARK GROSVENOR, age 55, was appointed to our Board of Directors as an
independent director at our Board Meeting on March 19, 2003. Mr. Grosvenor is
currently chief executive officer of Grosvenor Industries, originally
established in San Diego in 1979. Grosvenor Industries was involved in the
purchase and sale of the historic El Cortez Hotel in addition to owning three
other city blocks of property in downtown San Diego. Grosvenor Industries also
owns and operates Grosvenor Square Shopping Center. Since 1979, Mr. Grosvenor
has built three hotels and has founded or become involved with many other
national businesses. In 1984, he started Medallion Foods, Inc. in Newport,
Arkansas, a snack food manufacturing company supplying Wal-Mart, Sam's Club and
Costco as well as other companies. In 1989, Grosvenor formed GHG Hospitality,
Inc., which owns and operates eleven hospitality projects including motels,
hotels, resorts, and marinas across the United States. Prior to founding
Grosvenor Industries and its combination of businesses, Grosvenor worked for
more than three years as a stockbroker and financial planner. In 1973 he founded
Jaymark Financial, a real estate company with offices in San Diego, Tokyo and
Osaka, Japan. Mr. Grosvenor graduated from San Diego State University with a
bachelor's degree in business and finance. Mr. Grosvenor has been very active in
the community as a member of San Diego Sheriff's Association Honorary Deputy,
Young Presidents Organization: California and Colorado Chapters, the President's
Council at San Diego State University, the Lincoln Club, the San Diego Rotary,
the University Club and the San Diego Yacht Club. He serves as a Director of the
Grosvenor Foundation, a private family foundation which funds other charities.

WESLEY T. HUNTRESS, age 60, was elected to our Board of Directors as an
independent director at our 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 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.

                                       24
<PAGE>

CURT DEAN BLAKE, age 45, was appointed to our Board of Directors as an
independent director 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.
Prior to Starwave, Mr. Blake worked at Corbis from 1992 to 1993, where he led
the acquisitions and licensing effort to fulfill Bill Gates' vision of creating
the largest taxonomic database of digital images in the world. Mr. Blake acted
as General Counsel to Aldus Corporation from 1989 to 1992, where he was
responsible for all legal matters of the $125 million public corporation and its
subsidiaries. Prior to that, Mr. Blake was an attorney at Shidler, McBroom,
Gates and Lucas, during which time he was assigned as onsite counsel to the
Microsoft Corporation, where he was primarily responsible for the domestic
OEM/Product Support and Systems Software divisions. Mr. Blake has an MBA and JD
from the University of Washington.

GENERAL HOWELL M. ESTES, III (USAF RETIRED), age 61, was appointed to our Board
of Directors as an independent director 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
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 60, was appointed to our Board of Directors as an
independent director 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 2002 and 2001, we incurred consulting fees with
Hill and Knowlton, Inc., an affiliate of Wexler & Walker, in an aggregate amount
of approximately $56,000 and $36,000, respectively.

                                       25
<PAGE>

SCOTT MCCLENDON, AGE 63, was appointed to our Board of Directors as an
independent director on July 19, 2002. McClendon currently sits on the Board of
Directors for Overland Storage, Inc., where he acts as chairman of the Board. He
became the chairman after serving as president and chief executive officer from
October 1991 to March 2001. Prior to joining Overland Storage, Inc., Mr.
McClendon was employed by Hewlett-Packard Company for over 32 years in various
positions of engineering, manufacturing, sales and marketing. Mr. McClendon
received a Bachelor of Science degree in electrical engineering in June 1960,
and a Master of Science degree in electrical engineering in June 1962 from
Stanford University School of Engineering.

SIGNIFICANT EMPLOYEES

JEFF JANICIK, AGE 35, is our director of flight systems and was primarily
responsible for managing the success of the CHIPSat project. He also oversees
all flight system / component marketing and research activity. Mr. Janicik has
over 13 years experience in program management, engineering and instruction in
aerospace. Before coming to us in January 2000, Mr. Janicik spent ten years as a
project manager, engineer and instructor in the field of aerospace working for
the United States Air Force in designing low-cost, streamlined approaches for
the X-40A and X-37 program at Air Force SMC/TE, and set the precedent for future
space vehicle demos with extensive research of safety, technical and operational
issues. Mr. Janicik has an Aerospace Engineering degree from the University of
Notre Dame and a Master's Degree in Mechanical Engineering from the University
of California, Davis, which he received while serving as an active duty officer
in the United States Air Force.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based upon a review on the Forms 3 and 4 furnished to us with respect to our
most recent fiscal year, each of the Directors and/or Executive Officers each
timely filed his initial Form 3 and Forms 4 under Section 16(a) of the
Securities and Exchange Act of 1934 during 2002 with the following exception:
Messrs. Schaffer and McClendon filed their initial Form 3's a few days late.

                                       26
<PAGE>


ITEM 10. EXECUTIVE COMPENSATION

REMUNERATION PAID TO EXECUTIVES

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

<TABLE>
                                     SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                       Long Term Compensation
                                                               ---------------------------------------
                                   Annual Compensation                   Awards            Payouts
-------------------------- ---------------------------------- --------------------------- ----------- -----------

                                                     Other      Restricted   Securities
                                                     Annual       Stock      Under-lying     LTIP       All Other
Name and                    Salary      Bonus     Compensation   Award(s)     Options/      Payouts   Compensation
Principal Position  Year    ($)           ($)      ($)          ($)           SARs (#)         ($)         ($)
------------------- ------- ---------- ---------- ------------ ------------ -------------- ----------- -----------
<S>                 <C>      <C>               <C>          <C>          <C> <C>                    <C>         <C>
James W. Benson,    2000     42,946            -            -            -   2,500,000(1)           -           -
CEO (1)             2001    147,923            -            -            -      10,000(1)           -           -
                    2002    141,325            -            -            -              -           -           -
                                                                               750,000(2)

Charles H. Lloyd,   2000     77,770            -            -            -                          -           -
COO & CFO           2001    200,000            -            -            -      10,000(1)           -           -
                    2002    118,565            -            -            -              -           -           -
------------------- ------- ---------- ---------- ------------ ------------ -------------- ----------- -----------
</TABLE>

 (1)  Mr. Benson was awarded 2,500,000 options in 1997 and those options were
      modified in 2000. Messrs. Benson and Lloyd were awarded 10,000 options
      each as a part of an annual award of options to our employees. Mr. Lloyd
      resigned in June 2002.
 (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 our employees.

During the last fiscal year and as of December 31, 2002, we did not grant stock
options to our executive officers Listed in the above compensation 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              503,333/                    0/0
                                                                           2,006,667

Charles H. Lloyd(2)                    0                      0             697,963/                     0/0
                                                                                   0
--------------------- ------------------- ---------------------- --------------------- ----------------------
</TABLE>

                                       27
<PAGE>

(1)  For purposes of determining whether options are "in-the-money," we defined
     fair market value as the five-day weighted average of the closing price of
     our common stock on the Over-The-Counter Bulletin Board as of March 7,
     2003, or $0.46 per share. None of the options listed on the table are
     "in-the-money."
(2)  Mr. Lloyd resigned in June 2002; however, his options will remain
     exercisable until the five-year anniversary of the grant date of each
     option, as specified in a separation agreement with him dated May 31, 2002.

REMUNERATION PAID TO DIRECTORS

At our annual meeting on July 16, 2000, our Board of Directors adopted a
compensation plan for independent directors whereby they will receive options
for attending meetings of the Board as follows: each such director shall receive
an option to purchase 5,000 shares for each of two telephonic meetings attended
per year, and an option to purchase 10,000 shares for each of two meetings
attended in person per year. These directors will not receive additional
compensation for attending meetings in excess of those described above. In
addition to the above, independent directors will receive $5,000 in options on
the date of election or appointment. All such options will be issued pursuant to
the Plan at fair market value as of the date of the meeting attended, will vest
50% on the first anniversary date of the date of grant and 50% on the second
anniversary date of the date of grant and will expire on the five-year
anniversary of the grant date. We do not compensate any of our directors for
their services as members of the Board through non-standard arrangements.

The following table sets forth the remuneration paid to our directors during our
fiscal year ended December 31, 2002.
<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                     -                -                   -              -                  -
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Stuart Schaffer                      -                -                   -              -                  -
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Wesley T. Huntress                   -                -                   -              -             30,000
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Curt Dean Blake                      -                -                   -              -             30,000
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
General Howell M.                    -                -                   -              -             30,000
Estes, III
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Robert S. Walker                     -                -                   -              -             25,000
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
Scott McClendon(1)                   -                -                   -              -             15,460(1)
--------------------- ----------------- ---------------- ------------------- -------------- ------------------
</TABLE>

(1) Pursuant to our policy regarding compensation of independent directors, we
issued Mr. McClendon options to purchase a total of $5,000 in common shares, or
10,460 shares at a per share price of $0.478, upon acceptance of his position as
one of our directors. The exercise price of the shares represents the fair
market value on July 19, 2002, the date of issuance. The options vest at a rate
of 50% on July 19, 2003 and the remaining 50% on July 19, 2004. Mr. McClendon
also received options to purchase 5,000 shares on October 31, 2002 for
attendance at a telephonic meeting of the 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.

                                       28
<PAGE>

EMPLOYMENT AGREEMENTS

On November 21, 1997, we entered into a five-year employment agreement with our
CEO, Mr. Benson. This agreement provides for compensation of salary and stock as
well as stock options. This agreement also prohibits Mr. Benson from competing
with us, disclosing any confidential information, or soliciting any of our
employees or customers for one year after termination of employment. Our Board
of Directors amended the employment contract for Mr. 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 our common stock upon the occurrence of
certain events. Such options would be immediately exercisable upon grant.

On May 17, 2002, we entered into an "at-will" employment agreement with Mr.
Schaffer. The agreement provided for Mr. Schaffer's compensation of salary,
benefits and options to purchase up to 450,000 shares of our common stock. The
agreement also provided for severance under certain termination provisions.

On May 31, 2002, we entered into a Confidential Separation Agreement and General
Release of Claims with Mr. Lloyd, our former Chief Operating Officer and Chief
Financial Officer. The agreement provided for the resignation of Mr. Lloyd as an
officer and director of SpaceDev, Inc. and Integrated Space Systems, Inc.,
effective June 14, 2002. In exchange for a release of claims and other promises
set forth in the agreement, Mr. Lloyd received $36,000 and an extension of the
exercise period of each of his non-statutory stock options for a five-year
period from the original date of grant. Until May 31, 2003, the agreement also
prohibits Mr. Lloyd from soliciting our employees, inducing any customer away
from us or representing himself on our behalf.

On February 14, 2003, we entered into an "at-will" employment agreement with Mr.
Slansky. The agreement provided for Mr. Slansky's compensation of salary,
benefits and options to purchase up to 375,000 shares of our common stock. The
agreement also provided for severance under certain termination provisions.

EMPLOYEE BENEFITS

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

                                       29
<PAGE>

At the 2000 Annual Stockholder Meeting, the shareholders approved an amendment
to the Stock Option Plan of 1999, increasing the number of shares eligible for
issuance under the Plan to 30% of the then outstanding common stock and allowing
the Board of Directors to make annual adjustments to the Plan to maintain a 30%
ratio to outstanding common stock at each annual meeting of the Board of
Directors. The Board, at its annual meetings in 2001 and 2002, made no
adjustment, as a determination was made that the number of shares then available
under the Plan was sufficient to meet the Company's needs. As of December 31,
2002, 4,184,698 shares were authorized for issuance under the Plan, 3,398,772 of
which are currently subject to outstanding options and awards. The Stock Option
Plan of 1999 was registered with the U.S. Securities & Exchange Commission on
Form S-8.

During the fourth quarter of fiscal year 2002, we issued non-statutory options
to purchase 30,000 shares to our independent directors for attendance at our
October 18, 2002 Board of Directors meeting. In addition to the Stock Option
Plan of 1999, our shareholders adopted the 1999 Employee Stock Purchase Plan,
which authorized our Board of Directors to make twelve consecutive offerings of
our common stock to our employees. The 1999 Employee Stock Purchase Plan has
been instituted. To date, no employees have purchased any shares of common stock
under the Plan. We also offer a variety of health, dental, vision, 401(k) and
life insurance benefits to our employees in conjunction with our co-employment
partner, Administaff.


                                       30
<PAGE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table provides information as March 21, 2003 concerning the
beneficial ownership of our common stock by (i) each director, (ii) each named
executive officer, (iii) each shareholder known by us to be the beneficial owner
of more than 10% of our outstanding Common Stock, and (iv) our 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.
<TABLE>
<CAPTION>

---------------------- ----------------------------------- ---------------------------- -------------------
                         Name and Address of Beneficial       Amount and Nature of          Percent of
Title of Class                       Owner                   Beneficial Ownership(1)         Class(1)
---------------------- ----------------------------------- ---------------------------- -------------------
<S>                    <C>                                            <C>                      <C>
$.0001 par value       James W. Benson, CEO and Chairman              12,078,336(2)            56.9%
common stock           13855 Stowe Drive
                       Poway, California 92064

$.0001 par value       J. Mark Grosvenor, Director                     1,330,376(3)             6.3%
common stock           13855 Stowe Drive
                       Poway, California 92064

$.0001 par value       Curt Dean Blake, Director                         100,930(4)             0.5%
common stock           13855 Stowe Drive
                       Poway, California 92064

$.0001 par value       Wesley T. Huntress Jr., Director                   60,515(5)             0.3%
common stock           13855 Stowe Drive
                       Poway, California  92064

$.0001 par value       General Howell M. Estes, III,                      26,667(6)             0.1%
common stock           Director
                       13855 Stowe Drive
                       Poway, California  92064

$.0001 par value       Robert S. Walker, Director                         26,667(7)             0.1%
common stock           13855 Stowe Drive
                       Poway, California  92064

$.0001 par value       Stuart Schaffer, Director & Vice                  301,410(8)             1.4%
common stock           President, Product Development &
                       Marketing
                       13855 Stowe Drive
                       Poway, California  92064

$.0001 par value       Scott McClendon, Director                              --               <0.1%(9)
common stock           13855 Stowe Drive
                       Poway, California 92064

$.0001 par value       Officers and Directors as a group
common stock           (9 Persons)                                    13,949,901(10)           65.7%(1)
</TABLE>

(1)  Where persons listed on this table have the right to obtain additional
     shares of our common stock through the exercise of outstanding options or
     warrants or the conversion of convertible securities within 60 days from
     March 21, 2003, these additional shares are deemed to be beneficially owned
     for the purpose of computing the amount and percentage of common stock
     owned by such persons. Percentages are based on total outstanding shares on
     March 21, 2003 plus options and warrants that will become exercisable
     within 60 days of March 21, 2003, for a total of 21,237,688 shares.

                                       31
<PAGE>

(2)  Represents 236,000 shares held directly by Mr. Benson and his wife, 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, plus 503,333
     options and 973,295 warrants plus 973,295 equivalents from a convertible
     debt instrument currently outstanding beneficially owned at May 7, 2003. In
     addition, Mr. Benson has unvested options on 2,006,667 shares.
(3)  Mr. Grosvenor owns 665,188 shares of our common stock plus 665,188 vested
     warrants that he purchased in our private placement.
(4)  Mr. Blake owns 30,612 shares of our common stock plus 30,612 vested
     warrants that he purchased in our private placement. Mr. Blake also owns
     39,706 vested options, which he received as compensation for his
     participation on our Board of Directors. In addition, Mr. Blake has
     unvested options on 35,000 shares.
(5)  Mr. Huntress owns 8,868 shares of our common stock. Mr. Huntress also owns
     51,647 vested options, which he received as compensation for his
     participation on our Board of Directors. In addition, Mr. Huntress has
     unvested options on 30,000 shares.
(6)  General Estes III owns 26,667 vested options, which he received as
     compensation for his participation on our Board of Directors. In addition,
     General Estes III has unvested options on 40,000 shares.
(7)  Mr. Walker owns 26,667 vested options, which he received as compensation
     for his participation on our Board of Directors. In addition, Mr. Walker
     has unvested options on 35,000 shares.
(8)  Mr. Schaffer owns 128,205 warrants plus 128,205 share equivalents from a
     convertible debt instrument currently outstanding. Mr. Schaffer also owns
     45,000 vested options, which he received as part of his compensation
     package as Vice President of Product Development and Marketing. In
     addition, Mr. Schaffer has unvested options on 405,000 shares.
(9)  Mr. McClendon has unvested options on 25,460 shares, which he received as
     compensation for his participation on our Board of Directors. (10) Officers
     and directors as a group include our seven Board members, two of whom are
     also officers, plus Mr. Slansky, who beneficially owns 25,000 shares. In
     addition, Mr. Slansky has unvested options on 350,000 shares, which are not
     included in the calculation.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

James W. Benson, our Chief Executive Officer and Chairman of the Board of
Directors, and Susan Benson, our former Corporate Secretary, are husband and
wife. Mr. Benson has personally guaranteed the building lease on our facility.

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 2002 and
2001, we incurred consulting fees with Hill and Knowlton, Inc., an affiliate of
Wexler & Walker, in an aggregate amount of approximately $56,000 and $36,000.

In December 2001, we entered into a consulting agreement with one of our
independent directors, Curt D. Blake, pursuant to which Mr. Blake agreed to
perform certain services for us and identify and qualify significant investors
and potential acquisition targets for us. Under the agreement, Mr. Blake was to
receive compensation, in cash and non-statutory stock options, for his services.
In addition, Mr. Blake was to receive a cash finder's fee plus a common stock
grant for all monies raised as a result of introductions made by him. However,
as a result of the independence rules imposed by the Sarbanes-Oxley Act of 2002,
Mr. Blake voluntarily terminated his agreement with us on November 25, 2002.




                                       32
<PAGE>

In September and October 2002, certain of our officers provided personal
interest-free short-term loans to support our working capital needs. The officer
loans were paid with the proceeds from imminently pending contract payments and
the proceeds of the convertible note program sales.

From October 14, 2002 through November 14, 2002, we sold an aggregate of
$475,000 of 2.03% convertible debentures to three of our directors and officers.
Mr. Benson purchased $375,000 of Series A Subordinated Convertible Notes and Mr.
Shaffer purchased $50,000. The total funding was completed on November 14, 2002.
The convertible debentures entitle the holder to convert the principal and
unpaid accrued interest into our common stock when the note matures. The notes
originally were set to mature six (6) months from issue date and were
subsequently extended to twelve (12) months from issue date on March 19, 2003,
unless paid, extended or re-negotiated, the convertible debentures are
exercisable into a number of our common shares at a conversion price that equals
the 20-day average asking price less 10%, which was established when the note
was issued, or the initial conversion price. Concurrent with the issuance of the
convertible debentures, we issued to the subscribers, warrants to purchase up to
1,229,705 shares of our common stock. These warrants are exercisable for three
(3) years from the date of issuance at the initial exercise price, which equals
to the 20-day average asking price less 10% which was established when the note
was issued, or the initial conversion price. Upon issuance, the warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was recorded as debt discount. See Note
8(c) to our Consolidated Financial Statements for discussion of the terms of the
warrants. The debt discount is being amortized as additional interest expense
over the term of the convertible debentures. (See ITEM 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.)



                                       33
<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
Note Purchase Agreement for Series A Subordinated Convertible Notes (6)   4.11
Form of Series A Subordinated Convertible Note (6)                        4.12
Form of Warrant for Series A Subordinated Convertible Note Offering (6)   4.13
Common Stock Exchange Agreement Between SpaceDev and SIL (1)              10.1
Mutual Rescission and Release of Share Acquisition Agreement (1)          10.2
Share Exchange Agreement Between SpaceDev and ISS (1)                     10.3
Agreement of License and Purchase of Technology Between SpaceDev and
   AMROC (1)                                                              10.4
Firm Fixed Price Agreement Number 108252 Between SpaceDev and Regents
   of the University of California (1)                                    10.5
Employment Agreement of James W. Benson (2)                               10.6
Employment Agreement between ISS and Charles H. Lloyd (1)                 10.7
Deed of Counter-Indemnity dated August 28, 1999 (3)                       10.8
Financial Advisory Services Agreement, dated June 18, 2001 (5)            10.9
Consultant/Advisory Services Agreement, dated June 18, 2001 (5)           10.10
Employment Agreement between SpaceDev, Inc. and Stuart Schaffer, dated
   May 17, 2002                                                           10.11
First Amendment to Employment Agreement with Stuart Schaffer, dated
   June 11, 2002                                                          10.12
Employment Agreement between SpaceDev, Inc. and Emery Skarupa,
   dated May 24, 2002                                                     10.13
Confidential Separation Agreement and General Release of Claims,
   dated May 31, 2002                                                     10.14
Code of Business Conduct and Ethics                                       10.15
Employment Agreement between SpaceDev and Richard B. Slansky,
   dated February 10, 2003                                                10.16
Second Amendment to Series A Subordinated Convertible Note - Benson1,
   dated March 25, 2003                                                   10.17
Second Amendment to Series A Subordinated Convertible Note - Benson2,
   dated March 25, 2003                                                   10.18
Second Amendment to Series A Subordinated Convertible Note - Benson3,
   dated March 25, 2003                                                   10.19
Second Amendment to Series A Subordinated Convertible Note - Benson4,
   dated March 25, 2003                                                   10.20
Second Amendment to Series A Subordinated Convertible Note - Skarupa,
   dated March 25, 2003                                                   10.21
Second Amendment to Series A Subordinated Convertible Note - Schaffer,
   dated March 25, 2003                                                   10.22
Consent of Independent Auditor                                            23.1
Certificate of James W. Benson Pursuant to Section 1350 of Chapter
   63 of Title 18 U.S. Code                                               99.1
Certificate of Richard B. Slansky Pursuant to Section 1350 of
   Chapter 63 of Title 18 U.S. Code                                       99.2



                                       34
<PAGE>

(b) Reports on Form 8-K:

We have filed four reports on Form 8-K, since fiscal year ended December 31,
2001. These reports, dated June 19, 2002, July 30, 2002, November 25, 2002 and
December 10, 2002, disclosed: 1) the resignation of Mr. Llyod, our Chief
Operating Officer, Chief Financial Officer and one of our directors; 2) the
actions taken by the shareholders at the Annual Shareholders' Meeting held July
18, 2002 along with the issuance of the interim Arbitration Award against EMC
Holdings Corporation; , 3) the amendment to our Series A Convertible Note
offering to increase the aggregate offering price from $400,000 to $500,000;
and, 4) the correct beneficial ownership information of our Chief Executive
Officer, Mr. Benson.

(1)      Incorporated by reference to the corresponding Exhibit previously filed
         as an Exhibit to Registrant's Form 10-SB (File #0-28947).
(2)      Incorporated by reference to Exhibit 10.1 previously filed as an
         Exhibit to Registrant's Form 10-QSB filed on August 10, 2000.
(3)      Incorporated by reference to Exhibit 10.2 previously filed as an
         Exhibit to Registrant's Form 8-K filed on September 20, 2000.
(4)      Incorporated by reference to the corresponding Exhibit previously filed
         as an Exhibit to Registrant's Form 10-KSB filed on April 2, 2001.
(5)      Incorporated by reference to Exhibits 10.1 and 10.2 previously filed as
         an Exhibit to Registrant's Form 8-K filed on July 19, 2001.
(6)      Incorporated by reference to Exhibits 4.11, 4.12 and 4.13 previously
         filed as an Exhibit to Registrant's Form 10-QSB filed on November 14,
         2002.

ITEM 14.  CONTROLS AND PROCEDURES

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



                                       35
<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 28, 2002                     By: /s/ James W. Benson
                                             -----------------------------------
                                             James W. Benson, Chief Executive
                                             Officer



Date: March 28, 2002                     By: /s/ Richard B. Slansky
                                             -----------------------------------
                                             Richard B. Slansky, Chief Financial
                                             Officer






                                       36
<PAGE>


                                 SPACEDEV, INC.
                             a Colorado corporation
                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER

                            Section 302 Certification

I, James W. Benson, certify that:

1. I have reviewed this annual report on Form 10-KSB of SpaceDev, Inc., a
Colorado corporation (the "registrant");

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

            a) designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

            b) evaluated the effectiveness of the registrant's disclosure
            controls and procedures as of a date within 90 days prior to the
            filing date of this annual report (the "Evaluation Date"); and

            c) presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

            a) all significant deficiencies in the design or operation of
            internal controls which could adversely affect the registrant's
            ability to record, process, summarize and report financial data and
            have identified for the registrant's auditors any material
            weaknesses in internal controls; and

            b) any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 19, 2003

                                             By: /s/ James W. Benson
                                                 -------------------------------
                                                 James W. Benson
                                                 Chief Executive Officer


                                       37
<PAGE>



                                 SPACEDEV, INC.
                             a Colorado corporation
                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

                            Section 302 Certification

I, Richard B. Slansky, certify that:

1. I have reviewed this annual report on Form 10-KSB of SpaceDev, Inc., a
Colorado corporation (the "registrant");

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

            a) designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

            b) evaluated the effectiveness of the registrant's disclosure
            controls and procedures as of a date within 90 days prior to the
            filing date of this annual report (the "Evaluation Date"); and

            c) presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

            a) all significant deficiencies in the design or operation of
            internal controls which could adversely affect the registrant's
            ability to record, process, summarize and report financial data and
            have identified for the registrant's auditors any material
            weaknesses in internal controls; and

            b) any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 19, 2003

                                                By: /s/ Richard B. Slansky
                                                    ----------------------------
                                                    Richard B. Slansky
                                                    Chief Financial Officer



                                       38
<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


Board of Directors and Stockholders
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, 2002 and 2001, 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, 2002
and 2001, 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
$376,160 and $1,855,871 for the years ended December 31, 2002 and 2001,
respectively, and had working capital deficits of $197,381 and $1,002,390 as of
December 31, 2002 and 2001, 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 13, 2003


                                                                             F-2
<PAGE>

<TABLE>

                                                                                            SPACEDEV, INC.
                                                                                          AND SUBSIDIARIES

                                                                               CONSOLIDATED BALANCE SHEETS
<CAPTION>
==========================================================================================================

 DECEMBER 31,                                                                    2002             2001
----------------------------------------------------------------------------------------------------------
<S>                                                                         <C>               <C>
 ASSETS

 CURRENT ASSETS
     Cash (Note 10(a))                                                      $    27,648       $   211,637
     Accounts receivable (Note 10(b))                                            82,325           290,615
     Inventory                                                                    1,729                 -
     Receivable for assets held for sale (Note 2)                             3,150,124                 -
     Costs in excess of billings and estimated earnings (Note 1(f))             281,175                 -
     Other current assets                                                             -             6,974
----------------------------------------------------------------------------------------------------------

 Total current assets                                                         3,543,001           509,226

 FIXED ASSETS - NET (NOTES 1(g) AND 2)                                          141,488         2,180,569

 CAPITALIZED SOFTWARE  COSTS (NOTE 1(e))                                        103,508           207,016

 OTHER ASSETS (NOTE 3)                                                           23,960           116,840
----------------------------------------------------------------------------------------------------------

                                                                            $ 3,811,957       $ 3,013,651
==========================================================================================================
                   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                                                       F-3
</TABLE>

<PAGE>
<TABLE>

                                                                                                         SPACEDEV, INC.
                                                                                                       AND SUBSIDIARIES

                                                                                            CONSOLIDATED BALANCE SHEETS
=======================================================================================================================
<CAPTION>

 DECEMBER 31,                                                                                   2002              2001
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>               <C>
 LIABILITIES AND STOCKHOLDERS' DEFICIT

 CURRENT LIABILITIES
    Current portion of notes payable (Note 4(a))                                         $ 2,431,134       $    61,761
    Current portion of capitalized lease obligations (Note 9(a))                              32,783            31,130
    Notes payable - related party (Note 4(b))                                                174,665            80,000
    Convertible debt notes payable (Note 5)                                                  127,075                 -
    Accounts payable and accrued expenses                                                    598,480           397,914
    Accrued payroll, vacation and related taxes                                              174,188           158,252
    Customer deposits and deferred revenue (Note 1(f))                                        69,402           227,721
    Billing in excess of costs incurred and estimated earnings
      Note 1(f))                                                                                   -           302,553
    Provision for anticipated loss (Note 10(c))                                               11,044           102,285
    Other accrued liabilities (Note 9(b))                                                    121,611           150,000
-----------------------------------------------------------------------------------------------------------------------

 Total current liabilities                                                                 3,740,382         1,511,616

 NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(a))                                           89,052         2,374,096

 CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(a))                            8,431            26,942

 NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(b))                          563,831           585,232

 DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2)                                             1,172,720                 -

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

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

 Total liabilities                                                                         5,579,416         4,502,886

 COMMITMENTS AND CONTINGENCIES (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; 25,000,000 shares authorized, and
      14,477,640 and 14,817,580 shares issued and outstanding,
      respectively (Note 8(b))                                                                 1,447             1,481
    Additional paid-in capital                                                             8,302,803         8,204,831
    Additional paid-in capital - stock options (Note 8(d))                                   750,000           750,000
    Deferred compensation (Note 8(d))                                                       (250,000)         (250,000)
    Accumulated deficit                                                                  (10,571,709)      (10,195,547)
-----------------------------------------------------------------------------------------------------------------------

 Total stockholders' deficit                                                              (1,767,459)       (1,489,235)
-----------------------------------------------------------------------------------------------------------------------

                                                                                         $ 3,811,957       $ 3,013,651
=======================================================================================================================
                                THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.



                                                                                                                    F-4
</TABLE>

<PAGE>
<TABLE>

                                                                                                        SPACEDEV, INC.
                                                                                                      AND SUBSIDIARIES

                                                                                 CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>

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

 YEARS ENDED DECEMBER 31,                                                                   2002                 2001
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                  <C>
 NET SALES                                                                          $  3,370,118         $  4,099,094

 Cost of sales                                                                         3,322,029            2,808,028
 Anticipated loss on uncompleted contract (Note 10(c))                                   (32,299)            (397,238)
----------------------------------------------------------------------------------------------------------------------

 TOTAL COST OF SALES                                                                   3,289,730            2,410,790

 GROSS MARGIN                                                                             80,388            1,688,304

 OPERATING EXPENSES
    General and administrative (including stock-based
        compensation of $2,938 and $180,873 in 2002
        & 2001 respectively) (Note 1(k) and 8(b))                                        521,468            1,144,592
        EMC - stock based compensation (Note 8(b))                                      (455,000)             455,000
    Impairment of goodwill (Note 3(a))                                                         -              922,932
    Goodwill and amortization                                                                  -              519,000
    Research and development (Note 1(h))                                                       -              198,400
----------------------------------------------------------------------------------------------------------------------

 TOTAL OPERATING EXPENSES                                                                 66,468            3,239,924

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

 LOSS FROM OPERATIONS                                                                     13,920           (1,551,620)

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

 OTHER EXPENSE
 Interest expense                                                                       (263,480)          (302,651)
 Non-cash interest expense debt discount (Note 5)                                       (125,000)                   -
----------------------------------------------------------------------------------------------------------------------

 TOTAL OTHER EXPENSE                                                                    (388,480)            (302,651)

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

 LOSS BEFORE INCOME TAXES                                                               (374,560)          (1,854,271)
 Income tax provision (Notes 1(j) and 6)                                                   1,600                1,600
----------------------------------------------------------------------------------------------------------------------

 NET LOSS                                                                           $   (376,160)        $ (1,855,871)
======================================================================================================================

 NET LOSS PER SHARE:
     Net loss                                                                       $      (0.03)        $      (0.13)
----------------------------------------------------------------------------------------------------------------------

     Weighted-Average Shares Outstanding                                              14,744,423           14,440,354
======================================================================================================================
                               THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                                                                   F-5
</TABLE>

<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, 2001                                                       -      $       -        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(d))                                          -              -                 -             -
Warrants issued for acquisition of intangible assets (Note 3(b))                 -              -                 -             -

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

BALANCE AT DECEMBER 31, 2001                                                     -              -        14,817,580         1,481
Common stock issued for cash (Note 8(b))                                         -              -           153,060            15
Reversal of common stock issued for services (Note 8 (b))                        -              -          (493,000)          (49)
Warrants issued for convertible debt program (Note 5 and 8(c))                   -              -                 -             -

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

BALANCE AT DECEMBER 31, 2002                                                     -      $       -        14,477,640       $ 1,447
==================================================================================================================================
                                           THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                                                                               F-6
</TABLE>

<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>
BALANCE AT JANUARY 1, 2001                                                      $ 7,360,155         $ 750,000         $ (250,000)
Common stock issued for cash (Note 8(b))                                            119,984                 -                  -
Common stock issued for services (Note 8 (b))                                       545,047                 -                  -
Common stock issued to former employee (Note 8 (b))                                  45,165                 -                  -
Common stock exchanged by related party for services (Note 8(b))                     45,500                 -                  -
Options issued for services (Note 8(d))                                              67,055                 -                  -
Warrants issued for acquisition of intangible assets (Note 3(b))                     21,925                 -                  -

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

BALANCE AT DECEMBER 31, 2001                                                      8,204,831           750,000           (250,000)
Common stock issued for cash (Note 8(b))                                             74,985                 -                  -
Reversal of common stock issued for services (Note 8 (b))                          (452,013)                -                  -
Warrants issued for convertible debt program (Note 5 and 8(c))                      475,000                 -                  -

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

BALANCE AT DECEMBER 31, 2002                                                    $ 8,302,803         $ 750,000         $ (250,000)
=================================================================================================================================
                                          THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                                                                              F-7
</TABLE>
<PAGE>
<TABLE>

                                                                                                  SPACEDEV, INC.
                                                                                                AND SUBSIDIARIES

                                                                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<CAPTION>
================================================================================================================

                                                                                   Accumulated
                                                                                       Deficit            Total
----------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>               <C>
BALANCE AT JANUARY 1, 2001                                                       $  (8,339,678)    $   (478,123)
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(d))                                                      -           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                                                       (10,195,549)      (1,489,237)
Common stock issued for cash (Note 8(b))                                                     -           75,000
Reversal of Common stock issued for services (Note 8 (b))                                    -         (452,062)
Warrants issued for convertible debt program (Note 5 and 8(c))                               -          475,000
                                                                                                              -
    Net loss                                                                          (376,160)        (376,160)
----------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2002                                                     $ (10,571,709)    $ (1,767,459)
================================================================================================================
                         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                                                                             F-8
</TABLE>

<PAGE>
<TABLE>
                                                                                                  SPACEDEV, INC.
                                                                                                AND SUBSIDIARIES

                                                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
================================================================================================================

 YEARS ENDED DECEMBER 31,                                                               2002               2001
----------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>
 CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                     $ (376,160)      $ (1,855,871)
     Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
       Depreciation and amortization                                                 357,692            710,245
       Contributed assets                                                            (16,251)                 -
       Loss on disposal of assets                                                      7,410                  -
       Non-cash interest expense - convertible debt program                          125,000                  -
       Impairment of goodwill                                                              -            922,932
       Common stock issued for compensation and services                            (452,062)           702,832
       Change in operating assets and liabilities:

         Accounts receivable                                                         208,290             25,733
         Prepaid and other current assets                                             10,168                  -
         Inventory                                                                    (1,729)                 -
         Costs in excess of billings and estimated earnings                         (281,175)                 -
         Other assets                                                                      -             (2,032)
         Accounts payable and accrued expenses                                       202,641             38,349
         Accrued payroll, vacation and related taxes                                  15,936             (1,922)
         Customer deposits and deferred revenue                                     (158,319)            74,851
         Billings in excess of costs incurred and estimated
           earnings                                                                 (302,553)           (30,892)
         Provision for anticipated loss                                              (91,241)          (758,422)
         Accrued interest - related party                                             45,265             53,266
         Other accrued liabilities                                                       115            189,402
----------------------------------------------------------------------------------------------------------------

 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                (706,973)            68,471

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

CASH FLOWS FROM INVESTING ACTIVITIES
     Advance on sale of assets held for sale                                          50,000                  -
     Purchases of fixed assets                                                        (1,900)           (42,624)
----------------------------------------------------------------------------------------------------------------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                   48,100            (42,624)

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

 CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from convertible debt program                                          475,000                  -
     Principle payments on notes payable                                             (65,785)           (14,840)
     Principal payments on capitalized lease obligations                             (37,330)           (98,993)
     Payments on notes payable - related party                                       (66,667)           (80,000)
     Proceeds on notes payable - related party                                        94,666                  -
     Proceeds from issuance of common stock                                           75,000            120,000
----------------------------------------------------------------------------------------------------------------

 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                 474,884            (73,833)

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

 Net decrease in cash and cash equivalents                                          (183,989)           (47,986)

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

 CASH AT BEGINNING OF YEAR                                                           211,637            259,623
----------------------------------------------------------------------------------------------------------------

 CASH AT END OF YEAR                                                                $ 27,648          $ 211,637
================================================================================================================
                         THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                                                                             F-9
</TABLE>

<PAGE>

                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================

 YEARS ENDED DECEMBER 31,                                   2002         2001
-------------------------------------------------------------------------------

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the year for:
       Interest                                           $ 310,821   $ 249,385
       Income Taxes                                       $   1,600   $   1,600


NONCASH INVESTING AND FINANCING ACTIVITIES:

During 2002 and 2001 the Company acquired fixed assets under capital lease
agreements of $20,472 and $17,310, respectively.

During 2002 and 2001 the Company issued 7,000 and 655,599 shares of restricted
common for consulting services with a fair value of approximately $2,900 and and
$590,000, respectively. The Company also recovered 500,000 shares issued during
2001 and recorded a credit of $455,000. The fair value of the shares was
calculated using the average closing price surrounding the issuance date. See
Note 8(b)).

During 2002 the Company issued warrants to purchase 1,229,705 shares of common
stock under the Company's convertible debt program. A debt discount of $475,000
was recorded related to this convertible debt (See Note 5). These warrants were
valued in accordance with SFAS 123 for fair value of approximately $475,000.

In August 2001 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.

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.






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

                                                                            F-10
<PAGE>

                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

(a) NATURE OF OPERATIONS

SPACEDEV, INC. (the "Company") is engaged in the conception, design,
development, manufacture, integration and operations of space technology
systems, products and services. The Company is currently focused on the
commercial development of low-cost satellites and their subsystems, as well as
providing engineering technical services to aerospace companies. The Company was
incorporated under the laws of Colorado on December 23, 1996 as Pegasus
Development Group, Inc. (PDGI).

SpaceDev, LLC of Colorado was originally formed in 1997 for commercial space
exploration and was the sole owner of shares of common stock of SpaceDev (a
Nevada corporation) ("SpaceDev"). 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 the Company's common
stock for net assets of $1,232.

(b)  LIQUIDITY/GOING CONCERN

The accompanying consolidated financial statements as of December 31, 2002 have
been prepared assuming the Company will continue as a going concern. However,
the Company had working capital deficits of $197,381 and $1,002,390 as of
December 31, 2002 and 2001, respectively, and incurred net loss of $376,160 and
$1,855,871 for the years ended December 31, 2002 and 2001, 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 2002, management completed a sale
leaseback transaction (Note 12) and intends to obtain new commercial and
government contracts and to seek additional financing through a combination of
public and private debt or equity placements, commercial project financing and
government programs to fund future operations and commitments. There is no
assurance that new contracts or additional debt or equity financing needed to
fund operations will be available or obtained in sufficient amounts necessary to
meet the Company's needs.

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.


                                                                            F-11
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

(c) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned inactive subsidiaries: Integrated Space Systems, Inc. (ISS) (a
California Corporation); SpaceDev Australia; and, SpaceDev Oklahoma.

(d) USE OF ESTIMATES

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

(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
capitalized as development costs prior to the design of a detailed program or
working model. Costs incurred subsequent to the product release and development
costs performed under contract are charged to operations. During 2000 the
Company capitalized approximately $207,000 of costs related to the development
of satellite communications software. Beginning in the second quarter 2002,
capitalized software costs are being amortized over their estimated useful life
of eighteen months using the straight-line method. Periodically and at least
annually, management performs a review for impairment in accordance with SFAS
No. 144.

(f) REVENUE RECOGNITION

The Company's revenues are derived primarily from fixed price contracts and are
recognized using the percentage-of-completion method. Estimated contract profits
are taken into earnings in proportion to recorded sales. Sales under certain
long-term fixed price contracts, which provide for the delivery of minimal
quantities or require significant amounts of development effort in relation to
total contract value, are recorded upon achievement of performance milestones or
using the cost-to-cost method of accounting where sales and profits are recorded
based on the ratio of costs incurred to estimated total costs at completion.
Losses on contracts are recognized when estimated costs are reasonably
determined (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.

Billings in excess of costs incurred and estimated earnings represent the excess
of amounts billed in accordance with the contractual billing terms. Costs in
excess represent the excess of actual costs incurred to the amount that is
billed to date.


                                                                            F-12
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

(f) REVENUE RECOGNITION CONT.

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

(g) DEPRECIATION AND AMORTIZATION

Fixed assets are depreciated over their estimated useful lives of three-to-five
years using the straight-line method of accounting in accordance with Statement
of Financial Accounting Standards No. 144. 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. 142. Effective November 2001, there will be
no more amortization of goodwill (see Note 3).

In December 2002, the Company entered an agreement to sell its interest in its
facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building. In conjunction with the sale of its
facility in December 2002, the Company entered into a non-cancelable operating
lease with the buyer to lease-back its facilities for ten years (see Note 2).
The base rent shall increase by 3.5% per year (see note 2 and 9).

(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. There were no Research and
Development costs during 2002.

(i) ADVERTISING

The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense was approximately $900 and $67,000 in 2002 and
2001, respectively.

(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>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

(k) 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).

(l) COMMON STOCK, STOCK OPTIONS AND WARRANTS TO NON-EMPLOYEES

The Company has valued its stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
No. 123, which states that all transactions in which goods or services are
received for the issuance of equity instruments shall be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.

(m) NET LOSS PER COMMON SHARE

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

(n) FINANCIAL INSTRUMENTS

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

(o) SEGMENT REPORTING

The Company merged its Space Missions Division (SMD) business segment and ISS
business segment in 2002. The Company has two inactive subsidiaries, SpaceDev
Australia and SpaceDev Oklahoma. The Company follows the requirement of SFSA No.
131 "Disclosures about Segments of an Enterprise and Related Information" ("FAS
131").






                                                                            F-14

<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

(p) NEW ACCOUNTING STANDARDS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that SFAS, SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers."
Further, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or described their applicability under changed
conditions. This pronouncement requires gains and losses from extinguishment of
debt to be classified as an extraordinary item only if the criteria in
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," have
been met. Further, lease modifications with economic effects similar to
sale-leaseback transactions must be accounted for in the same manner as
sale-leaseback transactions. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions of SFAS No. 145 related to Statement 13 shall be
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 did not have a material impact on the
Company's consolidated financial position or results of operations for the year
ended December 31, 2002.

In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 requires that a liability for costs associated with an exit or
disposal activity be recognized and measured initially at fair value only when
the liability is incurred. SFAS 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. We do not expect the adoption of
SFAS 146 to have a material impact on our operating results or financial
position.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS No. 123." SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Management
is evaluating the adoption of this statement.


                                                                            F-15
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


2. FIXED ASSETS

In December 2002, the Company entered an agreement to sell its interest in its
facility. The transaction closed in January 2003. The escrow transaction
included the sale of the land and building.

In conjunction with the sale, the Company entered into a lease agreement with
the buyer to lease-back its facilities (see Note 9). The gain on the sale of the
facility was deferred and will be amortized in proportion to the gross rental
charged to expense over the lease term. Deferred gain of $1,172,720 will be
amortized over ten (10) years beginning February 2003 and ending in February
2013. This amortization will be included in the Company's occupancy and facility
expense.

     Fixed assets consisted of the following:
     DECEMBER 31,                                      2001             2001
     --------------------------------------------------------------------------
     Capital leases                               $   145,345          224,721
     Computer equipment                                24,429          251,158
     Building and improvements                          9,488        2,191,136
     Furniture and fixtures                             5,271           18,445
     --------------------------------------------------------------------------
                                                      284,533        2,685,460

     Less accumulated depreciation
        and amortization                             (143,065)        (504,891)
     ---------------------------------------------------------------------------
                                                  $   141,488      $ 2,180,569
     ===========================================================================

Depreciation and amortization expense for fixed assets was approximately
$164,000 and $156,000 for the 2002 and 2001, respectively.

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.


                                                                            F-16
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(a) ISS CONT.

Goodwill from the ISS acquisition consisted of the following:

     DECEMBER 31,                                              2001
     ------------------------------------------------------------------
     Goodwill                                              $ 3,461,000
     Less accumulated amortization                          (2,538,068)
     Less impairment loss                                     (922,932)
     ------------------------------------------------------------------
                                                           $         -
     ==================================================================

Amortization expense was approximately $519,000 for 2001.

(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.

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, the Company issued warrants to
purchase 25,000 shares of restricted common stock with fair value of $21,925
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.


                                                                            F-17
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(b) AMROC CONT.

Included in other assets are intangibles, which consisted of the following:

     DECEMBER 31,                                    2002               2001
     ---------------------------------------------------------------------------
     Other intangibles                           $   116,292      $   116,292
     Less accumulated amortization                  (105,736)         (65,415)
     ---------------------------------------------------------------------------
                                                 $    10,556      $    50,877
     ===========================================================================

Amortization expense was approximately $40,000 and $32,000 for 2002 and 2001,
respectively.

4. NOTES PAYABLE

(a) BUILDING AND SETTLEMENT NOTES

On February 23, 2000, the Company borrowed $1,330,000 from a lender to refinance
its facility in Poway, California. The note called for 300 monthly payments of
approximately $9,000, which included principal and interest at prime plus 1.5%.
On December 31, 2002 the interest rate on the note was 5.75% with an outstanding
balance of $1,281,227. The note was set to mature in February 2025. In December
2002 the Company entered into an agreement to sell its interest its facility and
the aforementioned debt was paid in full at the close of escrow in January 2003.

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 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, 2002 and 2001, the outstanding
balance on this loan was $495,012 and $499,671, respectively. In December 2002
the Company entered into an agreement to sell its interest in its facility and
the aforementioned debt was paid in full at the close of escrow in January 2003.

In 1999 the Company entered into a second loan agreement. 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, 2002 and 2001, the
outstanding balance on this loan was $456,020 and $458,609, respectively. In
December 2002 the Company entered into an agreement to sell its interest in its
facility and the aforementioned debt was paid in full at the close of escrow in
January 2003.


                                                                            F-18
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(a) BUILDING AND SETTLEMENT NOTES CONT.

In June 2001, the Company accrued a $150,000 contingent liability from Technical
& General Guarantee Company Ltd. ("T&G") 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. On May 6, 2002 a
settlement agreement was reached with T&G, which called for twelve monthly
payments in the amount of $1,200 to begin March 1, 2002. After the twelve
months, the note called for a balloon payment on the anniversary of the
effective date in the amount of $139,000. The note also called for a third deed
of trust to be placed on the Company's building and land. At December 31, 2002
the outstanding balance on this loan was $141,400. In December 2002 the Company
entered into an agreement to sell its interest in its facility and the
aforementioned debt was paid in full at the close of escrow in January 2003.

In 2001, the Company entered into three loan agreements with various vendors.
The total of $171,402 for all three loans called for payment between 24 and 50
months with interest that ranged from 0% to 8%. At December 31, 2002 and 2001,
the outstanding balances on these notes were $146,527 and $170,089,
respectively.

Future minimum principal payments on notes payable, building and settlement
notes are as follows:

     ===============================================================
     YEAR ENDED DECEMBER 31,
     ---------------------------------------------------------------
             2003                                     $ 2,431,134
             2004                                          41,452
             2005                                          36,670
             2006                                          10,930
     ---------------------------------------------------------------
                                                      $ 2,520,186
     ===============================================================

(b) RELATED PARTIES

The Company has notes payable to its CEO. At December 31, 2002 and 2001, the
balances were $738,496 and $665,232, respectively, with accrued interest of 10%.
The notes were converted to a demand note and amended on March 20, 2000 to call
for annual payments of not less than $80,000 per year with interest at 10%.


                                                                            F-19
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(b) RELATED PARTIES CONT.

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

     YEAR ENDED DECEMBER 31,
     --------------------------------------------------------------------
                2003                                         $ 174,665
                2004                                            80,000
                2005                                            80,000
                2006                                            80,000
                2007                                            80,000
                Thereafter                                     243,831
     --------------------------------------------------------------------
                                                              $738,496
     ====================================================================

Interest expense accrued on these notes was $45,265 and $53,266 for 2002 and
2001, respectively.

5. CONVERTIBLE DEBENTURES

From October 14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various director and officers of
the Company. The total funding was completed on November 14, 2002. The
convertible debentures entitle the holder to convert the principal and unpaid
accrued interest into the Company's common stock when the note matures. The
original maturity on the notes was six (6) months from issue date and was
subsequently extended to twelve (12) months from issue date on March 19, 2003.
The convertible debentures are exercisable into a number of the Company's common
shares at a conversion price that equals the 20-day average asking price less
10%, which was established when the note was issued, or the initial conversion
price.

Concurrent with the issuance of the convertible debentures, the Company issued
to the subscribers, warrants to purchase up to 1,229,705 shares of our common
stock. These warrants are exercisable for three (3) years from the date of
issuance at the initial exercise price which equals to the 20-day average asking
price less 10% which was established when the note was issued, or the initial
conversion price. Upon issuance the warrants were valued using the Black-Scholes
pricing model based on the expected fair value at issuance and the estimated
fair value was recorded as debt discount. See Note 8(c) for discussion of the
terms of the warrants.

All debt discounts are to be amortized as additional interest expense over the
term of the convertible debentures. As of December 31, 2002, $475,000 has been
reflected as debt discount of which $125,000 was amortized to non-cash interest
expense during 2002.


                                                                            F-20
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


CONVERTIBLE DEBENTURES CONT.

Convertible debenture dated December 31, 2002                        $  475,000

         Accrued interest                                                 2,075
         Less debt discount
         Total                                           475,000
                    Amount amortized to expense         (125,000)      (350,000)
                                                      -----------    -----------

Convertible debenture at December 31, 2002                           $  127,075
                                                                     ===========

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 $1,372,000 and $2,036,000 as of December 31, 2002 and
2001, 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
$664,000 in 2001 from $2,036,000 at December 31, 2001 to $1,372,000 at December
31, 2002.

At December 31, 2002, the Company has federal and state tax net operating loss
and capital loss carryforwards of approximately $3,358,000 and $1,525,000,
respectively. The federal and state tax loss carryforwards will expire through
2021, unless previously utilized. The state of California has suspended the
utilization of net operating loss for 2002 and 2003.

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

     YEARS ENDED DECEMBER 31,                              2002          2001
     ---------------------------------------------------------------------------
     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%)
     ---------------------------------------------------------------------------
                                                             -             -
     ===========================================================================


                                                                            F-21
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


INCOME TAXES, CONT.

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

     DECEMBER 31,                                        2002           2001
     ---------------------------------------------------------------------------
     Deferred tax assets:
        Loss carryforwards                           $ 1,262,000    $ 1,866,000
        Temporary differences                            100,000        120,000
        Research and development credits                  10,000         50,000
     ---------------------------------------------------------------------------
     Gross deferred tax assets                         1,372,000      2,036,000

     Valuation allowance                              (1,372,000)    (2,036,000)
     ---------------------------------------------------------------------------
                                                     $         -    $         -
     ===========================================================================

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 2002 and 2001, 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 Stock Purchase Plan will not be less than
85% of the fair market value of the stock on the date the stock is purchased.
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 stock awards. See Note
8(d).




                                                                            F-22

<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


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 the
Company's 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.

The Company entered into agreements with current employees, public relations
firms and consultants to perform services and reach certain milestones for the
Company. In connection with these agreements, the Company issued 7,000 and
655,599 shares of its common stock during 2002 and 2001, respectively, of which
500,000 went to EMC and subsequently was recovered after a final judgment in
favor of the Company was granted on October 22, 2002. The Company recorded a
credit of $455,000 during 2002 to offset the expense that was recorded during
2001. The Company also recorded an expense of approximately $2,900 and $590,000
for 2002 and 2001, respectively, for the issuance of common stock. The fair
value of the shares issued was calculated using the average closing price
surrounding the issuance dates.

On June 18, 2001, SpaceDev entered into a relationship with two individuals
(doing business as EMC Holdings Corporation ("EMC")) whereby EMC was to provide
certain consulting and advisory services to the Company. EMC received the first
installment of 500,000 shares of common stock on June 26, 2001. Total expense
for the initial stock issuance through September 30, 2001 was $455,000. 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. EMC filed its own claim
with the American Arbitration Association on November 13, 2001, alleging that
the Company owed EMC $118,000 in fees, plus damages to be proven at arbitration.



                                                                            F-23
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(b) COMMON STOCK, CONT.

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

Because collection of the attorney and arbitration fees award is not assured,
the Company has expensed all of its fees related to this matter. Any recovery of
the fees will be recorded as income in the period they are received. The return
of the 500,000 shares, as provided in the interim award issued on July 17, 2002,
was recorded in the third quarter of 2002 as a reversal of the original expense
recorded. Because the original expense was not recorded as an extraordinary
item, the reversal of the expense did not qualify as an extraordinary item.

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 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 the average of the high
bid prices on the date of issuance and four preceding days, with no minimum per
share price and the warrants allow the holder to acquire additional shares at
the same price as the shares acquired.

The Company sold 153,060 and 156,752 shares of its common stock under the PPM
during 2002 and 2001, respectively. The Company also issued matching warrants to
the investors under the PPM agreement. The Company received $75,000 and $120,000
for the shares of common stock sold under the PPM during 2002 and 2001,
respectively.

                                                                            F-24
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(c) WARRANTS

On August 14, 2001, 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.

Concurrent with the issuance of the convertible debentures from October 2002
through November of 2002, the Company issued to subscribers warrants to purchase
up to 1,229,705 shares of the Company's common stock. These warrants are
exercisable for three (3) years from the date of issuance at the initial
exercise price, which is equal to the 20-day average asking price less 10%
established when the notes were issued. Upon issuance the warrants were valued
using the Black-Scholes pricing model based on the expected fair value at
issuance and the estimated fair value was also recorded as debt discount.

 (D)  STOCK OPTIONS
On November 21, 1997, the Company entered into a five (5) year employment
agreement with its CEO. As part of the employment agreement, the Company granted
options to the CEO to purchase up to 2,500,000 shares of the Company's $.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:
<TABLE>
<CAPTION>
                                                                            Exercise
     Number                                                                 price per
   of shares                        Vesting Conditions                        share
--------------------------------------------------------------------------------------
<S>               <C>                                                          <C>
    500,000       Currently vested                                             $1.00
    500,000       Obtaining $6,500,000 additional equity capital               $1.50
                  Financing and executing a definitive space launch
    500,000       agreement                                                    $2.00
    500,000       Launching of first lunar or deep-space mission               $2.50
                  Successful  completion of first lunar or deep-space
    500,000       mission                                                      $3.00
                  Upon the Company's market capitalization reading $250
    250,000       million                                                      $5.00
                  Upon the Company's market capitalization reading $500
    500,000       million                                                     $10.00
                  Upon the Company's market capitalization reading $1
    750,000       billion                                                     $20.00
--------------------------------------------------------------------------------------
</TABLE>

All options expire five (5) years from date of amendment.

                                                                            F-25
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(d) STOCK OPTIONS CONT.

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

On August 27, 2001, as part of an annual review process, an additional 10,000
options were granted to the CEO at the exercise price of $0.9469 per share with
a set vesting schedule of 3,333 per year after issuance with the third year
having 3,334 options vest. These options expire five years from 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, 2001                 3,761,553               $1.81
           Granted                                 648,609                0.83
           Exercised                                    -                    -
           Expired                                 (50,000)               1.28
      -------------------------------------------------------------------------

      Balance at December 31, 2001               4,360,162               $1.67
           Granted                               1,386,110                0.50
           Exercised                                    -                    -
           Expired                                (297,500)               0.88
      -------------------------------------------------------------------------

      Balance at December 31, 2002               5,448,772               $0.91
      ==========================================================================

The weighted average fair value of options granted to employees under the plan
during 2002 and 2001 was $0.50 and $0.83, respectively. At December 31, 2002 and
2001, there were 2,064,716 and 1,834,475 options exercisable at a weighted
average exercise price of $2.25 and $0.42 per share, respectively. The weighted
average remaining life of outstanding options under the plan at December 31,
2002 was 5.75 years.
<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>
     $0.42-0.99           1,728,919         4.80 years               401,530            $0.56
      1.00-1.99           2,217,631         6.75 years             1,660,964             1.26
      2.00-2.99           1,002,222         7.04 years                 2,222             2.25
      3.00-3.50             500,000         2.05 years                     -             3.00
    ------------------------------------------------------------------------------------------
                          5,448,772         5.75 years             2,064,716            $1.38
    ==========================================================================================
</TABLE>

                                                                            F-26
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(d) STOCK OPTIONS, CONT'D

As of December 31, 2002, the Company had warrants outstanding that allow the
holders to purchase up to 1,692,753 shares of common stock at prices between
$0.37 and $1.44 per share. The warrants may be exercised any time within five
(5) 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 2002 and 2001 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 2002 and 2001 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,                          2002              2001
      --------------------------------------------------------------------------
      Net loss:
        As reported                                $(376,160)      $(1,885,871)
        Pro forma                                  $(604,395)      $(2,002,481)
      --------------------------------------------------------------------------
      Loss per Share:
        As reported                                    $(.03)            $(.13)
        Pro forma                                      $(.04)            $(.14)
      ==========================================================================

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 the Company for $1.00 per share.





                                                                            F-27
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================

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,                                      2002              2001
       -------------------------------------------------------------------------
       Computer equipment                         $   145,365       $   224,721
       Less accumulated depreciation                  (76,161)          (94,890)
       -------------------------------------------------------------------------
                                                  $    69,204       $   129,831
       =========================================================================

Future minimum lease payments are as follows:

       YEAR ENDING DECEMBER 31,
       -------------------------------------------------------------------------
                 2003                                           $   35,563
                 2004                                                8,882
       -------------------------------------------------------------------------
       Total minimum lease payments                                 44,445
       Amount representing interest                                 (3,231)
       -------------------------------------------------------------------------
       Present value of minimum lease payments                  $   41,214
       =========================================================================

       Total obligation                                         $   41,214
       Less current portion                                        (32,783)
       -------------------------------------------------------------------------
       Long-term portion                                        $    8,431
       =========================================================================

(b) OTHER ACCRUED LIABILITIES

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

(c) BUILDING LEASE

In conjunction with the sale of its facility in December 2002, the Company
entered into a non-cancelable operating lease with the buyer to lease-back its
facilities for ten years (see Note 2). The base rent is $25,678 and will
increase by 3.5% per year. Mr. Benson provided a guarantee for the leaseback.



                                                                            F-28
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


10. CONCENTRATIONS AND CONTINGENCIES

(a) CREDIT RISK

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

(b) CUSTOMER

During 2002 and 2001, the Company had a major customer that accounted for sales
of approximately $1,727,000 and $3,163,000 or 51% and 77% of consolidated
revenue, respectively. At December 31, 2002 and 2001, the amount receivable from
this customer was approximately $0 and $228,000, 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, 2002 approximately $7.2 million,
including two change orders worth approximately $412,000 June 12, 2002 and
October 7, 2002. This contract represented 51% of the Company's revenue in 2002.
The contract will conclude on January 31, 2004. The payments on the contract are
made on a monthly basis according to a preset payment schedule and resulted in
costs in excess of billings and estimated earnings of approximately $268,800. At
December 31, 2002 the total costs estimated to complete the contract was
approximately $7,640,000.

11. OPERATING SEGMENTS

The Company's operating structure included one operating segment for 2002 and
two operating segments for 2001.

(a) SEGMENT PRODUCTS AND SERVICES

The Company merged its Space Missions Division (SMD) business segment and ISS
business segment in 2002.





                                                                            F-29
<PAGE>
                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================


(a) SEGMENT PRODUCTS AND SERVICES, CONT.

The following is a summary of operating results and assets by segment for 2001.

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

(b) METHOD OF DETERMINING SEGMENT PROFIT OR LOSS

Management evaluated the performance of its operating segments separately in
2001 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 evaluated 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.

12. SUBSEQUENT EVENTS

On January 31, 2003, the Company closed escrow on the sale of its facility in
Poway, California. The selling price of the facility was $3.2 million. The total
debt repayment from the transaction was approximately $2,407,000. The
approximate net proceeds to the Company for working capital purposes was
$635,800.

On February 10, 2003, the Company hired a new chief financial officer, who was
subsequently approved during a Board meeting on February 14, 2003. The Board
approved an at-will contract for him and granted the new chief financial officer
options to purchase up to 375,000 shares of the Company's common stock at the
closing price on date of grant. The options vest over various time periods based
on certain performance criteria and expire six (6) years from grant date.

                                                                            F-30