<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, 2000

[   ] 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: $3,893,271

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 12, 2001 was $0.84375, based on the last
sale price of $0.9063 as reported by the NASD Over the Counter Bulletin Board.

As of March 28, 2001, Registrant had outstanding 14,072,476 shares of common
stock, its only class of common equity outstanding.

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



<PAGE>

<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

PART I
------

<S>                                                                              <C>
ITEM 1.        DESCRIPTION OF BUSINESS..............................................3
-------        -----------------------

   BACKGROUND.......................................................................3
   ----------
   THE COMPANY......................................................................5
   -----------
   VISION STATEMENT.................................................................7
   ----------------
   COMPANY STRATEGY.................................................................7
   ----------------
   PRODUCTS AND SERVICES............................................................8
   ---------------------
   BUSINESS PLAN...................................................................13
   -------------
   MARKET STRATEGIES...............................................................15
   -----------------
   COMPETITION.....................................................................16
   -----------
   SPACEDEV AUSTRALIA..............................................................18
   ------------------
   REGULATION......................................................................19
   ----------
   EMPLOYEES.......................................................................21
   ---------
   INTELLECTUAL PROPERTY...........................................................21
   ---------------------

ITEM 2.        DESCRIPTION OF PROPERTY.............................................21
-------        -----------------------

ITEM 3.        LEGAL PROCEEDINGS...................................................22
-------        -----------------

ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................22
-------        ---------------------------------------------------


PART II
-------

ITEM 5.        MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............23
-------        --------------------------------------------------------

   MARKET INFORMATION..............................................................23
   ------------------
   HOLDERS.........................................................................23
   -------
   DIVIDENDS.......................................................................23
   ---------

ITEM 6.        MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........23
-------        ---------------------------------------------------------

   OVERVIEW........................................................................24
   --------
   RESULTS OF OPERATIONS...........................................................26
   ---------------------
   LIQUIDITY AND CAPITAL RESOURCES.................................................27
   -------------------------------
   FORWARD-LOOKING STATEMENTS......................................................28
   --------------------------

ITEM 7.        FINANCIAL STATEMENTS................................................29
-------        --------------------

ITEM 8.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.......................29
-------        ---------------------------------------------

                                       1


<PAGE>

PART III
--------

ITEM 9.        DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
-------        -------------------------------------------------------
               PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..........30
               ----------------------------------------------------------

ITEM 10.       EXECUTIVE COMPENSATION..............................................34
--------       ----------------------

   REMUNERATION PAID TO EXECUTIVES.................................................34
   -------------------------------
   REMUNERATION PAID TO DIRECTORS..................................................36
   ------------------------------
   EMPLOYMENT AGREEMENTS...........................................................36
   ---------------------
   EMPLOYEE BENEFITS...............................................................37
   -----------------

ITEM 11.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......37
--------       --------------------------------------------------------------

ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................38
---------      ----------------------------------------------

ITEM 13.       EXHIBITS AND REPORTS ON FORM 8-K....................................39
--------       --------------------------------

INDEX TO FINANCIAL STATEMENTS.....................................................F-1
-----------------------------

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

                                        2


<PAGE>

                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

BACKGROUND

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

         SpaceDev's overall vision is to establish itself as a commercial space
exploration and development company operating in small space. The three primary
lines of business are:

         o Micro spacecraft and missions,
         o Small hybrid propulsion space systems, and
         o The future development of new commercial revenue generating
           businesses developed around the Company's new space technologies (due
           to the number of factors involved, we cannot predict the extent to
           which we can accomplish this goal with certainty).

         SpaceDev intends to generally follow commercial business practices by
submitting fixed-priced delivery bids, as opposed to the traditional methods of
government contracting where bids are often submitted on cost plus fixed fee or
time and materials basis. The extent to which SpaceDev will bid contracts on a
non-fixed price basis cannot be accurately determined at this time, but the
overall plan is that this will be done on an exception basis only. SpaceDev
intends to generally submit fixed-priced proposals to government agencies and
non-government or quasi-government customers. For example, SpaceDev's CHIPSat
project with the University of California at Berkeley consists of a
commercial-type contract with no FAR (Federal Acquisition Regulations) clauses,
even though NASA funds the University's CHIPS project through the auspices of
the Explorers Program

         The Company's approach is to provide smaller spacecraft - approximately
250 kg mass and less - and compatible small hybrid propulsion space systems to a
growing market of commercial, international, and government customers. The small
spacecraft market is supported by the evolution and enabling of
micro-electronics, common hardware & software interface standards, and smaller
launch vehicles. Reduction of the size and mass of traditional spacecraft
electronics (i.e., black boxes) has directly resulted in allowing overall
spacecraft size, mass, and volume to be reduced over the past 10 to 15 years. A
direct example of the small spacecraft market is evidenced by smaller, lower
cost launch vehicles (i.e., rockets) that were not available ten years ago -
specifically, launch vehicles such as Pegasus, Taurus, Athena-I, Athena-II, and
Minotaur. These launch vehicles are significantly smaller than traditional
Titan, Delta, and Atlas classes of launch vehicles, and have been developed
specifically to accommodate the smaller spacecraft market (i.e., less than 1,000
kg weight class).

         SpaceDev intends to use common commercial business practices, whenever
possible, rather than the government-driven processes that dominate the space
industry. SpaceDev seeks to avoid "re-inventing the wheel" on each project and
instead intends to rely on existing technologies used in new standardized
combinations. Existing technologies include commodities that are readily
available to support space flight missions, such as catalog-type components,
where the vendor offers a product (or products) which is built to a known
specification with standard available interfaces.

         Traditionally, technologies needed to support space missions may have
required significant dollar and time investment, thereby increasing the overall
cost. These technologies are associated with higher risk, higher development
costs, higher maintenance costs, and longer schedule development - whereas use

                                       3


<PAGE>

of existing technologies serves to reduce cost, schedule, and most importantly,
operational risk since these technologies are proven and have flown in space
before.

         Since its inception, a specific SpaceDev objective has been to be the
first company to successfully define, implement and execute commercial, low-cost
deep-space missions, i.e., missions to the Moon and beyond. All prior beyond
earth orbit and deep-space missions to date - U.S. and foreign - have been
government-defined, government funded, and relatively expensive. At the
beginning of the space age, all satellites were launched and operated by
governments. After the first commercial communications satellite was put into
service, the private sector became actively involved in designing, launching and
operating communications satellites. Following this trend is the space
telecommunications sector that began decades ago, and more recently, the space
remote-sensing sector (e.g., EarthWatch, Orbview, and Space Imaging) -
consisting of satellites that gather data about weather, crops, terrain
elevations, temperatures, etc.

            Key to our strategy is a strong focus on smaller, capable,
affordable satellites and propulsion systems addressing the deep space and
Earth-orbiting markets. Smaller satellites are also a key element of enabling
lower cost Earth-orbiting missions, for which demand is rising. Demand for lower
cost earth-orbiting missions is increasing from both the government and
commercial sectors. NASA has several earth orbiting programs, including New
Millennium EO-1, SMEX, NPOESS Preparatory Bridge, ESSP, UNEX, and UNESS. NASA's
University-Class Explorer program, or UNEX are investigations characterized by
definition, development, launch service, and mission operations and data
analysis costs not to exceed $13 million total cost to NASA. University-class
Explorer missions will be launched by a variety of low-cost methods. Initially,
one launch per year is anticipated. A long term goal is to achieve multiple
launches per year for this class of Explorer missions with a substantially lower
cost per mission. The CHIPSat satellite being built by SpaceDev is the first in
this program. Analogous to the computer field, such small satellites are often
called "microsatellites" or "micro-spacecraft," with their associated
"micromissions."

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

         One final aspect of SpaceDev's disciplined strategy is the hiring of
individuals with world-class experience and skills in the areas above, combined
with strategic acquisitions of companies successfully engaged in these markets.
SpaceDev's core business is providing smaller, low-cost space products, and in
that context, SpaceDev uses "world-class experience" in the common sense of the
term to mean people whose experience in the small low-cost spacecraft field is
hard to top. For example, Charles Lloyd, SpaceDev CFO has been a top level
manager in two companies that commercialized military missiles into commercial
launch vehicles and went on to negotiate or sell over $4 billion of such launch
vehicles. Stan Dubyn, President and COO of SpaceDev, has twenty-two years of
experience managing the design and construction of small spacecraft for both
earth orbit and deep-space missions in addition to being a founder of a highly
successful company that built small spacecraft for over 11 years.

         The Company intends to gain maximum competitive advantage by developing
and offering a limited yet relevant suite of proprietary, open-standard small
satellites, hybrid space propulsion systems and related subsystem components.
"Open-standard" is a term used to describe standard hardware or software and
their interfaces such as found in personal computer boards and operating
systems, but applied to small spacecraft. Open standards often result in less
expensive products because, being "open," they can be produced by a variety of
competing sources, as opposed to proprietary standards that are often available
only from limited sources. This is part of the Company's strategy to avoid
re-inventing the wheel on each project.

                                       4


<PAGE>

THE COMPANY

         SpaceDev was founded to be a leader in "making commercial space happen"
in the New Millennium. SpaceDev believes that space will only "happen" as
additional practical ways are found to make space profitable. Since its
inception, SpaceDev has sought to be the first company to successfully define,
implement and execute profitable commercial, low-cost deep-space missions, i.e.,
robotic missions to the Moon and beyond, and to create new products to reduce
the cost of access to space.

         SpaceDev believes that the more it is oriented toward smaller,
innovative, affordable commercial space products, the better it can deliver a
higher value to its customers and shareholders. SpaceDev has two primary lines
of space hardware business:

         o Unmanned earth-orbiting micro-satellites and unmanned deep space
           micro-spacecraft,

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

           In addition to the hardware business, SpaceDev is attempting to
create new markets that generate significant space-related service, media,
tourism and commercial revenue streams well beyond the value of the space
hardware that it builds. The Company is currently focused on these three
markets:

         o Working with industry-leaders to develop the sub-orbital manned space
           plane tourism market.

         o Building the unmanned Beyond Earth Orbit commercial market with its
           Lunar Orbiter project designed and developed with SpaceDev partner,
           The Boeing Company (Boeing).

         o Selling its micro-satellites and micro-propulsion products to provide
           integrated on-orbit data delivery systems and solutions for small
           payload customers.

         Due to the number of factors involved and the Company's need for
commercial or government revenue, there can be no guaranteed assurance that any
of these markets will be developed, In order to accomplish these goals, the
Company will require partner commitments and investor funding, and there can be
no guarantee that the Company will be able to be successful in achieving these
goals.

         In February 1998, the Company acquired Integrated Space Systems (ISS),
in San Diego. ISS is now a wholly-owned SpaceDev subsidiary. Most of the ISS
employees were former launch-vehicle engineers and managers who worked for
General Dynamics (which was acquired by Martin-Marietta) in San Diego. At
SpaceDev they perform aerospace-engineering services and research and
development (R&D), with a principal focus on hybrid propulsion module products.
With the acquisition of ISS, SpaceDev's employee base increased to 20 employees
in February 1998.

         In August 1998 SpaceDev also acquired the patents and intellectual
property produced by the now-defunct American Rocket Company (AMROC), which
specialized in hybrid rocket technology (solid fuel and liquid or gas oxidizer)
for small sounding rockets and launch vehicles. AMROC's purpose and sole focus
was to design, build and test hybrid rocket motors with the intention of
producing hybrid sounding rockets and hybrid launch vehicles. Dozens of hybrid
motors were built, and hundreds of test firings were conducted by AMROC.
SpaceDev acquired from AMROC only intellectual property that was produced by
AMROC before AMROC went out of business in the mid-1990s. The acquisition of
such data has not had a material effect on SpaceDev operations other than to
provide access to hybrid rocket documents, designs and test results.

                                       5


<PAGE>

         In October 1998, the Company entered into an agreement with Space
Innovations Limited (SIL) in Newbury, England to acquire all of the shares of
SIL in exchange for common shares of SpaceDev. By mutual and amicable agreement
of both parties, this transaction was rescinded in December 1999. The primary
reason for the rescission was resultant from the difficulties that SpaceDev and
SIL encountered in working with each other due to the new highly restrictive
technology-transfer regulations instituted by the US State Department.
Technology transfer restrictions related to space products and engineering
created a barrier between SpaceDev and SIL. SpaceDev originally desired to use
SIL expertise in the design and manufacturing of space radios, but because of
restrictions on SpaceDev's ability to communicate its product enhancement ideas
to SIL, an important reason for acquiring SIL was eliminated.

         By 1998, the core SpaceDev team had refined the definition of its Near
Earth Asteroid Prospector (NEAP) mission, modeled after NASA's current
successful Near Earth Asteroid Rendezvous (NEAR) mission to the degree that NASA
formally recognized it as a commercial Mission of Opportunity. This was
significant because Missions of Opportunity had never been included in NASA's
Discovery program. Missions of Opportunity are missions to be flown by entities
other than NASA on which there is room for one or more additional experiments.
In the past, it had been assumed by NASA that Missions of Opportunity would be
government missions of other countries.

         Launch of NEAP was planned for late 2001, with a rendezvous at the
near-Earth asteroid Nereus in mid-2002. Due to program delays, the mission is
being reprogrammed to another accessible target asteroid. Multiple back-up
targets are available for this reprogramming which is a part of nominal mission
planning to accommodate schedule slips as a result of launch vehicle readiness,
funding delays, and/or priority changes. Due to the number of factors involved
and the Company's need for commercial or government revenue, there can be no
guaranteed assurance that NEAP will be launched. In order to accomplish the
launch of NEAP, the Company will require commercial or government revenue in the
form of sales, and there can be no guarantee that the Company will be able to
obtain sales sufficient to support the mission.

         Also in late 1998, SpaceDev began bidding on and winning
government-sponsored R&D contracts directly relevant to its strategic commercial
space interests. The Company competed with seven other industry teams to perform
a mission and spacecraft feasibility assessment study of proposed 200-kg Mars
micro missions and was one of five firms selected by NASA's Jet Propulsion
Laboratory (JPL). The final report was delivered to JPL in March 1999 and the
Company is now offering lunar and Mars commercial deep-space missions based on
this highly innovative space system design.

         In mid-1999, SpaceDev's ISS subsidiary competitively won an R&D
contract from the National Reconnaissance Office (NRO) to study a family of very
small, hybrid-based "micro" kick-motors for small-satellite orbital transfer
applications.

         In November 1999, the Space Missions Division was awarded a $4,995,868
million turnkey mission contract by the Space Sciences Laboratory (SSL) at
University of California, Berkeley (UCB). SpaceDev was competitively selected by
UCB/SSL to design, build, integrate, test and operate for one year a small
NASA-sponsored scientific, Earth-orbiting spacecraft called CHIPSat.

         On February 1 2000, SpaceDev announced that it had teamed with The
Boeing Company to investigate opportunities of mutual interest in the commercial
deep-space arena. On March 22, 2000, SpaceDev received notification from the
California Spaceport Authority and the California Space and Technology Alliance
(CSTA) that SpaceDev had been awarded a grant of $105,000 to be used for test

                                       6


<PAGE>

firing SpaceDev hybrid rocket motors. California's Western Commercial Space
Center also awarded SpaceDev a $200,000 grant to help build-out and equip its
satellite and space vehicle manufacturing facilities. These facilities were
completed in January 2001.

          In July 2000, the National Reconnaissance Office (NRO) granted
SpaceDev two separate, follow-on awards of $400,000 each for further hybrid
rocket engine design, test, evaluation, and development.

         In January 2001, SpaceDev Australia Limited was formed for the purpose
of creating a partnership between the Company and Space Projects Australia
Limited, an Australian business entity formed to create an Australian owned
spaceport. The primary purpose of the alliance is to expand commercial space
projects in Australia and Asia.

VISION STATEMENT

         SpaceDev remains true to the vision established in 1997, to be a leader
in "making commercial space happen" in the New Millennium. Specifically,
SpaceDev is driven by the following four precepts:

         o Brand SpaceDev as the market leader in bold, new practical and
           profitable ways of "Making Commercial Space Happen";

         o Produce highly profitable, capable and affordable space missions,
           space products and space services;

         o Leverage our successes to create a standards-based value chain of
           newer, smaller, lower cost technologies, accelerating space industry
           paradigm changes, and creating greater demand for SpaceDev products
           and services; and

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

COMPANY STRATEGY

         The SpaceDev strategy is based on the belief that advancements in
technology and the application of standard processes will make doing things in
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 demands for SpaceDev products.

         Our business strategy is summarized below:

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

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

         o Leverage government programs to fund SpaceDev R&D and product
           development;

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

                                       7


<PAGE>

           these products onto various launch vehicles offers integrated
           on-orbit data delivery systems and solutions. We believe SpaceDev is
           filling an unmet demand in this rapidly growing niche market;

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

         o Establish SpaceDev Australia and partnerships with Australian
           companies, and in particular with Space Projects Australia Limited,
           to develop the Australian and Asian markets for SpaceDev products and
           services.

PRODUCTS AND SERVICES

         SpaceDev's products and services are grouped into three business areas:
1) micro-spacecraft products and missions; 2) small space hybrid propulsion
systems; and 3) the development of new commercial revenue generating business
derived from our technology. Our business is not seasonal to any significant
extent; however, because it is a commercial concern, our business follows normal
industry trends such as increased demand during bullish economic periods, or
slow-downs in demand during recessionary periods.


         MICRO SPACECRAFT PRODUCTS AND MISSIONS

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

            Space missions consist of the overall effort, including the design
of the mission and its science, commerce or technology demonstration goals, the
design of an appropriate space vehicle (satellite or spacecraft), construction
and testing of the spacecraft, integration of one or more payloads (instruments,
experiments or technologies) into the spacecraft, integration of the spacecraft
onto the launch vehicle (rocket), the launch, and the mission control and
operations during the life of the mission. Missions can orbit the earth, travel
to another planetary body, or cruise through space taking measurements and
transmitting valuable data back to Earth. SpaceDev also sells its satellites to
customers that do not desire the total mission service, as more fully discussed
below under the heading "Business Plan."

         The Company's products can be sold into two general markets, the DEEP
SPACE (OR BEYOND EARTH ORBIT) and EARTH ORBITING markets.

                                       8


<PAGE>

         DEEP-SPACE MICRO-SPACECRAFT PRODUCTS AND MISSIONS

         In December 1998, a SpaceDev led team was awarded a contract by NASA's
Jet Propulsion Laboratory (JPL) to assess the feasibility of sending "micro
missions" to Mars for less than $US50 million total mission cost. Micro-missions
are generally in the few hundred kilogram mass range, and were popularized by
NASA studies in their search for ways to comply with NASA headquarters'
admonitions for missions to be "faster, better and cheaper." These missions
would cost approximately one-third to one-fifth of recent Mars-mission costs. An
extensive final report was submitted by SpaceDev to JPL the following March.
This work formed the basis for redefining SpaceDev's proposed Near Earth
Asteroid Prospector (NEAP) mission to be significantly smaller and lower cost
than the previous baseline, and also prompted SpaceDev to offer low-cost
commercial lunar orbiter and Mars probe-carrier missions employing a similar
design.

         On February 1, 2000, SpaceDev announced that it had teamed with The
Boeing Company to investigate opportunities of mutual interest in the commercial
deep-space arena. The purpose of the agreement is to investigate a variety of
small, low-cost, deep space mission initiatives formulated by SpaceDev that are
based on SpaceDev's commercial micro-mission work.

         During 2000, technical and corporate staff from Boeing and SpaceDev
further refined and advanced SpaceDev's concept of commercial missions to the
Moon, Mars and near-Earth asteroids, involving micro-spacecraft of 250 kg mass.
The effort also included a global assessment of the market potential for such
missions, and a technical and programmatic assessment of lower cost launch
vehicle options for such missions. The Company is now in the process of
obtaining sponsors and customers for a Lunar Orbiter mission.

         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 whereby the Company purchased all of
the outstanding common stock of ExploreSpace.com, Inc. in exchange for options
to purchase a total of 80,000 common shares of SpaceDev for $1.00 per share. We
have applied for a trademark on the name and plan to use both the name and the
website in conjunction with the Lunar Orbiter mission. We have applied for
dissolution of ExploreSpace.com, Inc., an Illinois corporation.

         EARTH-ORBITING MICRO-SATELLITE PRODUCTS AND MISSIONS

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

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

         CHIPSat is the first mission of NASA's low-cost University-Class
Explorer (UNEX) series to be approved for the implementation phase. SpaceDev
started its work on the CHIPSat project in November 1999 under the $4,995,868
commercial, fixed-price contract with UCB. Initial integration and testing of
the spacecraft's components are planned at the Company's headquarters in Poway
in 2001. Launch from Cape Canaveral on a Boeing Delta II is expected in
mid-2002, followed by one year of mission operations to be controlled at
SpaceDev's Mission Control Center in Poway, California. In 2000, as we reported
on the Third Quarter 10QSB, the Company reviewed this position at year-end and
determined that the total costs at the end of the program will exceed the likely
revenue. As a result, the Company has accrued a loss of $861,000, we believe
that this estimated loss covers all possible contingencies through the life of
the program. Included in the review was an expected increase of $600,000 to the
contract value to reflect added scope. During 2000 and 1999, CHIPsat accounted
for sales of approximately $2,052,000 and $1,130,000 or 53% and 23% of
consolidated revenue, respectively. At December 31, 2000 and 1999, the amount
receivable on the contract was approximately $188,000 and $0, respectively.

                                       9


<PAGE>

         SpaceDev believes that the CHIPSat contract establishes the Company as
a significant competitor in the smaller-satellite arena, and it expects this
perception to spread rapidly among NASA, DoD, university/R&D, and foreign and
commercial customer bases during the next several months. The CHIPSat mission
was awarded in the first round of NASA's smallest and least expensive missions
ever - the University Explorer (UNEX) program. NASA caps these missions at about
$13 million total. This was the largest and first significant competition
SpaceDev had participated in at the time, and as a result of winning the
competition to design the mission and spacecraft, build, test and conduct the
mission, SpaceDev believes this win helped establish SpaceDev's credentials as
being able to successfully compete with older and more established companies.
Winning the UNEX mission has helped to create a market `niche' for SpaceDev and
demonstrates NASA's confidence in SpaceDev to take on the responsibility for
design and development of low-cost science missions.

         Work is progressing on the CHIPSat contract. The Company successfully
passed the Confirmation Review with the customer in late 2000, at which time a
review of the technical progress to date was conducted and the decision was made
to commit to full-scale development. The satellite is now in production at the
SpaceDev facility in Poway, California.

         SMALL HYBRID PROPULSION SPACE PRODUCTS

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

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

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

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

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         SpaceDev is developing a commercial product line of affordable small
space vehicles with broad range capabilities, called orbital MTVs. This product
line uses hybrid motors, and currently consists of three MTV designs from 25 kg
to 100 kg in size. For each size, there are three degrees of intelligence, from
the low-end "dumb" micro-kick motor, to the high-end intelligent version which
includes SpaceDev's highly capable HPX-21 single board space computer product,
SpaceDev's MST-21 S-band variable power transceiver product, and such features
as three axis stabilization.

         Current MTV versions fit the Shuttle and most commercial launch
vehicles designed to carry small secondary spacecraft to earth orbit and beyond.
SpaceDev plans include larger manned and unmanned hybrid engines and orbital
maneuvering vehicles for commercial customers and government missions.

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

         DEVELOPMENT OF NEW COMMERCIAL REVENUE GENERATING BUSINESSES DERIVED
         FROM THE COMPANY'S SPACE TECHNOLOGY.

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

         THE SUB-ORBITAL MANNED SPACE PLANE TOURISM MARKET

         SpaceDev is developing a sound conceptual design for a moderately
sized, clean, safe, affordable hybrid rocket motor for manned, sub-orbital use.
Nineteen organizations have officially registered as contestants for the X-Prize
(www.xprize.org), a competition in which the $10 million prize will be awarded
to the first privately funded and build spacecraft capable of lifting three
humans to a sub-orbital altitude of 62 miles on two consecutive flights. We have
identified and contacted a number of known designers of airframes believed
capable of winning the $10 million X-Prize competition for reusable manned
launch vehicles. While winning the X-Prize is not a SpaceDev objective, winning
one or more contracts to develop propulsion systems for one or more credible
teams could create favorable publicity and the potential of raising additional
capital as SpaceDev meets its rocket motor development milestones. We believe
that a hybrid rocket engine is critical to building a safe affordable space
plane to enter this market in the near term, and one of SpaceDev's goals is to
be the rocket motor supplier for manned space planes.

         There is growing international recognition that low Earth orbit travel
will soon be possible for businesses and individuals. Japan's long-range space
program calls for advancing transportation technology so that the average person
can fly into space, and so that nations can take advantage of the plentiful
resources of space. Recently, an official of the Tanegashima Launch Facility
(Japan's major spaceport and premier launch site) projected that roughly 75% of
the launches twenty years from now will involve space tourism.

         A large number of people are paying over $25,000 for exotic vacations
and one space travel company (Space Adventures in Arlington, Virginia) claims it

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has about $2 million escrowed for prepaid sub-orbital space tourism flights.
Public space transportation activity holds a potential for commercial revenues,
as true commercial consumer markets for space tourism become a reality.

         Before this happens, basic issues about the feasibility and economics
of commercial human space travel must be addressed. X-Prize competitors will
demonstrate the technical and operational capability needed by vehicles that
would carry customers into space.

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

         As the next step, SpaceDev intends to create final and detailed
engineering designs, work breakdown analyses, and cost and revenue estimates for
the hybrid rocket motor business. The last phase of the program is to build and
test fire full-size hybrid rocket motors designed for use in manned space
planes. SpaceDev plans to build two motors: the test and qualification motor,
and one production motor available for sale and delivery to the first customer.

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

         SpaceDev worked under contract with The Boeing Company beginning in
February 2000, to investigate the launch of the world's first commercial Beyond
Earth Orbit mission, the "Lunar Orbiter." The Lunar Orbiter is designed to
provide an historic and unique stream of live HDTV video of moonscape and earth
views never before seen by the public. The lunar satellite is based on a design
prepared by SpaceDev under contract to NASA's Jet Propulsion Lab (JPL) as part
of their Mars micro-mission program. It has been projected by outside
consultants that this dramatic lunar content will be viewed on earth through
network, cable, and pay TV, as well as the Internet.

         The mission itself is currently planned to launch in early 2003, but is
contingent upon raising the funds required to complete the project. The program
will last for up to eighteen months. Project revenues would be generated by the
sale of sponsorships, media rights, science data, educational programs, and
movie and game rights and from a variety of other smaller sources. A key
component of the mission is planned to be a comprehensive educational program
for elementary and high school students around the world. As part of this
educational tie-in, SpaceDev will create and distribute educational material to
schools and will provide live updates on its website.

         INTEGRATED SMALL ON-ORBIT DATA DELIVERY SYSTEMS

         In order for the small satellite market to grow, it is in SpaceDev's
long-term strategic interest to assist the market in finding such affordable
launch opportunities. SpaceDev is working with several launch providers to
identify and market these opportunities and to provide customers with a complete
on-orbit data delivery service that can combine our spacecraft and hybrid
propulsion products. These innovative, low-cost, turnkey launch solutions would
enable us to provide one stop shopping for launch services, spacecraft, payload
accommodation, total flight system integration and test and mission operations.
The customer only needs to provide the payload, and SpaceDev performs all the
tasks required for the customer to get to orbit and to get their data.

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         We are working in three areas to develop this capability: an expansion
of the work done on the CHIPSat program; design of a system combining
commercially available Phantom F-4D jets and hybrid MTVs; and the use of a large
launch system for secondary payloads.

         The CHIPSat approach benefits from our design and development
experiences of making CHIPSat for a Boeing Delta-II launch vehicle. CHIPSat has
unique capabilities to accommodate up to 30 kg of pure technology payload mass.
Our concept is based on the work we have done with Boeing to integrate the
NASA/UC Berkeley CHIPSat mission. Our CHIPSat satellite supports about 30 kg of
payload technologies to low Earth orbit (500-700 km). CHIPSat will launch in
mid-2002. There are 6 to 7 missions manifested on Delta-II launches each year
over the next five years, providing an ongoing source of launches for SpaceDev's
affordable satellites.

         SpaceDev has formed an exclusive team with a launch partner (Space
Launch Corp. in Irvine, California) that has the unique capabilities to provide
all elements to accommodate the range of 28 kg to 50 kg of pure technology
payload mass onto our spacecraft. We are confident that total system cost,
including launch and the first 30 days of on-orbit checkout and operations, will
not exceed $15 million per mission, which is substantially below our
competitors. SpaceDev offers dedicated, reliable, accurate, and affordable
access to Low Earth Orbit (LEO) based on a 3-stage air-launch system with an
innovative fourth stage: a hybrid fourth stage Maneuvering Transfer Vehicle
(MTV) developed by SpaceDev for the National Reconnaissance Office (NRO) which
enables multiple burns of the engine to achieve final orbit.

         We work with customers to evaluate efficient accommodations for their
payloads, in order to establish standard mechanical and electrical interfaces to
our MTV stage. We will also perform trajectory trade-offs, which will then be
used to define the final orbit capabilities with respect to payload mass. Our
Access-to-Space system incorporates a small, reliable, low cost expendable
rocket, which is air-launched from one of four commercially available F-4D
Phantom jets.

BUSINESS PLAN

         SpaceDev's corporate goal is to increase the intrinsic value of the
Company by providing proprietary, reliable, low-cost access to space through
innovative solutions currently lacking in the marketplace - low cost
space-mission solutions involving micro satellites (less than 250 kg) and even
smaller satellites (less than 50 kg).

         The Company intends to define and market proprietary missions and
spacecraft based on open standards. "Open-standard" is a term used to describe
industry standard hardware or software and their interfaces such as found in
personal computer boards and operating systems, but applied to small spacecraft.
Open standards often result in less expensive products because being "open" they
can be produced by a variety of competing sources, as opposed to proprietary
standards that are often available from limited sources.

         We intend to continue developing new products and services the
Company's management believes are needed in the marketplace.

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

                                       13


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         Our staff and some carefully selected external partners have a combined
experience base with such systems - direct experience in defining, implementing
and operating several dozen small-spacecraft missions.

         SpaceDev customers will come from a variety of different markets, but
they will all have the common requirement for a low cost small-space system.
That is the "market niche" that SpaceDev intends to fill. Customer requirements
will emanate from various needs. Some customers, such as entertainment or
Internet content companies, may want a small satellite to deliver pictures or
streaming from outer space that can be integrated into theme parks or Internet
sites. Some customers, such as foreign countries, may want to buy small
satellites commercially to be a delivery system for their science instruments as
they explore the inner solar system. Customers, such as NASA may want to buy
small satellites as a part of their traditional programs or perhaps buy data
from the satellites on a commercial basis. While other customers, such as
universities, may want to buy satellites as a delivery system for experiments
designed by students and faculty. Finally some customers, such as the Air Force
or the National Reconnaissance Office may want to buy our products to test new
technologies in space--sometimes procured in a traditional manner and sometimes
commercially. At the present time, one customer, the University of California,
Berkeley, is forecasted to account for about 35% of our expected 2001 revenue
through the CHIPSat project. The Company's preferred space-mission
implementation approach has the following attributes:

         o SpaceDev-defines products and services from a catalog, rather than
           designs responding to government-supplied specifications
         o SpaceDev focuses on "Small Space," involving turnkey mission
           solutions and application of proven commercial business practices
           such as offering launch and mission space insurance options through
           our space insurance broker of record, International Space Brokers,
           competitive pricing and creative billing arrangements as part of our
           commercial space mission packages
         o SpaceDev uses relatively simple and elegant, rather than complex and
           bulky, (elegant meaning meeting or exceeding the technical
           requirements with less complexity) programmatic and technical
           solutions

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

         o 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 Creates an easy and convenient way for customers to contract for
           space missions and/or spacecraft subsystems
         o Lowers total project costs and therefore provides greater value and
           increases return on investment for SpaceDev and its customers
         o Creates barriers to entry and competition from competitors

         Though the Company prefers to define and execute complete space
missions for clients, it also offers customers space-delivery services (for
customer-supplied science or technology demonstration payloads); integration and
launch services (for a customer-supplied spacecraft); space hardware from
commercial price lists (for customer spacecraft); and science-instrument or
technology-demonstration data-set products (from SpaceDev-supplied payloads).
Data sets are end-item products (e.g., data, photographs) that consist of the

                                       14


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results of a science experiment or technology demonstration, and are used to
generate new scientific knowledge or to describe performance results when new
technology is being tested in space. These features of the Company's business
approach place it more into the template that existed during the early days of
the microcomputer technical revolution rather than into the classical patterns
of the existing government-dominated, limited-profit margin, aerospace industry.

MARKET STRATEGIES

         MICRO SPACECRAFT PRODUCTS AND MISSIONS

         The Company intends through its commercial deep space and
Earth-orbiting missions to prove its viability and establish itself as the
premier commercial space-exploration and development company. Once it has
established its capabilities for insured, high quality, fast turnaround and
low-cost systems and missions, the Company believes it will be able to
effectively compete, develop new markets and expand existing markets for space
exploration and other applications.

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

         DEEP-SPACE PRODUCTS AND MISSIONS. Since all deep-space missions to date
world-wide have been defined and executed by various government agencies, our
plan for defining and executing such missions as a commercial venture places the
Company at the forefront of a new way of doing business in this arena. Under
such conditions, questions naturally arise within the space community about
whether the Company and its partners are capable of successfully performing in
this arena. The Company's approach is two-fold: (1) Selectively compete for
deep-space related work (R&D studies and development efforts as well as
missions) against established space-systems companies, and (2) Define, develop
and execute space missions independently of government agencies, as evidenced by
our concerted effort to define and cultivate alternative sponsors for these
missions, such as other commercial companies, research and technology consortia,
non-U.S. space interests, etc. SpaceDev's win of the JPL-funded Mars
Micromissions study in 1998 is representative of approach (1) above, while its
efforts to define and promote the Lunar Orbiter streaming video missions fit
approach (2) above.

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

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

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<PAGE>

         For non-governmental sponsors, the Company prefers to deal directly
with the customer(s). Currently, our biggest customer (in terms of dollar
revenue) is a non-government customer: the University of California Berkeley,
which is an academic institution. UC Berkeley provides the PI (Dr. Mark
Hurwitz), who has been given a contract by the NASA Explorer Office to provide
the CHIPSat mission data set. Dr. Hurwitz, as the PI for this mission, exercised
his power as the PI to contract separately with SpaceDev to provide for the
spacecraft bus and mission operations services.

         SMALL HYBRID PROPULSION SPACE PRODUCTS

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

         Recognizing this problem, government and commercial industry have been
performing research and development in an attempt to reduce the cost per
kilogram (or pound) to orbit for small spacecraft. Paul Coleman, president of
the Universities Space Research Association (USRA), has challenged the space
industry with launch-cost targets priced between $2.0 million and $3.5 million
for a 300-kg spacecraft. Clearly, today's commonly used launch-vehicle
technologies cannot achieve this goal. Launch service users have pinned their
future hopes on reusable launch vehicles, which appear to be ten years or more
away from day-to-day use, to lower launch costs.

         In the near term, the only real hope for low cost launches for small
spacecraft is to find an alternative path to space using a secondary ride system
such as the Ariane Structure for Auxiliary Payloads (ASAP) or a low-cost launch
system yet to be developed. The Company is working with a variety of partners to
developed more affordable launch opportunities for small spacecraft. We believe
that this will increase the market for micro-spacecraft as well as small hybrid
propulsion systems.

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

COMPETITION

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

         The primary domestic competition for micro-spacecraft products missions
in the targeted SpaceDev markets comes from such companies as One-Stop Satellite
Shop, Orbital Sciences Corporation, Space Dynamics Laboratory and AeroAstro. In
addition to private companies there are certain universities in the United
States that have the capability to produce reasonably simple satellites such as
Weber State in Utah and Arizona State University (ASU) in Phoenix. Within the
industry it is generally known which companies participate in what kinds of
projects, both by dollar range and type of mission. Catalog Indefinite Delivery
Indefinte Quantity (IDIQ) contracts that now exist within NASA and DOD have
additionally provided insight into various aerospace contractors' cost and
capabilities envelopes.

                                       16


<PAGE>

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

         At these conferences and in many private conversations with space
industry colleagues, space customers, and senior space officials, SpaceDev is
not aware of any established companies such as TRW, Lockheed, Boeing, Loral,
which have expressed corporate goals to design and build inexpensive micro
spacecraft for commercial deep space missions or for any other missions which
would be in direct competition with SpaceDev. In fact, as a result of massive
consolidation of major space companies over the past seven years (e.g.
Fairchild, Martin-Marietta, Hughes Space & Communications, Rockwell, McDonnell
Douglas, and GE Astro Space), these "new" mega-aerospace companies cannot
justify the lower ROIs associated with smaller and lower cost space systems.

         By way of example, NASA's University Explorer program funds NASA's
smallest and least expensive space science missions. SpaceDev is the first and
only for-profit company to be awarded a contract to design and conduct such a
mission. The only other UNEX mission selected by NASA has been recently
terminated; the spacecraft integrator was a university and not a commercial
company, leaving SpaceDev as the sole commercial company engaged in building
this category of NASA spacecraft. Additionally, SpaceDev believes it is the only
company that has publicly declared the availability of commercial deep space
missions as products. The clear competitor in the international arena is Surrey
Satellite Technology Limited (SSTL) in the United Kingdom. Swedish Space
Corporation is also able to compete in the small-satellite arena; they were
named in November 1999 as the prime contractor for the European Space Agency's
(ESA) SMART-1 technology-demonstration spacecraft to the Moon.

         The Company is not aware of any current direct and credible competition
in the field of COMMERCIAL deep space exploration and development. Firms such as
those mentioned above and other R&D laboratories (e.g., JPL, Applied Physics
Laboratory, ISAS in Japan) have the technical knowledge and experience to design
and execute missions similar to NEAP and CHIPSat, but they are primarily
government agencies, Federally Funded Research & Development Centers (FFRDCs) or
foreign competitors, where in each case, there exists some level of government
restriction on competing within the commercial industry. We believe that federal
procurement regulations and accounting systems (e.g. total cost accounting
mandates) make it difficult for these organizations to viably compete on price
with the Company.

         Governments and government programs like those in NASA, ESA and the
Japanese space agencies (NASDA and ISAS) have executed many missions over a
period of many years, but all of these are characterized by long lead times,
high expense, little flexibility, and generally uninsured payloads - coupled
with the fact that many foreign "commercial" space programs are heavily
subsidized by their respective governments, usually in an effort to foster
organic capabilities (with a long-term goal to maintain space development
sovereignty). It is our opinion that NASA Administrator Dan Goldin has done an
outstanding job in reducing both cost and schedule of the organization's science
missions , and while the typical NASA mission cost over the past ten years has
declined from billions of dollars to hundreds of millions of dollars, SpaceDev
is targeting missions costing only tens of millions. Given the overhead and
culture of such agencies and their stable of aerospace contractors, it may be

                                       17


<PAGE>

difficult for the government-defined and managed programs to lower costs much
more, particularly in light of the "new scrutiny" that has come about over the
past 18 months, mostly as a result of the twin Mars failures in late 1999.

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

         The Company firmly believes that a truly reusable launch system will
ultimately provide the low cost means of enabling the repeatability and
reliability necessary to support access to space in the years to come. There
exists today only one "reusable" launch system, and in actuality, it is only
partially re-usable: the Space Shuttle (the "Space Transportation System," or
"STS") - which additionally is very expensive (~$400 Million per launch), high
maintenance, highly fractionated over several geographic regions of the country,
and prone to the bureaucratic red-tape associated with being both a
government-provided and manned space system. Over the past five years, a
multitude of companies such as Beale Aerospace, Kelly Aerospace, Rotary Rocket,
Kistler Space and Pioneer Rocketplane have been working on a variety of designs
to capture this market. The most notable attempts at developing re-usable
vehicles are the now-cancelled NASA co-sponsored X-33/Venture Star (with a
Lockheed Martin-led consortium), the X-34 (with an Orbital-led consortium) and
the X-38 (led by Boeing).

SPACEDEV AUSTRALIA

         In January 2001, SpaceDev Australia Limited was formed for the purpose
of creating a strategic alliance between SpaceDev and Space Projects Australia
Limited, an Australian business entity formed to create an Australian owned
spaceport. The purpose of the alliance is to expand commercial space projects in
Australia and Asia. SpaceDev and SpaceDev Australia will use the alliance to:

         o Develop partnerships in Australia designed to build the Australian
           space enterprise;
         o Market and sale our hybrid rockets and satellites and an integrated
           on-orbit system in Australia and Asia;
         o Develop a man-rated hybrid space plane motor; and
         o Design, sell and market development of SpaceDev's planned commercial
           Lunar Orbiter project.

         Space Projects Australia Ltd. (SPA) will primarily act as the
facilitator for space projects developed and designed by SpaceDev Australia and
SpaceDev by providing local and particular knowledge, assets and networks to
provide the required Australian regulatory compliance, launch sites, research
and development facilities, mission and operational services and marketing
support within the Asian and Australasian arena. SPA has obtained a letter of
approval to sublease a portion of the Woomera Prohibited Area for the purpose of
developing a spaceport facility. The Woomera Prohibited Area is located in South
Australia and covers an area of about 127,000 square kilometers. The lease would
cover approximately 2,200 hectares until 2037, with further options to 2050.

         SpaceDev Australia is authorized to issue two classes of common stock,
with equal voting rights. SpaceDev owns eleven million shares of Class A common
stock, while SPA owns one million shares of Class A common stock. SpaceDev
Australia is planning an offshore offering in Australia for up to 8.89 million
shares of Class B common stock. A Prospectus has been submitted to the
Australian Securities and Investment Commission and the Company is now awaiting
approval of the prospectus to begin selling securities. Because the Class B

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<PAGE>

common stock will have the same voting rights as the Class A common stock, the
offering represents substantial dilution of SpaceDev's equity interest in
SpaceDev Australia. SpaceDev Australia will be funded by SpaceDev with eight
hundred eighty-nine thousand (889,000) shares of its common stock, pursuant to
Regulation S of the Securities Act of 1933, upon the first sale in the offering.
Shares issued to SpaceDev Australia by SpaceDev under Regulation S are expected
to be distributed by SpaceDev Australia to investors in the Australian offering
as an immediate dividend to its shareholders. The Regulation S shares may not be
resold or distributed into the United States or to United States citizens living
abroad absent registration with the U.S. Securities & Exchange Commission or
compliance with Rule 144 of the Securities Act of 1933, including the holding
periods set forth in subsections (d) and (k) of Rule 144. SpaceDev Australia and
SpaceProjects Australia Ltd. will be required to pay dividends equal to 20% of
the net operating profits of SpaceDev Australia before tax.

         Pursuant to the terms of its agreement with SPA, SpaceDev will receive
six hundred thousand (600,000) shares of Class C common shares in SPA's common
stock. SpaceDev will issue three hundred eleven thousand (311,000) shares of its
common stock to SPA pursuant to Regulation S of the Securities Act of 1933.

         The offering of SpaceDev Australia common stock is intended to raise a
maximum of eight million Australian dollars ($8,000,000 AUS), which is the
equivalent of approximately four million six hundred thousand U.S. dollars
($4,600,000). Pursuant to the terms of its agreement with SPA and the formation
of SpaceDev Australia, SpaceDev will be entitled to net proceeds from the
offering of two million six hundred thousand dollars ($US2,600,000) in the event
the maximum offering is sold in Australia. We intend to use SpaceDev's portion
of the net proceeds to open the SpaceDev Australia office in Sydney, Australia
as a base to expand its sales and marketing efforts in Australia and throughout
the Asian region. SpaceDev also intends to use the proceeds to partner with one
or more established Australian space companies for micro-satellite assembly and
testing activities using SpaceDev's micro-satellite designs and subsystems and
to initiate an intern program to identify outstanding Australian space
engineering students as potential future employees.

         SPA will receive one million eight hundred thousand U.S. dollars
($1,800,000) of the net proceeds in the event the maximum offering is sold. SPA
intends to use its portion of the net proceeds to (1) establish capital asset
acquisitions such as launch site research and development facilities,
telemetry/GPS and communications, mission control and payload integration
facilities at Woomera; (2) establish capital works such as launch site clearance
and preparation, environmental and bio-diversity compliance and development
planning costs; and (3) support administration, marketing and personnel
operations of SpaceDev Australia.

         We believe that SpaceDev Australia will allow SpaceDev to expand the
market for its products and services into the Australian and Asian markets, and
increase world awareness of the commercial space industry in general and
SpaceDev's products in specific.

REGULATION

         The Company's business activities are regulated by various agencies and
departments of the U.S. government and, in certain circumstances, the
governments of other countries. Several government agencies, including NASA and
the U.S. Air Force, maintain Export Control Offices to ensure that any
disclosure of scientific and technical information (STI) complies with the
Export Administration Regulations and the International Traffic in Arms
Regulations (ITAR). Exports of the Company's products, services, and technical
information require either Technical Assistance Agreements (TAAs) or licenses
from the U.S. Department of State depending on the level of technology being
transferred. This includes recently published regulations restricting the
ability of U.S. based companies to complete offshore launches, or to export
certain satellite components and technical data to any country outside the
United States. The export of information with respect to ground-based sensors,

                                       19


<PAGE>

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

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

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

         It is anticipated that the Company will need to utilize the Deep Space
Network (DSN) on some of its 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 DSN currently
consists of three deep-space communications facilities placed approximately 120
degrees apart around the world: at GOLDSTONE [http://gts.gdscc.nasa.gov/], in
California's Mojave Desert; near Madrid, Spain; and near CANBERRA
[http://tid.cdscc.nasa.gov/], Australia. This strategic placement permits
constant observation of spacecraft as the Earth rotates, and helps to make the
DSN the largest and most sensitive scientific telecommunications system in the
world. The network is a facility of NASA, and is managed and operated for NASA
by the Jet Propulsion Laboratory. The Telecommunications and Mission Operations
Directorate (TMOD) manages the program within JPL. Coordination for the use of
this facility is arranged with the Telecommunications and Mission Operations
Command (TMOC).

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

                                       20


<PAGE>

EMPLOYEES

         As of the date of this annual report, the Company employs approximately
twenty-five (25) persons full and part-time, of which most are aerospace,
mechanical and electrical engineers. The Company expects to hire other personnel
as necessary for product development, quality assurance, sales and marketing and
administration. In addition, due to the nature of its business, the Company
anticipates that it may become necessary to lay off other employees whose work
is no longer required by the Company to maintain operations in order to prevent
cost overruns.

         SpaceDev does not have any collective bargaining agreements with its
employees and believes its employee relations are good. An employee
stock-incentive program and an employee stock-purchase program were approved at
the 1999 annual shareholders meeting and have been implemented.

INTELLECTUAL PROPERTY

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

         In August 1998, SpaceDev acquired license to intellectual property
(including patents and trade secrets) from an individual who had acquired them
from the former American Rocket Company (AMROC), which specialized in hybrid
rocket technology. The Company issued warrants to this individual to purchase a
minimum of 100,000 and a maximum of 3,000,000 shares of its Common Stock over
the next 10 years, depending on the Company's annual revenues related to sales
of hybrid technology-based products.

         In 1999, the Company began preparing a new patent application
addressing a technological need in the accommodation and deployment of secondary
payloads on launch vehicles. This patent application specifically addresses a
need to enable lower cost, more frequent access to space on existing or planned
(i.e., government funded) launch vehicles. It expects to submit the application
in 2000.

ITEM 2.  DESCRIPTION OF PROPERTY

         SpaceDev owns over 25,000 square feet of office, engineering and
manufacturing space in Poway, CA. In December 1998, the Company purchased its
headquarters facility in the Poway Industrial Park complex and proceeded to
invest $300,000 in modifications and improvements before moving in mid-May
(SpaceDev corporate and ISS). 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. By late
1999, the Company had defined plans for outfitting the building with a 1,800
square foot clean room facility to support spacecraft integration and additional
space for testing, an avionics test area, machine shop and shipping/receiving
area. All of these improvements, except the clean room, were completed in 2000.

          The build-out of the clean room was completed on March 1, 2001. The
project consisted of the addition of upgraded air-handling equipment, new doors
and new floor coverings. The space for the clean room was already a part of the
existing structure that SpaceDev owns.

                                       21


<PAGE>

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

         On February 23, 2000, the Company signed a $1,330,000 note with a new
lender to refinance the aforementioned debt. The note calls for 300 monthly
payments of $12,091, which include principal and interest at the bank's prime
rate (9.50% at December 31, 2000) plus 1.5%. The note matures on March 1, 2025.
At December 31, 2000, the outstanding balance was $1,322,328.

         In December 1998, the Chief Executive Officer of the Company entered
into a $500,000 loan agreement with another lender to finance additional costs
of its new facility. This liability was assigned to the Company and called for
59 monthly interest payments at 12.23% and a balloon payment of $505,000,
including interest, on December 17, 2003. At December 31, 2000 and 1999, the
outstanding balance on this loan was $499,671 and $500,000, respectively. The
notes are personally guaranteed by the Chief Executive Officer of the Company.

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

ITEM 3.  LEGAL PROCEEDINGS

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

         On December 17, 1999, the Company's Board of Directors entered into a
Mutual Release and Rescission of Agreement (Release Agreement) to rescind the
original acquisition of SIL, effective October 1, 1998. SIL has since filed for
bankruptcy under the laws of England. On or about September 5, 2000, SpaceDev
received a demand from T&G under the Deed of Counter Indemnity for $300,000
Australian Dollars (approximately $162,600 United States Dollars) based on SIL's
alleged failure to perform under the contract. SpaceDev is in the process of
investigating the claim(s) made against the performance bond upon which this
demand is being made. In the event SpaceDev is required to indemnify T&G on the
demand, it is SpaceDev's intention to pursue indemnification against SIL to the
extent allowed by the bankruptcy laws of England. At this time, management
believes it is not likely that this claim will be pursued against the Company
based on information received regarding the continuation of the FEDSat project
in Australia.


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

         No matters were submitted to a vote of the Company's security holders
during the fourth quarter of its fiscal year ended December 31, 2000.

                                       22


<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

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

<TABLE>
<CAPTION>
          QUARTER ENDING          QUARTERLY HIGH                  QUARTERLY LOW
          <S>                <C>             <C>             <C>              <C>
          3/31/2000          2               $2.00           25/32            $0.78125
          6/30/2000          1 7/8           $0.875          1/2              $0.50
          9/29/2000          1 11/16         $1.6875         3/4              $0.75
          12/29/2000         1 1/4           $1.25           7/8              $0.875
          3/5/2000*          1 1/64          $1.015625       1 1/64           $0.8125
</TABLE>


*Reflects partial period.

HOLDERS

         As of March 1, 2001, there were approximately 173 holders of record of
the Company's common stock. The Board of Directors believe that the number of
beneficial owners substantially greater than the number of record holders
because a significant portion of our outstanding Common Stock is held in broker
"street names" for the benefit of individual investors.

DIVIDENDS

         The Company has never paid a cash dividend on its Common Stock. Payment
of dividends is at the discretion of the Board of Directors. The Board of
Directors plans to retain earnings, if any, for operations and does not intend
to pay dividends in the foreseeable future.

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

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

OVERVIEW

         During 1998, SpaceDev acquired Integrated Space System ("ISS") and
Space Innovation Limited ("SIL"). 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 ISS. ISS provides small bybrid propulsion systems.

                                       23


<PAGE>

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 excess of
the calculated purchase price of the approximately $164,000 of net assets
acquired was capitalized as goodwill and is being amortized over sixty months.

         On October 1, 1998, the Company entered into an agreement with Space
Innovations Limited (SIL) in Newbury, England to acquire all of the outstanding
common shares of SIL in exchange for shares of SpaceDev common stock. By mutual
and amicable agreement of the parties, this transaction was rescinded in
December 1999 primarily as a result of the difficulties the Company and SIL
encountered in working with each other under new highly restrictive technology
transfer regulations instituted by the U.S. Department of State. The Release
Agreement resulted in the retirement of the 1,000,000 shares of the Company's
common stock which had been issued to the former shareholders of SIL, the
cancellation of all outstanding options for Company stock and the cancellation
of the acquisition price payable. The transaction was recorded as a purchase of
treasury stock. In accordance with Accounting Principles Board Opinion No. 29,
"Accounting for Non-monetary Transactions," the transaction was recorded as a
decrease to stockholders' equity. Therefore, $423,345 was recorded as a decrease
in the Company's additional paid-in-capital on December 17, 1999.

         The significant components of the amount recorded in 1999 as a
reduction to additional paid-in capital were as follows:

    Loss on unamortized goodwill                                $ (1,929,000)
    Gain on extinguishment of acquisition price payable            1,000,000
    Net liabilities disposed of from SIL                             506,000
                                                               --------------
                                                               $    (423,000)
                                                               ==============

         The Company was previously a guarantor on a bank line of credit used to
finance SIL's operations. Under terms of the Release Agreement, SIL agreed to
apply 25 percent of the proceeds from each payment received on a specific
contract until the bank loan was paid in full. Once the loan had been paid in
full, the loan agreement was to be terminated, releasing the Company's guarantor
obligation. At December 31, 1999, the outstanding balance on the bank line of
credit was approximately $386,000. On October 5, 2000 the amount of the line
guaranteed by the Company was paid.

         In 1998, operating activities included engineering technical services
work for aerospace customers and continued development of NEAP preliminary
designs and mission analysis. During 1999, operating activities included
preliminary design and conceptual studies for the CHIPSat program, engineering
technical services and continued work on the NEAP mission. SpaceDev's employee
base increased with the acquisition of ISS to 20 employees in February 1998.

         In 1998, SpaceDev entered into a fixed price contract with the Jet
Propulsion Laboratory (JPL) to provide mission support for the Deep Space
Tracking Network. JPL's main task was to coordinate the NEAP mission trajectory
analysis into their Deep Space Network Plan. SpaceDev paid JPL $10,000 for this
phase of work. The nature of the contract is highly technical. Quoting from the
statement of work: "Supported work will focus on NEAP telecommunications system
analysis and Deep Space Network/Advanced Multi-Mission Operations System
(DSN/AMMOS) mission support assessment." In plain English, this means JPL will
work to understand NEAP's communication needs in relation to other missions
which might be flying at the same time, relative to the Deep Space Network
capacity to handle multiple missions simultaneously. This is a standard study
performed in advance of all proposed deep space missions.

                                       24


<PAGE>

         On November 20, 1998, SpaceDev initiated its DSN support contract with
JPL. The total cost of the effort was agreed to be $35,000. Approximately
one-third of the work has been performed to date at a cost to SpaceDev of
$10,000. As additional planning work is required to be performed by JPL under
the contract, to stay current with the NASA and JPL planning process as it moves
forward, more of the agreed upon tasks will be performed by JPL. SpaceDev will
pay the remaining balance of $25,000 as those tasks are completed by JPL, which
could take through the end of 2001

         On June 23, 1999, the Company filed for a registration statement with
the State of Colorado for units consisting of one share of $.0001 par value
common stock and one re-pricing warrant to purchase one share of common stock.
The primary purpose of the offering was to raise $350,000 under Rule 504 of the
Securities Act of 1933 to finance development of a hybrid rocket. That
registration statement was made effective by the State of Colorado on August 26,
1999, providing for a per unit price of $1.50 per share. Due to fluctuations in
the market price of the Company's common stock, the Company was forced to
negotiate a per unit price based on the five-day trading average, less thirty
percent. The entire offering of $350,000 was sold to a single investor in
Colorado at a price of $0.91 per unit. Following that sale, the Company
determined to raise the aggregate offering price in order to allow it to obtain
funding during preparation of its Form 10-SB Registration Statement. The
registration statement was amended for a total aggregate offering price of
$730,000, with a per unit price based on the negotiated amount paid by the
initial investor, and was made effective by the State of Colorado on October 13,
1999. Following effectiveness of the post-effective amendment, the Company sold
an additional $10,000 in units under the offering at a price of $0.83 per unit.

         The repricing warrants were convertible into common stock of the
Company if the market price of the Company's common stock dropped below the
price paid per unit in the offering during the 150 days immediately following
issuance. The conversion formula was to be based on a minimum market price of
$1.25 per share. If the 150-day average closing bid price of the common stock
exceeded the unit price in the offering, the warrants would automatically
expire. Since the units were issued to investors at a discount, the warrants are
not convertible under the conversion formula, which uses a minimum market price
of $1.25, since any calculation under the formula results in a negative number.
As a result, no further shares will be issued as a result of the issuance of the
re-pricing warrants.

         In November 1999, SpaceDev was awarded a $4,995,868 million mission
contract by the Space Sciences Laboratory (SSL) at University of California,
Berkeley (UCB). SpaceDev was competitively selected by UCB/SSL to design, build,
integrate, test and operate for one year a small scientific, Earth-orbiting
spacecraft called CHIPSat. The CHIPSat contract will conclude on December 31,
2003. Revenues for 2000, 2001 and 2002 are expected to be approximately $2.0
million, $1.4 million and $1.1 million. The payments on the contract are made on
a monthly basis according to a preset payment schedule. This was the Company's
first production contract. As we reported we would do in the Third Quarter
10QSB, the Company reviewed this position at year-end and determined that the
total costs at the end of the program will exceed the likely revenue. As a
result, the Company has accrued a loss of $861,000, we believe that this
estimated loss covers all possible contingencies through the life of the
program.

         In July 2000, the Company was awarded two contracts from the Office of
Space Launch of the National Reconnaissance Office for a total of approximately
$800,000 these contracts are expected to be completed in the second quarter of
2001. This work is a continuation of a previous contract concerning the
development of hybrid space propulsion technology.

                                       25


<PAGE>

RESULTS OF OPERATIONS

         Numbers reflected in the following discussion have been rounded to the
nearest one thousandth. Please refer to the financial statements, which are
apart of this report for further information regarding the results of operations
of the Company.

         FULL YEAR ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999

         During the year ended December 31, 2000, the Company had net sales of
$3.9 million as compared to net sales of $4.9 million for 1999. Sales in 2000
were comprised of $2.1 million from the CHIPSat program, $844,000 from research
and development performed for the Office of Space Launch (OSL), $250,000 from
the Boeing Company for a joint study of beyond Earth Orbit commercial missions
and $700,000 for all other programs. In 1999, $3.8 million of sales was from the
SIL subsidiary, which is no longer apart of the Company. The remainder of 1999
sales--$1.1 million--was from a contract with OSL ($363,000), the Jet Propulsion
Laboratory ($145,000), contract work for Launch Services ($225,000) and the
remainder from other projects.

         For the year 2000, the Company had cost of sales (direct and allocated
costs associated with individual contracts) of $3.2 million, compared to $2.4
million in 1999. This increase was primarily due to higher CHIPSat and other
project sales volume ($1.0 million) and the allocation of certain overhead costs
(such as building expense, equipment depreciation, utilities and operating
supplies) to cost of goods sold ($910,000). These increases were largely offset
by a $2.0 million reduction in cost of goods sold due to the SIL rescission in
1999. In addition to the normal changes in cost of goods sold, the Company took
a write-off of $861,000 against the CHIPSat program. This loss was primarily due
to increased overhead charges that accrued to the program due to lower than
expected business bases in 2000 and in 2001 and to a longer than expected time
to get the project confirmed for production status by NASA. The performance on
direct costs--labor and material--has been on budget. We believe that this
write-off will cover all program contingencies to the end of the program --
which is currently scheduled for April 2003.

         The Company experienced a decrease in general and administrative
expenses from $5.6 million in 1999 to $1.7 million for 2000. General and
administrative expenses consisted primarily of salaries for administrative
personnel, fees for outside consultants, goodwill amortization of acquisition
costs, insurance, legal and accounting fees and other overhead. The reduction
was primarily attributable to the SIL rescission ($3.0 million), a
reclassification of certain overhead costs to costs of goods sold ($910,000) and
other cost reductions of $105,000; this was partially offset by increased legal
and accounting expenses of $70,000 related to the preparation and filing of the
Company's registration statement on Form 10-SB and other SEC required reports.

         Interest expense for the periods ending December 31, 2000 and December
31, 1999 was $325,768 and $412,284, respectively.

         Research and development expense decreased from $568,000 in 1999 to $0
for 2000. In 2000, all of the Company's research and development efforts have
been paid through contracts with various customers.

         For the year ended December 31, 2000, the Company had a net loss of
$1.4 million, compared to a net loss of $4.1 million for 1999. The reduction in
the net loss was due to the rescission of the SIL acquisition agreement, which
reduced the loss by $2.5 million, and an increase in the volume of sales from
the CHIPSat program and the Office of Space Launch, which absorbed a significant
portion of the company's overhead costs ($810,000) and higher margins on the
Boeing contract and other business. The improvements were partially offset by an
estimated loss on the CHIPSat program ($861,000).

         As of December 31, 2000, the Company's backlog of business was
approximately $2.9 million, as opposed to approximately $5.5 million as of
fiscal year end 1999. During 2000, the Company won $1.3 million of additional
business and obtained over $300,000 in California grant funds. It currently has
over $15 million in outstanding commercial and government proposals and is
working with potential partners for over $30 million in additional bids to be
submitted for the Lunar Orbiter and the Low Earth Orbit Space Plane.

                                       26


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         The Company's auditors have expressed a formal auditors' opinion that
the Company's December 31, 2000 financial position raises "substantial" doubt
about its ability to continue as a going concern." The opinion is based on net
losses incurred by the Company for the years ended December 31, 2000 and 1999 of
$1,405,395 and $4,119,648, respectively, and working capital deficits of
$1,675,765 and $1,291,411, respectively, for those years. The Company's
opportunity to continue as a going concern depends upon management's plans to
consummate additional funding. This funding can come from a variety of sources,
including public or private equity markets, state and federal grants and
government and commercial customer program funding. However, there can be no
assurance that we will be able to obtain such funding as needed. The likelihood
of our success must be considered in light of the expenses, difficulties and
delays frequently encountered in connection with the developing businesses,
those historically encountered by us, and the competitive environment in which
we will operate.

         In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133). The new standard requires companies to record derivatives on the balance
sheet as assets or liabilities measured at fair value. Gains or losses resulting
from changes in the values of those derivatives will be reported in the
statement of operations or as a deferred item, depending on the use of the
derivatives and whether they qualify for hedge accounting. The key criterion for
hedge accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. The Company is required to adopt FAS 133 in 2001 and has not
yet determined the impact, if any, that the adoption of FAS 133 will have on the
consolidated financial statements.

         In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 is effective no later than the quarter ended December 31, 2000.
Since the Company is substantially in compliance with SAB 101, Management
believes the adoption will not have a material effect on the consolidated
financial statements.

         In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25" (the "Interpretation"). The Interpretation is intended to
provide guidance for certain issues that have arisen in practice since the
issuance of APB 25. The Company adopted the Interpretation for all transactions
entered into after July 1, 2000. The adoption of the Interpretation did not have
a material impact on the consolidated financial statements.

         Deferred income taxes are provided for temporary differences in
recognizing certain income and expense items for financial and tax reporting
purposes. The deferred tax asset of $2,166,000 consisted primarily of the income
tax benefits from net operating loss carry-forwards, amortization of goodwill
and research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$274,000 in 2000, from $1,892,000 at December 31, 1999 to $2,166,000 at December
31, 2000.

         Numbers reflected in the following discussion have been rounded to the
nearest one thousandth. Please refer to the financial statements, which are a
part of this report for further information regarding the liquidity and capital
resources of the Company.

         FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999

         Net increase in cash during 2000 was $157,000 compared to a net
decrease of $4,000 in 1999. Net cash provided by operating activities totaled
$930,000 for the year ended 2000, an increase of $1.5 million as compared to
$542,000 used by operating activities during 1999. This improvement is

                                       27


<PAGE>

attributable primarily to increased sales volume generated by the CHIPSat
program and sales to the Office of Space Launch, as well as the elimination of
negative operating cash flows generated by the SIL subsidiary.

         Net cash used in investing activities totaled $354,000 during 2000,
compared to $217,000 used 1999, a decrease in cash used of $33,000. This
difference is primarily attributable to a increase in the purchase of software
needed to execute contracted business.

         Net cash used in financing activities totaled $419,000 during 2000, a
decrease of $1.2 million from the $749,000 provided by financing activities
during 1999. This decrease is primarily attributable to issuing only $25,000 in
common stock in 2000 versus $565,000 in 1999 and a reduction of $591,000 in
funds provided by related parties and $36,000 in all other financing activities.
The $25,000 in common stock was raised through the sell of shares to the
Company's Chief Financial Officer as part of a private placement of units of
common stock and warrants dated November 2, 2000. Pursuant to revisions to the
November 2, 2000 private placement, each warrant sold in the private placement
entitles the holder to purchase an additional 25,000 shares of common stock of
the Company at an exercise price of $1.00 per share, and Mr. Lloyd's warrants
were reissued on these terms on March 6, 2001.

         At December 31, 2000, the Company's cash, which includes cash reserves
and cash available for investment, was $260,000 as compared to $103,000 at
December 31, 1999, an increase of $157,000. At December 31, 2000 the Company had
accounts receivable of $316,000 and accounts payable of $460,000.


FORWARD-LOOKING STATEMENTS

         The Company's business strategy requires significant capital
expenditures. The Company will incur a substantial portion of these expenditures
before it generates significant sales. Combined with operating expenses, these
capital expenditures will result in a negative cash flow until the Company
establishes an adequate revenue-generating customer base. The Company expects
losses through the end of 2001, and does not expect to generate net positive
cash flow from operations sufficient to fund both operations and capital
expenditures until the launch of its first commercial spacecraft or hybrid
propulsion product. There is no assurance that the Company will achieve or
sustain any positive cash flow or profitability thereafter.

         During the years ended December 31, 2000, December 31, 1999 and
December 31, 1998, the Company raised approximately $1.1 million (including
proceeds from the 504 Colorado offering described above) through private sales
of stock. To execute the Company's total strategy of small, capable, low-cost
micro satellites, hybrid propulsion products and new commercial revenue sources,
the Company requires significant funding. The current estimate is over $20
million, which could come from a combination of private or public equity
placements, commercial project financing and government program funding. At this
time, the Company does not have a commitment from any placement agent or
underwriter to implement any additional public offering or from any government
agency to obtain significant additional program funding for its products.

         The Company may also need to raise additional capital if, for
example,(i) significant delays occur in deploying its first space mission due to
technical difficulties, launch, or satellite failure, or other reasons; (ii) the
Company does not enter into agreements with customers on the terms the Company
anticipates; (iii) the Company's net operating deficit increases because it
incurs significant unanticipated expenses; or (iv) the Company incurs additional
costs from modifying all or part of NEAP or its proposed hybrid-related systems
to meet changed or unanticipated market, regulatory, or technical requirements.
If these or other events occur, there is no assurance that the Company could
raise additional capital on favorable terms, on a timely basis or at all. A
substantial shortfall in funding would delay or prevent deployment of the Lunar
Orbiter, NEAP and/or the hybrid-related systems.

                                       28


<PAGE>

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

         The Company will receive fixed compensation on the CHIPSat project in a
total amount of $4,995,868, of which about $2.1 million was generated in 2000.
The fixed price will be paid in increments over the term of the contract. In
2000, as we reported on the Third Quarter 10QSB, the Company reviewed this
position at year-end and determined that the total costs at the end of the
program will exceed the likely revenue. As a result, the company has taken a
write-off to earnings of $861,000, we believe that this action covers all
possible contingencies through the life of the program. Included in the review
was an expected increase of $600,000 to the contract value to reflect added
scope.

ITEM 7.  FINANCIAL STATEMENTS

         Please see the Company's audited financial statements for the period
ended December 31, 2000 as compared to the period ended December 31, 1999
attached hereto.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

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

                                       29


<PAGE>

                                    PART III

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

         The management and directors of the Company's business activities are
under the control of its Board of Directors. Its Chief Executive Officer, James
W. Benson, manages the Company's daily operations. The Company currently has
four directors. Below are the executive officers and directors of the Company.

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

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

Stanley W. Dubyn              Director, President and Chief Operating Officer
13855 Stowe Drive
Poway, California 92064

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

Susan Benson                  Secretary
13855 Stowe Drive
Poway, California 92064

David Smith                   Chief Technical Officer
13855 Stowe Drive
Poway, California 92064

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

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

     *   Denotes Independent Director

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

         JAMES W. BENSON, age 56, is the founder of the Company, and has served
as its Chief Executive Officer and President since inception. Mr. Benson is also
a Director of the Company, a position he has held since October 1997. In 1984,
Mr. Benson founded Compusearch Corporation (later renamed Compusearch Software
Systems), in McLean, Virginia. The company was based on use of personal
computers to create full text indexes of massive government procurement
regulations and to provide fast full text searches for any word or phrase; the
first instance of large scale, commercial implementation of PC-based full text

                                       30


<PAGE>

searching, which later grew to encompass such systems as worldwide web search
engines. Seeing related opportunities in document and image management, Mr.
Benson started the award-winning ImageFast Software Systems in 1989, which later
merged with Compusearch. In 1995, Mr. Benson sold Compusearch and ImageFast, and
retired at age fifty. After months of research, Mr. Benson started SpaceDev LLC,
which was acquired by the Company in October 1997. Mr. Benson holds a Bachelor
of Science degree in Geology from the University of Missouri. He founded the
non-profit Space Development Institute and introduced the $5,000 Benson Prize
for Amateur Discovery of Near Earth Objects. He is also Vice-Chairman and
private sector representative on NASA's national Space Grant Review Panel and a
member of the American Society of Civil Engineers subcommittee on Near Earth
Object Impact Prevention and Mitigation.

         STANLEY W. DUBYN, age 44, has been appointed as an interim director of
the Company, a position he has held since February 4, 2000, and will act as
President and Chief Operating Officer for the Company beginning March 4, 2000.
Mr. Dubyn was formerly Senior Vice-President and Chief Operating Officer for
Spectrum Astro, Inc. in Manhattan Beach, California, a position he held since
October 1990 and which he resigned prior to becoming an officer of the Company.
In that capacity, Mr. Dubyn was responsible for overall cost, schedule and
technical management and oversight of company business activities with NASA,
USAF, BMDO DARPA, classified and government customers, and managed over $75
million in prime contract revenue associated with spacecraft design,
development, manufacturing, integration, test, launch and on-orbit operation. He
was directly responsible for proposal management and winning a $1.5 billion NASA
Goddard Space Flight Center contract. Mr. Dubyn has managed subcontracts and
suppliers totaling over $34 million, many with new development technologies on
compressed delivery schedules, and has functioned as director of new business
and marketing for all classified, defense and NASA programs for Spectrum Astro.
Concurrently with his employment for Spectrum Astro, Mr. Dubyn has acted as
program manager on the following projects: New Millennium Deep Space One
(October 1995-February 1997), Mars-98 Orbiter & Lander (February 1995 - October
1995), MSTI-3 (May 1994 - February 1995), MSTI-2 (November 1992 - May 1994),
MSTI -1, where he also acted as Chief Systems Engineer (November 1991 - November
1992) and DSP Evolution Study (October 1991 - November 1992). Prior to going to
work with Spectrum Astro, Mr. Dubyn worked for TRW Space & Technology Group from
June 1982 to October 1990, where he worked on a variety of classified projects
in a myriad of capacities, including Program Manager and Director of STS
Training for the Defense Projects Division. From May 1978 to June 1982, Mr.
Dubyn worked for Hughes Aircraft Company, Space & Communications Group in El
Segundo, California as a Mission and Systems Analyst, STS Integration Engineer
and Preliminary Design Engineer, and, from July 1977 to September 1997, Mr.
Dubyn worked for Rockwell International, B-1 Division as a Structural Analyst.
Mr. Dubyn received his Master of Science Degree, Aerospace Engineering in 1981,
and a Bachelor of Science Degree in Aerospace Engineering in 1978 from the
University of Southern California. He has been honored throughout his career
with awards for recognition and achievement, including the Hughes Aircraft Co.
Masters Fellowship Award in 1980 and American Institute of Aeronautics and
Astronautics Judging Awards in 1986, 1987 and 1988. In 1990, Mr. Dubyn received
the TRW Chairman's Award for Innovation.

         CHARLES H. LLOYD, age 50, has acted as the Company's Chief Financial
Officer since November 3, 1999. At the same time, he was appointed CEO of ISS.
Mr. Lloyd was formerly the CEO and President of International Launch Services
(ILS), a joint venture of Lockheed Martin Corporation, Khrunichev State Research
and Production Space Center and RSC Energia. During his tenure at ILS, he was
responsible for the development, expansion, and ongoing operation of the joint
venture. Mr. Lloyd aggressively marketed product lines globally, not only by
overcoming cultural barriers, but also by structuring the organization to
support multiple product and management requirements. He is credited with
developing strategic international relationships between the United States and
Russia, and with setting the industry standard for strict controls in the
transfer of technology. Mr. Lloyd and his team at ILS generated over a billion
dollars in new contracts and developed competitive markets in Asia, Europe, and

                                       31


<PAGE>

North America, all of which have provided increased revenues. He has close to 20
years of senior management experience in high technology, international service
and manufacturing environments, with most of that time in positions focused on
operations management, marketing and finance and administration. Prior to his
employment with Lockheed and ILS, Mr. Lloyd held several management positions at
General Dynamics (GD). He was Vice President and Managing Director, and
responsible for the management and operations of General Dynamics Commercial
Launch Services. Prior to that, he was Vice President of Finance and Controller
of GD Space Systems, and Vice President of Finance and Administration of GD
Services Company. Mr. Lloyd began his career as a Senior Financial Planning
Analyst at Ford Motor Company in 1975. Mr. Lloyd holds a Masters of Business
Administration from the University of Michigan and earned his Bachelor of Arts
Degree in Finance from Virginia Polytechnic Institute and State University.

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

         DAVID B. SMITH, age 61, was appointed to the newly created positions of
Chief Technical Officer and Vice President of Engineering on June 29, 2000. Mr.
Smith also assumed the role of Vice-President of Engineering with responsibility
for consolidating overall company technical activities, and to ensure the
development of quality hardware and flight systems. Prior to his employment with
the Company, Mr. Smith held various positions with JPL between January 1971 and
June 2000, including, in the last six years, Principal Engineer for the Mars
Exploration Program Office from September 1999 to June 2000, Manager of one of
their product development offices and new products architect from October 1998
to September 1999, Project Manger on the DNP Project from July 1997 to October
1998, Manager of Program Design and Architecture Office (where he was
responsible for new business project design center) from June 1996 to October
1997, Advanced Projects Manager, Team X (where he developed a JPL new business
proposal process, led the JPL DNP Re-engineering team and developed a design to
cost process) from October 1994 to June 1996. His thirty-eight year career has
focused on multiple deep space and Earth-orbiting missions including Apollo,
MVM, Viking, Voyager, Galileo, and two shuttle radar missions: STS 59 & 68. He
was awarded NASA's Exceptional Achievement medal in 1995 for his leadership and
management skills for the Earth orbiting shuttle missions. His activities on
these missions ranged from navigation, mission design, systems engineering to
the development and delivery of the central computer system (CDS) to the Galileo
spacecraft. Mr. Smith's experience also includes key positions on the Pioneer-10
Navigation Team, the Mars Viking Orbiter and Lander Navigation Team, the
Apollo-11 and Voyager Mission Design Teams, and the Galileo and SIR-C
Development Teams. Mr. Smith has a Masters of Aerospace Engineering from the
University of Southern California and a Bachelor's of Aerospace Engineering from
West Virginia University. He has published, either jointly or singly, twelve
papers on topics related to the industry from 1967 to June 1999.

         WESLEY T. HUNTRESS, age 58, was elected to the Company's Board of
Directors as an Independent Director at the Company's annual shareholder meeting
held June 30, 1999. Dr. Huntress is currently Director of the Geophysical
Laboratory at the Carnegie Institution of Washington in Washington, DC, where he
leads an interdisciplinary group of scientists in the fields of high-pressure
science, astrobiology, petrology and biogeochemistry. Prior to his appointment
at Carnegie, Dr. Huntress served the Nation's space program as the Associate
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

                                       32


<PAGE>

cosmos. Dr. Huntress also served as a Director of NASA's Solar System
Exploration Division from 1990 to 1993, and as special assistant to NASA's
Director of the Earth Science and Applications from 1988 to 1990. Dr. Huntress
came to NASA Headquarters from Caltech's Jet Propulsion Laboratory (JPL). Dr.
Huntress joined JPL as a National Research Council resident associate after
receiving is B.S. in Chemistry from Brown University in 1964 and his Ph.D. in
Chemical Physics from Stanford in 1968. He became a permanent research scientist
at JPL in 1969. He and his JPL team gained an international reputation for their
pioneering studies of chemical evolution in interstellar clouds, comets and
planetary atmospheres. At JPL Dr. Huntress served as co-investigator for the ion
mass spectrometer experiment in the Giotto Halley's Comet mission, and as an
interdisciplinary scientist for the Upper Atmosphere Research Satellite and
Cassini missions. He also assumed a number of line and research program
management assignments while at JPL, and spent a year as a visiting professor in
the Department of Planetary Science and Geophysics at Caltech.

         CURT DEAN BLAKE, age 43, was appointed to the Board on September 5,
2000. Mr. Blake acted as the Chief Operating Officer of the Starwave Corporation
from 1993 until 1999, where he managed business development, finance, legal and
business affairs, and operations for the world's most successful collection of
content sites on the Internet. During that time, he developed business
strategies, financial models, and structured and negotiated venture agreements
for Starwave's flagship site, ESPN Sportszone, at that time the highest traffic
destination site on the Internet. He also developed and negotiated venture
agreements with the NBA, NFL, Outside Magazine and NASCAR to create sites around
these brands. Mr. Blake negotiated sale of controlling interest in Starwave
Corporation to Disney/ABC (NYSE:DIS). Prior to Starwave, Mr. Blake worked at
Corbis from 1992 to 1993, where he led the acquisitions and licensing effort to
fulfill Bill Gates' vision of creating the largest taxonomic database of digital
images in the world. Mr. Blake acted as General Counsel to Aldus Corporation
(now NASDAQ:ADBE) from 1989 to 1992, where he was responsible for all legal
matters of the $125 million public corporation and its subsidiaries. Prior to
that, Mr. Blake was an attorney at Shidler, McBroom, Gates and Lucas, during
which time he was assigned as onsite counsel to the Microsoft Corporation
(Nasdaq:MSFT) where he was primarily responsible for the domestic OEM/Product
Support and Systems Software divisions. Mr. Blake has an MBA and JD from the
University of Washington.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Based upon a review on the Forms 3 and 4 furnished to the Company with
respect to its most recent fiscal year, each of the following Directors and/or
Executive Officers file his initial Form 3 late under Section 16(a) of the
Securities and Exchange Act of 1934: Stanley W. Dubyn and Curt Dean Blake. The
following Executive Officer filed two delayed reports on Form 4 for transactions
which took place in December 31, 2000: Charles H. Lloyd. Each of the
transactions reported in the delayed filing were acquisitions representing
compensation under the terms of existing employment agreements in the case of
the Executive Officers, and an attendance fee in the case of the Director. The
Form 4 for options issued to Wesley T. Huntress in November 2000 was not timely
filed. The acquisition was reported on Form 5 on March 29, 2001.

                                       33


<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

REMUNERATION PAID TO EXECUTIVES

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

                                     SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                        Long Term Compensation
                          ------------------------------------- ---------------------------------------
                                  Annual Compensation                    Awards              Payouts
                          ------------------------------------- -------------------------- ------------
                                                       Other                  Securities
                                                      Annual     Restricted     Under-                   All Other
Name and                                              Compen       Stock        lying         LTIP        Compen-
Principal                                             sation      Award(s)     Options/      Payouts      sation
Position        Year      Salary ($)   Bonus ($)       ($)          ($)       SARs (#)(3)     ($)           ($)
--------------- --------- ------------ ------------ ----------- ------------ ------------- ------------ ------------
<S>             <C>           <C>                <C>         <C>     <C>        <C>                  <C>    <C>
James W.        1998                0            -           -            -           -              -          -
Benson, CEO     1999                0            -           -            -     100,000              -          -
                2000           42,946            -           -            -           -              -          -
Charles H.      1998                -            -           -            -           -              -          -
Lloyd, CFO(1)   1999            8,077            -           -            -     450,000              -          -
                2000           77,770            -           -            -     750,000(5)           -          -
Stanley W.      1998                -            -           -            -           -              -          -
Dubyn,          1999                -            -           -            -           -              -          -
President       2000          125,192            -           -            -     100,000(6)           -          -
David Smith,    1998                -            -           -            -           -              -          -
CTO & VP        1999                -            -           -            -           -              -          -
                2000           62,308            -           -            -           -              -          -
Philip E.       1998           61,060            -           -            -     100,000              -          -
Smith, COO(4)   1999           43,388            -           -            -           -              -          -
                2000                -            -           -            -           -              -          -
Thomas Brown,   1998           59,246            -           -            -     100,000              -          -
CFO(1)          1999           68,454            -           -            -           -              -          -
                2000                -            -           -            -           -              -          -
Susan Benson,   1998                0            -           -            -           -              -          -
Secretary       1999                0            -           -            -           -              -          -
                2000                0            -           -            -           -              -          -
Jan King, V.P.  1998           43,154            -           -       10,000           -              -      5,500(2)
                1999          134,133            -           -            -           -              -          -
                2000           59,180            -           -            -           -              -          -
</TABLE>

(1)   Thomas W. Brown's employment with the Company terminated on November 3,
      1999. Pursuant to his resignation, the Company signed a Separation and
      Release Agreement requiring the Company to pay Mr. Brown a total of
      $60,000 for the release of his employment agreement. To date, the Company
      has not paid Mr. Brown the final installment due under the Separation and
      Release Agreement, and there is currently a principal balance of $9,000.
      The Company is in negotiations with Mr. Brown for an extension of the
      payment terms. In addition to the principal balance, Mr. Brown is claiming
      late payment penalties of $9,250. In the event the Separation and Release
      Agreement is extended, the Company will be required to pay the total
      principal and accrued penalties to Mr. Brown over a the next three months.

                                       34


<PAGE>

(2)   Represents a relocation allowance paid upon execution of Mr. King's
      employment agreement. Mr. King is no longer with the Company.
(3)   James W. Benson purchased 100,000 shares for $.50 per share in December
      1998.
(4)   Phillip Smith is no longer an officer or director of the Company.
(5)   200,000 of these options were performance-based options which terminated
      on December 31, 2000.
(6)   50,000 of these options were performance-based options which terminated on
      March 4, 2001.

         During the last fiscal year and as of December 31, 2000, the Company
granted stock options to executive officers as set forth in the following table:

<TABLE>
<CAPTION>
                         OPTION/SAR GRANTS ENDED DECEMBER 31, 2000

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

Charles H. Lloyd              250,000          33 1/3%              $1.44               11/01/09
                              250,000          33 1/3%              $1.25               05/10/10
                              250,000          33 1/3%              $1.23               08/01/10

Stanley W. Dubyn               50,000              50%              $1.28               05/19/10
                               50,000              50%              $1.28               05/19/10(1)

David Smith                         -               -                   -                      -

Susan Benson                        -               -                   -                      -
</TABLE>

      (1) This option was a performance-based option which, according to its
      terms, would expire on March 4, 2001 in the event certain goals were not
      met on or prior to that date. This option has expired according to its
      terms.

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

                           Shares Acquired on                           Exercisable/          Exercisable/
Name                       Exercise (#)           Value Realized ($)    Unexercisable         Unexercisable(1)
--------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                   <C>          <C>                           <C>
James W. Benson                                0                     0              500,000/                    0/0
                                                                                  2,000,000
Charles H. Lloyd                               0                     0            1,000,000/                    0/0
                                                                                          0
Stanley W. Dubyn                               0                     0               50,000/                    0/0
                                                                                          0
David Smith                                    0                     0                    0                       0

Susan Benson                                   0                     0                    0                       0
</TABLE>

                                       35


<PAGE>

(1)  For purposes of determining whether options are "in-the-money," the Company
     defined fair market value as the five-day trading average of the Company's
     common stock on the Over-The-Counter Bulletin Board as of March 12, 2001,
     or $0.88748 per share. None of the options listed on the table are
     "in-the-money."

REMUNERATION PAID TO DIRECTORS

         The following table sets forth the remuneration paid to the Company's
directors during its fiscal year ended December 31, 2000.

<TABLE>
<CAPTION>
                                      Cash Compensation                      Security Grants
                        ---------------------------------------------  -----------------------------
                                                                                  Number of
                                                                                  Securities
                        Annual                        Consulting       Number of  Underlying
Name                    Retainer Fees  Meeting Fees   Fees/Other Fees  Shares     Options/SARs
----------------------- -------------  -------------  ---------------  ---------  ------------------
<S>                                <C>            <C>              <C>    <C>                 <C>
James W. Benson                    -              -                -          -                   -

Charles H. Lloyd                   -              -                -          -                   -

Stanley W. Dubyn                   -              -                -          -               4,706

Wesley T. Huntress(1)              -              -                -      4,424               9,425

Curt Dean Blake(2)                 -              -                -          -                   -
</TABLE>


(1)      Wesley T. Huntress Jr. was elected to the Board at the 1999 Annual
         Shareholders' Meeting. Pursuant to an agreement with the Company, Mr.
         Huntress was to receive a total of $10,000 in the Company's common
         stock as compensation for his services as a director in two separate
         issuances during the first two years of his directorship. In 1999, he
         received the first issuance of 4,444 shares pursuant to that agreement.
         Mr. Huntress received the second issuance of 4,424 shares in during the
         year ended December 31, 2000. Additionally, Mr. Huntress received an
         option to purchase a total of $10,000 in common shares, or 4,425 shares
         at a per share price of $1.13, the fair market value on January 1,
         2000, when the options were issued pursuant to the agreement. Pursuant
         to the Company's policy regarding compensation of independent
         directors, Mr. Huntress received an option to purchase 5,000 shares on
         November 10, 2000 for his attendance at a telephonic meeting of the
         Company's Board of Directors.
(2)      Pursuant to its policy regarding compensation of independent directors,
         the Company issued Mr. Blake an option to purchase a total of $10,000
         in common shares, or 4,706 shares at a per share price of $1.0625, upon
         acceptance of his position as a director for the Company. The exercise
         price of the shares represents the fair market value on September 5,
         2000, the date of issuance. The option does not vest until September 5,
         2001.

EMPLOYMENT AGREEMENTS

         On November 21, 1997, the Company entered into a five-year employment
agreement with its President, James W. Benson. This agreement provides for
compensation of salary and stock as well as stock options. This agreement also
prohibits Mr. Benson from competing with the Company, disclosing any
confidential information, or soliciting any employees or customers of the
Company for one year after termination of employment.

                                       36


<PAGE>

         On November 1, 1999, the Company, through ISS, entered into an
employment agreement with its Chief Financial Officer, Charles H. Lloyd. The
agreement automatically renews for one-year periods until terminated by written
notice of either Mr. Lloyd or the Company. This agreement provides for
compensation of salary and options to the employee. The agreement also prohibits
the employee from competing with the Company for one year after termination of
employment.

         On February 4, 2000, the Company entered into an employment agreement
with its Chief Operating Officer, Stanley W. Dubyn. The agreement automatically
renews for one-year periods until terminated by written notice of either Mr.
Dubyn or the Company. This agreement provides for compensation of salary and
options to the employee. The agreement also prohibits the employee from
competing with the Company for one year after termination of employment.
Pursuant to that agreement, Mr. Dubyn has received options to purchase 100,000
shares of the Company's common stock at the fair market value of the stock on
the grant date. As of the date of this report, 50,000 of the options have vested
while the remaining options have expired. On March 1, 2001, the Company issued
50,000 shares to Mr. Dubyn pursuant to the employment agreement which provided
for the shares upon successful completion of his first year of employment with
the Company.

         On June 28, 2000, the Company entered into an employment agreement with
its Chief Technical Officer and Vice-President of Engineering, David Smith. The
agreement provides for a base salary of $135,000 per annum, with bonus
compensation in the form of performance-based options, none of which have been
issued to date.

EMPLOYEE BENEFITS

         The Company has adopted, at its 1999 Annual Stockholder Meeting, an
Incentive Employee Stock Option Plan under which its Board of Directors may
grant employees, directors and affiliates of the Company opportunities to
purchase Incentive Stock Options, Supplemental Stock Options and to receive
stock bonuses or rights to purchase restricted stock of the Company. Incentive
Stock Options will only be available to employees, including officers, and
affiliates of the Company; they will not be available to non-employee directors.
The exercise price of the Incentive Stock Options shall not be less than 100% of
the fair market value of the stock subject to the option on the date the option
is granted. The exercise price for the Supplemental Stock Options will not be
less than 85% of the fair market value of the stock subject to the option on the
date the option is granted. The Company will be required to reserve an amount of
common shares equal to the number of shares which may be purchased as a result
of such stock awards.

         During its fourth quarter of fiscal year 2000, the Company issued
options to employees under the Plan to purchase a total of 37,500 common shares
at the fair market value of the stock on the date of grant. The total options
issued were a combination of incentive and non-statutory options. Options were
also issued under the Plan to William George McCoy, a consultant of the Company,
in connection with the purchase of ExploreSpace.com, Inc. Mr. McCoy's options
are non-statutory options to purchase shares at $1.00 per share and will expire
five years from the date of grant. Mr. McCoy acts as Web Director for the
Company on a consulting basis.

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

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table provides information as March 12, 2001 concerning
the beneficial ownership of the Company's common stock by (i) each director,
(ii) each named executive officer, (iii) each shareholder known by the Company
to be the beneficial owner of more than 10% of its outstanding Common Stock, and
(iv) the directors and officers as a group. Except as otherwise indicated, the
persons named in the table have sole voting and investing power with respect to
all shares of Common Stock owned by them.

                                       37


<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                 Name and Address of Beneficial       Amount and Nature of
Title of Class                              Owner(2)                  Beneficial Ownership       Percent of Class
--------------------------------------------------------------------------------------------------------------------
<S>                            <C>                                                 <C>                 <C>
$.0001 par value common stock  James W. Benson, CEO and                            9,628,413(3)          68%(1)
                               President and
                               Susan Benson, Secretary
                               13855 Stowe Drive
                               Poway, California 92064

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

$.0001 par value common stock  Stanley W. Dubyn                                       50,000           <0.7%(1)
                               President and COO
                               13855 Stowe Drive
                               Poway, California 92064

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

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

$.0001 par value common stock  Officers and Directors as a group                   9,712,281             69%(1)
</TABLE>


(1)  Where persons listed on this table have the right to obtain additional
     shares of Common Stock through the exercise of outstanding options or
     warrants or the conversion of convertible securities within 60 days from
     December 31, 1999, these additional shares are deemed to be outstanding for
     the purpose of computing the percentage of Common Stock owned by such
     persons, but are not deemed outstanding for the purpose of computing the
     percentage owned by any other person. Percentages are based on 14,072,476
     Shares outstanding on March 28, 2001.
(2)  Represents 236,000 shares held directly by James W. Benson; 8,895,000
     shares held by SD Holdings, LLC, an entity controlled by James W. Benson;
     and 497,413 shares recently transferred from SD Holdings, LLC to Space
     Development Institute, a 501(c)(3) corporation.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

         James W. Benson had personally guaranteed the letters of credit of the
Company's subsidiary, Integrated Space Systems in the amount of $250,000. This
letter of credit has now expired. Mr. Benson also personally guaranteed two
loans for the purchase of the Company's new headquarters; the loans are in the
amount of $1,780,937.

                                       38


<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
ITEM                                                                             EXH. NO.
-----                                                                            --------
<S>                                                                                 <C>
SpaceDev's Articles of Incorporation*                                               3.1
SpaceDev's Articles of Amendment to Articles of Incorporation dated                 3.2
November 4, 1997 Authorizing Series B Preferred Stock*
SpaceDev's Articles of Amendment to Articles of Incorporation dated                 3.3
December 17, 1997 Changing Name to SpaceDev, Inc.*
SpaceDev's Bylaws*                                                                  3.4
Form of Common Stock Certificate*                                                   4.1
Form of Non-Qualified Stock Option*                                                 4.2
Form of Incentive Stock Option*                                                     4.3
Form of Re-Pricing Warrant*                                                         4.4
Form of Warrant*                                                                    4.5
1999 Stock Option Plan*                                                             4.6
1999 Employee Stock Purchase Plan*                                                  4.7
Form of Warrant from November 2, 2000 Private Placement                             4.8
Common Stock Purchase Warrant - Phillips Aerospace                                  4.9
Common Stock Exchange Agreement Between SpaceDev and SIL*                           10.1
Mutual Rescission and Release of Share Acquisition Agreement*                       10.2
Share Exchange Agreement Between SpaceDev and ISS*                                  10.3
Agreement of License and Purchase of Technology Between SpaceDev and AMROC*         10.4
Firm Fixed Price Agreement Number 108252 Between SpaceDev and Regents of            10.5
the University of California*
Employment Agreement of James W. Benson**                                           10.6
Employment Agreement  between ISS and Thomas W. Brown*                              10.7
Employment Agreement  between ISS and Philip E. Smith*                              10.7
Employment Agreement of Jan A. King*                                                10.8
Employment Agreement between ISS and Charles H. Lloyd*                              10.9
Separation and Release Agreement with Philip E. Smith*                              10.10
Employment Agreement between SpaceDev and Stanley W. Dubyn*                         10.11
Deed of Counter-Indemnity dated August 28, 1999***                                  10.12
</TABLE>

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

*     Incorporated by reference to the corresponding Exhibit previously filed as
an Exhibit to Registrant's Form 10-SB (File #0-28947).

**    Incorporated by reference to Exhibit 10.1 previously filed as an Exhibit
to Registrant's Form 10-QSB filed on August 10, 2000.

***   Incorporated by reference to Exhibit 10.2 previously filed as an Exhibit
to Registrant's Form 8-K filed on September 20, 2000.

                                       39


<PAGE>

INDEX TO FINANCIAL STATEMENTS


                                                                  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' Equity (Deficit)     F-6 to F-8
        Consolidated Statements of Cash Flows                        F-9 to F-10
        Notes to Consolidated Financial Statements                  F-11 to F-31

                                      F-1


<PAGE>

REPORT OF INDEPENDENT AUDITORS


To the Board of Directors of
SPACEDEV, INC.

We have audited the accompanying consolidated balance sheets of SPACEDEV, INC.
AND SUBSIDIARY (see Note 1(c) to the consolidated financial statements) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity (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 SUBSIDIARY as of December 31, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the years then ended, in conformity with accounting principles generally
accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(b) to
the consolidated financial statements, the Company incurred net losses of
$1,405,395 and $4,119,648 for the years ended December 31, 2000 and 1999,
respectively, and had working capital deficits of $1,675,765 and $1,291,411 as
of December 31, 2000 and 1999, respectively, that raises substantial doubt about
its 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.



San Diego, California
February 8, 2001, (except for Note 10(c) as to which the date is March 22, 2001)


                                      F-2


<PAGE>

                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                                     CONSOLIDATED BALANCE SHEETS
================================================================================

DECEMBER 31,                                               2000         1999
--------------------------------------------------------------------------------

ASSETS (Note 4)
CURRENT ASSETS
   Cash (Note 10(a))                                  $   259,623   $   102,887
   Accounts receivable (Note 10(b)                        316,348       363,915
   Other current assets                                     6,974         6,974
--------------------------------------------------------------------------------

Total current assets                                      582,945       473,776

FIXED ASSETS - NET (Notes 1(g) and 2)                   2,263,457     2,103,326

INTANGIBLE ASSETS - NET (Notes 1(g) and 3)              1,502,585     2,182,232

CAPITALIZED SOFTWARE COSTS (Note 1(e))                    207,016             -

Other Assets                                               80,651         2,730
--------------------------------------------------------------------------------

                                                      $ 4,636,654   $ 4,762,064
================================================================================

                                      F-3


<PAGE>

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

                                                                           CONSOLIDATED BALANCE SHEETS, CONTINUED
=================================================================================================================

DECEMBER 31,                                                                             2000            1999
-----------------------------------------------------------------------------------------------------------------

<S>                                                                                   <C>            <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
   Line of credit (Note 4)                                                            $         -    $   241,415
   Current portion of notes payable (Note 5(a))                                            13,000          7,200
   Current portion of capitalized lease obligations (Note 9)                               52,290         11,135
   Notes payable - related party (Note 5(b))                                               80,000        718,002
   Accounts payable and accrued expenses                                                  606,223        377,213
   Accrued payroll, vacation and related taxes                                            160,174        116,136
   Customer deposits and deferred revenue (Note 1(f))                                     152,871         19,166
   Billing in excess of costs incurred and estimated earnings (Note 1(f))                 333,445        274,920
   Provision for anticipated loss (Note 10(c))                                            860,707              -
-----------------------------------------------------------------------------------------------------------------

Total current liabilities                                                               2,258,710      1,765,187

NOTES PAYABLE, LESS CURRENT MATURITIES (Note 5(a))                                      2,267,608      2,251,721
CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (Note 9)                            87,465         17,972
NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (Note 5(b))                        495,992              -
DEFERRED REVENUE (Note 1(f))                                                                5,000          5,000
-----------------------------------------------------------------------------------------------------------------

Total liabilities                                                                       5,114,775      4,039,880

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY (DEFICIT)
   Convertible preferred stock, $.001 par value, 10,000,000 shares
     authorized no shares issued or outstanding (Note 8(a))                                     -              -
   Common stock, $.0001 par value; 50,000,000 shares authorized, and
      14,005,229 and 13,879,945 shares issued and outstanding,
     respectively (Note 8(b))                                                               1,400          1,388
   Additional paid-in capital                                                           7,360,155      7,155,077
   Additional paid-in capital - stock options (Note 8(d))                                 750,000        750,000
   Deferred compensation (Note 8(d))                                                     (250,000)      (250,000)
   Accumulated deficit                                                                 (8,339,676)    (6,934,281)
-----------------------------------------------------------------------------------------------------------------

Total stockholders' equity (deficit)                                                     (478,121)       722,184
-----------------------------------------------------------------------------------------------------------------

                                                                                      $ 4,636,654    $ 4,762,064
=================================================================================================================

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

                                                     F-4
</TABLE>



<PAGE>

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

                                                    CONSOLIDATED STATEMENTS OF OPERATIONS
=========================================================================================

YEARS ENDED DECEMBER 31,                                        2000            1999
-----------------------------------------------------------------------------------------

<S>                                                         <C>             <C>
NET SALES                                                   $  3,893,271    $  4,877,931
Cost of sales                                                  2,385,444       2,445,304
Anticipated loss on uncompleted contract (Note 10(c))            860,707               -
-----------------------------------------------------------------------------------------

Total Cost of Sales
                                                               3,246,151       2,445,304
-----------------------------------------------------------------------------------------

GROSS MARGIN                                                     647,120       2,432,627

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

OPERATING EXPENSES
   General and administrative (including stock-based
     compensation of $95,909  and $178,810, respectively)
     (Notes 1(l) and 8(b))                                     1,725,147       5,568,338
   Research and development (Note 1(h))                                -         568,318
-----------------------------------------------------------------------------------------

LOSS FROM OPERATIONS                                          (1,078,027)     (3,704,029)

Interest expense                                                (325,768)       (412,284)
-----------------------------------------------------------------------------------------

Loss Before Income Taxes                                      (1,403,795)     (4,116,313)

Income Tax Provision (NOTES 1(j) AND 6)                            1,600           3,335
-----------------------------------------------------------------------------------------

Net Loss                                                    $ (1,405,395)   $ (4,119,648)
=========================================================================================

Net Loss Per Share:
      NET LOSS                                              $       (.10)   $       (.39)
-----------------------------------------------------------------------------------------

      WEIGHTED-AVERAGE SHARES OUTSTANDING                     13,956,796      10,629,483

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

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

                                          F-5
</TABLE>


<PAGE>

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

                                                             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
======================================================================================================================

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

<S>                                                                <C>      <C>             <C>           <C>
BALANCE AT JANUARY 1, 1999                                         82,450   $        82      6,047,743    $       605

Preferred stock converted to common stock (Note 8(a))              82,450           (82)     8,245,000            825

Common stock issued for cash (Note 8(b))and
services (Note 8(b))                                                    -             -        546,546             54

Common stock issued for services (Note 8(b))                            -             -         40,656              4

Recission of SIL acquisition  (Notes 1(g) and 3(c))                     -             -     (1,000,000)          (100)

Warrants issued for acquisition of intangible assets
(Note 3(b))                                                             -             -              -              -

Comprehensive loss:
  Net loss                                                              -             -              -              -
  Foreign currency translation adjustment                               -             -              -              -
----------------------------------------------------------------------------------------------------------------------

  Comprehensive loss                                                    -             -              -              -
----------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1999                                            -             -     13,879,945          1,388

Common stock issued for cash (Note 8(b))                                -             -         25,000              2

Common stock issued for services (Note 8(b))                            -             -         60,284              6

Common stock issued to former employee (Note 8(b))                      -             -         40,000              4

Warrants issued for services (Note 8(c))                                -             -              -              -

Warrants issued for acquisition of intangible
assets (Note 3(b))                                                      -             -              -              -

  Net loss                                                              -             -              -              -

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

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

                                                F-6
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                                                                                               SPACEDEV, INC.
                                                                                             AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED
=============================================================================================================

                                                                                   Additional
                                                                   Additional       Paid-In
                                                                    Paid-In         Capital -      Deferred
                                                                    Capital      Stock Options   Compensation
-------------------------------------------------------------------------------------------------------------

<S>                                                               <C>             <C>            <C>
BALANCE AT JANUARY 1, 1999                                        $ 6,795,229     $   750,000    $  (250,000)

Preferred stock converted to common stock (Note 8(a))                    (743)              -              -

Common stock issued for cash (Note 8(b))and
services (Note 8(b))                                                  564,880               -              -

Common stock issued for services (Note 8(b))                          178,806               -              -

Recission of SIL acquisition  (Notes 1(g) and 3(c))                  (423,345)              -              -

Warrants issued for acquisition of intangible assets
(Note 3(b))                                                            40,250               -              -

Comprehensive loss:
  Net loss                                                                  -               -              -
  Foreign currency translation adjustment                                   -               -              -
-------------------------------------------------------------------------------------------------------------

  Comprehensive loss                                                        -               -              -
-------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1999                                        7,155,077         750,000       (250,000)

Common stock issued for cash (Note 8(b))                               24,998               -              -

Common stock issued for services (Note 8(b))                           77,832               -              -

Common stock issued to former employee (Note 8(b))                     54,560               -              -

Warrants Issued for services (Note 8(c))                               18,071               -              -

Warrants issued for acquisition of
intangible assets (Note 3(b))                                          29,617               -              -

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

BALANCE AT DECEMBER 31, 2000                                      $ 7,360,155     $   750,000    $   250,000
=============================================================================================================
</TABLE>

                                                F-7


<PAGE>

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

                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) CONTINUED
=========================================================================================================

                                                                              Accumulated
                                                                                 Other
                                                               Accumulated   Comprehensive
                                                                 Deficit        Income          Total
---------------------------------------------------------------------------------------------------------

<S>                                                            <C>            <C>            <C>
BALANCE AT JANUARY 1, 1999                                     $(2,814,633)   $     7,323    $ 4,488,606

Preferred stock converted to common stock (Note 8(a))                    -              -              -

Common stock issued for cash (Note 8(b))and
services (Note 8(b))                                                     -              -        564,934

Common stock issued for services (Note 8(b))                             -              -        178,810

Recission of SIL acquisition  (Notes 1(g) and 3(c))                      -              -       (423,445)

Warrants issued for acquisition of intangible
assets (Note 3(b))                                                       -              -         40,250

Comprehensive loss:
  Net loss                                                      (4,119,648)             -     (4,119,648)
  Foreign currency translation adjustment                                -         (7,323)        (7,323)
---------------------------------------------------------------------------------------------------------

  Comprehensive loss                                            (4,119,648)        (7,323)    (4,126,971)
---------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1999                                    (6,934,281)             -        722,184

Common stock issued for cash (Note 8(b))                                 -              -         25,000

Common stock issued for services (Note 8(b))                             -              -         77,838

Common stock issued to former employee (Note 8(b))                       -              -         54,564

Warrants Issued for services (Note 8(c))                                 -              -         18,071

Warrants issued for acquisition of
   intangible assets (Note 3(b))                                         -              -         29,617

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

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

=========================================================================================================
</TABLE>

                                           F-8


<PAGE>

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

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

YEARS ENDED DECEMBER 31,                                                         2000           1999
--------------------------------------------------------------------------------------------------------

<S>                                                                          <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                                  $(1,405,395)   $(4,119,648)
   Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
     Depreciation and amortization                                               836,056      1,945,937
     Common stock and warrants issued for compensation
      and services                                                                95,909        178,810
     Change in operating assets and liabilities:
       Accounts receivable                                                        47,567        954,604
       Inventory                                                                       -       (250,065)
       Other current assets                                                            -        118,736
       Other assets                                                              (24,842)        14,010
       Accounts payable and accrued expenses                                     229,011        682,453
       Accrued payroll, vacation and related taxes                                98,602         43,938
       Customer deposits and deferred revenue                                    133,704       (385,336)
       Billings in excess of costs incurred and estimated earnings                58,525        274,920
       Provision for anticipated loss                                            860,707              -
--------------------------------------------------------------------------------------------------------

Net cash provided by (used in) operating activities                              929,844       (541,641)
--------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Capitalized software costs                                                   (207,016)             -
   Purchases of fixed assets                                                    (146,728)      (103,092)
   Cash disposed of in sale of subsidiary                                              -       (113,420)
--------------------------------------------------------------------------------------------------------

Net cash used in investing activities                                           (353,744)      (216,512)
--------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds (payments) from bank lines of credit                                (241,415)       141,415
   Payments on notes payable - related party                                    (142,010)      (110,000)
   Payments on notes payable                                                     (31,392)       (50,663)
   Principal payments on capitalized lease obligations                           (29,547)       (52,632)
   Proceeds from issuance of common stock                                         25,000        564,934
   Proceeds from notes payable - related party                                         -        591,002
   Decrease in bank overdraft                                                          -       (477,298)
   Proceeds from notes payable                                                         -        141,921
--------------------------------------------------------------------------------------------------------

Net cash provided by (used in) financing activities                             (419,364)       748,679
--------------------------------------------------------------------------------------------------------

Effect of exchange rate changes on cash                                                -          5,822
--------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                             156,736         (3,652)

Cash at Beginning of Year                                                        102,887        106,539
--------------------------------------------------------------------------------------------------------

Cash at End of Year                                                          $   259,623    $   102,887
========================================================================================================

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

                                                F-9
</TABLE>


<PAGE>

                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                 CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
================================================================================

YEARS ENDED DECEMBER 31,                                2000           1999
--------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
   Interest                                           $ 280,577     $ 356,041
   Income taxes                                       $   1,600     $   3,335

NONCASH INVESTING AND FINANCING ACTIVITIES:

During 2000 and 1999, the Company acquired $140,195 and $29,660 of fixed assets
under capital lease agreements, respectively.

During 2000 and 1999, the Company issued 60,284 and 40,656 shares of restricted
common stock for consulting services with a fair value of approximately $78,000
and $179,000, respectively. The fair value of the shares was calculated using
the average closing price surrounding the issuance dates. See Note 8(b)).

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

In August 2000 and 1999, 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 a fair value of approximately $30,000 and
$40,000, respectively.

During 1999, the Company financed $317,000 of building improvements with a note
payable.


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

                                      F-10


<PAGE>

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying consolidated financial statements
follows. As discussed in Note 3(c), the Company disposed of its interest in SIL
on December 17, 1999.

(a)   NATURE OF OPERATIONS

SPACEDEV, INC. (the "Company") was incorporated under the laws of Colorado on
December 23, 1996 as Pegasus Development Group, Inc. (PDGI). The Company,
through its two business segments, is engaged in the commercial development of
low-cost satellites and their subsystems, as well as providing engineering
technical services to major aerospace companies. The principal geographic
markets of the Company are the United States and Europe. See Note 11(a)).

PDGI was originally formed for the purpose of entering the real estate industry.
SpaceDev, LLC of Colorado was originally formed in 1997 for commercial space
exploration and was the sole owner of shares of common stock of SpaceDev (a
Nevada corporation) ("SpaceDev"). On October 22, 1997, PDGI issued 8,245,000 of
its $.0001 par value common stock for 100 percent (1,000,000 shares) of
SpaceDev's common stock owned by SpaceDev, LLC. Upon the acquisition of the
SpaceDev stock, SpaceDev was merged into PDGI and, on December 17,1997, PDGI
changed its name to SPACEDEV, INC. After the merger, SpaceDev, LLC, changed its
name to SD Holdings, LLC on December 17, 1997. (See Notes 8(a) and 8(b)).

For accounting purposes, the transaction was accounted for as a reverse merger
with the Company as the acquirer. Since SpaceDev had minimal assets prior to the
merger, the transaction was accounted for as the sale of Company's common stock
for net assets of $1,232.

(b)   LIQUIDITY/GOING CONCERN

The accompanying consolidated financial statements as of December 31, 2000 have
been prepared assuming the Company will continue as a going concern. However,
the Company had working capital deficits of $1,675,765 and $1,291,411 as of
December 31, 2000 and 1999, respectively, and incurred net loss of $1,405,395
and $4,119,648 for the years ended December 31, 2000 and 1999, respectively.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Subsequent to December 2000, management intends to raise
additional financing through a combination of public and private equity
placements, commercial project financing and government program funding to fund
future operations and commitments. There is no assurance that additional debt
and equity financing needed to fund operations will be consummated or obtained
in sufficient amounts necessary to meet the Company's needs.

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>

(c)   PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Integrated Space Systems, Inc. (ISS) (a
California corporation) and Space Innovations Limited (SIL) (a United Kingdom
entity). As discussed in Note 3(c), the Company disposed of its interest in SIL
on December 17, 1999. All significant intercompany balances and transactions
have been eliminated in the consolidation.

(d)   USE OF ESTIMATES

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

(e)   SOFTWARE DEVELOPMENT COSTS

In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes the direct costs and allocated overhead
associated with the development of software products. Initial costs are charged
to operations as research prior to the development of a detailed program design
or a working model. Costs incurred subsequent to the product release, and
research and development performed under contract are charged to operations.
During 2000, the Company capitalized approximately $207,000 of costs related to
the development of satellite communications software. These costs will be
amortized over the expected number of units to be produced in the future.

(f)   REVENUE RECOGNITION

The Company's revenues are derived primarily from fixed price contracts and are
recognized using the percentage-of-completion method of contract accounting
based on the ratio of incurred costs to total estimated costs. Losses on
contracts are recognized when they become known and reasonably estimable (see
Note 10(c)). Actual results of contracts may differ from management's estimates
and such differences could be material to the consolidated financial statements.
Professional fees are billed to customers on either 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. At December
31, 2000, billings in excess of costs incurred and estimated earnings was
approximately $333,000.

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

                                      F-12


<PAGE>

(g)   DEPRECIATION AND AMORTIZATION

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

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

As a result of the disposal of SIL, the goodwill associated with the original
acquisition became impaired on December 17, 1999. The loss of approximately
$1,929,000 from the impairment represented the net unamortized goodwill at
December 17, 1999, and was recorded as a reduction to additional paid-in
capital. See Note 3(c).

(h)   RESEARCH AND DEVELOPMENT

The Company was actively engaged in new product development efforts in 1999.
Research and development expenditures relating to possible future products were
expensed as incurred. Research and development expenses was $568,318:

(i) ADVERTISING

The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expenses were approximately $0 and $9,500 for 2000 and
1999, 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.

(k)   NEW ACCOUNTING STANDARDS

In December 1999 the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 is effective no later than the quarter ended December 31, 2000. Since the
Company is substantially in compliance with SAB 101, Management believes the
adoption will not have a material effect on the consolidated financial
statements.


                                      F-13


<PAGE>

(k)   NEW ACCOUNTING STANDARDS, CONT'D

Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives
Instrument and Hedging Activities," established accounting and reporting
standards for derivative instruments. The Company has not in the past, nor does
it anticipate that it will, engage in transactions involving derivative
instruments which will impact the consolidated financial statements. In March
2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, and Interpretation of APB Opinion no.
25" (the "Interpretation"). The Interpretation is intended to provide guidance
for certain issues that have arisen in practice since the issuance of APB 25.
The Company adopted the Interpretation for all transactions entered into after
July 1, 2000. The adoption of the Interpretation did not have a material impact
on the consolidated financial statements.

(l)   STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). 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" (APB 25) and has provided pro
forma disclosures as if the fair value based method prescribed SFAS 123 has been
utilized. See Note 8(d).

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

The Company has valued its stock, stock options and warrants issued to
non-employees at fair value in accordance with the accounting prescribed in SFAS
123, which states that all transactions in which goods or services are received
for the issuance of equity instruments shall be accounted for based on the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.

(n)   NET LOSS PER COMMON SHARE

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

(o)   FINANCIAL INSTRUMENTS

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

                                      F-14


<PAGE>

(p)   SEGMENT REPORTING

The Company's reportable segments are as follows: Space Missions Division (SMD)
and ISS. The Space Missions Division is involved in micro spacecraft and
missions. ISS provides small hybrid propulsion space systems. SIL developed
low-cost satellites and satellite subsystems for use in space. The Company
disposed of SIL on December 17, 1999. See Note 3(c). A new segment, which
involves the development of new commercial revenue generating businesses
developed around the Company's new space technology, is still in the development
stage. The Company follows the requirement of Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131").

2.    FIXED ASSETS
                    Fixed assets consisted of the following:

       DECEMBER 31,                                      2000           1999
       -------------------------------------------------------------------------
       Building and improvements                     $ 2,186,637    $ 2,071,437
       Capital leases                                    207,411         68,197
       Computer equipment                                200,033        167,650
       Furniture and fixtures                             18,445         18,442
       -------------------------------------------------------------------------
                                                       2,612,526      2,325,726
       Less accumulated depreciation
          and amortization                              (349,069)      (222,400)
       -------------------------------------------------------------------------
                                                     $ 2,263,457    $ 2,103,326
       =========================================================================


Depreciation and amortization expense was $126,792 and $110,810 for the 2000 and
1999, 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 and will be amortized over sixty months.

                                      F-15


<PAGE>

(a)   ISS, CONT'D

Goodwill from the ISS acquisition consisted of the following:

DECEMBER 31,                                             2000           1999
--------------------------------------------------------------------------------
Goodwill                                             $ 3,461,000    $ 3,461,000
Less accumulated amortization                         (2,018,918)    (1,326,717)
--------------------------------------------------------------------------------
                                                     $ 1,442,082    $ 2,134,283
================================================================================

Amortization expense was $692,201 and $692,200 for 2000 and 1999, respectively.

(b)   AMROC

On August 14, 1998, the Company entered the Agreement for License and Purchase
of Technology (AMROC) with an unrelated individual. The technology acquired was
hybrid rocket technology that will be used in the future operations of the
Company. Upon execution of the Agreement, the Company issued the seller a
warrant to purchase 25,000 shares of restricted common stock at a strike price
equal to 50 percent of the market price of the common stock on the issuance
date.

For the three years following the Agreement date, the seller will receive
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, 2000 and 1999, the Company issued
warrants to purchase 25,000 shares of restricted common stock with fair value of
$29,617 and $40,250 respectively using the same valuation method. This amount
was capitalized as an additional acquisition of intangible assets and will be
amortized over the remaining four years of the estimated useful life of the
assets. All warrants are immediately exercisable after issuance and expire on
the fifth anniversary of their issuance. No value is given to the future
issuance of warrants as the strike price is unknown at this time.

                                      F-16


<PAGE>

(b)   AMROC, CONT'D

Other intangible assets consisted of the following:

DECEMBER 31,                                               2000          1999
--------------------------------------------------------------------------------
Other intangibles                                        $ 94,367      $ 64,750
Less accumulated amortization                             (33,864)      (16,801)
--------------------------------------------------------------------------------
                                                         $ 60,503      $ 47,949
================================================================================

Amortization expense was $17,063 and $14,963 for 2000 and 1999, respectively.

(c)   SIL

On October 1, 1998, the Company issued 1,000,000 shares of restricted common
stock and acquired all of the outstanding shares of common stock of Space
Innovations Limited ("SIL"). SIL develops low-cost satellites and satellite
subsystems for use in space. The fair value of the shares issued was $1.75 per
share and was 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 $3,182,000, including approximately $432,000 of liabilities in
excess of the value of assets acquired. Also included in the total goodwill was
an acquisition price payable of $1,000,000. To satisfy the payable, the Company
was to issue $1,000,000 of restricted common stock to the former shareholders of
SIL in four equal semi-annual installments. The fair market value of the common
stock at specified dates would be used to determine the number of shares to be
issued. The resulting goodwill amount was to be amortized over sixty months.
Amortization expense was approximately $994,000 for 1999.

Included in the acquisition agreement and under the Company's Revenue and Profit
Incentive Stock Option Plan and the Profit Sharing Stock Issuance Plan, the
former stockholders of SIL also received options to purchase up to 500,000
additional shares of the Company's common stock at a price to be determined in
the year of grant should certain future events occur in each of the next three
years. During 1998, 100,000 options expired as the qualifying events did not
occur. Effective December 17, 1999, all remaining unexpired options were
cancelled.

On December 17, 1999, the Company's Board of Directors entered into a Mutual
Release and Rescission of Agreement ("Release Agreement") to rescind the
original acquisition of SIL, effective October 1, 1998. Subsequent to SIL's
acquisition and prior to December 17, 1999, the accounts of SIL were included in
the consolidated financial statements of the Company.

The Release Agreement resulted in the retirement of the 1,000,000 shares of the
Company common stock which had been issued to the former shareholders of SIL,
the cancellation of all outstanding options for Company stock and the
cancellation of the acquisition price payable. In accordance with Accounting
Principles Board Opinion No. 29, "Accounting for Non-monetary Transactions," the
transaction was recorded as a decrease to stockholders' equity. Therefore,
$423,345 was recorded as a decrease in the Company's additional paid-in-capital
on December 17, 1999.

                                      F-17


<PAGE>

(c)   SIL, CONT'D

The significant components of the amount recorded in 1999 as a reduction to
additional paid-in capital are as follows:

-------------------------------------------------------------------
Loss on unamortized goodwill                           $(1,929,000)
Gain on extinguishment of acquisition
   price payable                                         1,000,000
Net liabilities disposed of from SIL                       506,000
-------------------------------------------------------------------
                                                       $  (423,000)
===================================================================

The Company remained a guarantor on a bank line of credit used to finance SIL's
operations. Under terms of the Release Agreement, SIL agreed to apply 25% of the
proceeds from each payment received on a specific contract until the bank loan
is paid in full. Once the loan has been paid in full, the loan agreement will be
terminated, releasing the Company's guarantor obligation. During 2000, the line
was paid off in full.

4.    LINE OF CREDIT

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

5.    NOTES PAYABLE

(a)   BUILDING NOTES

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

On February 23, 2000, the Company signed a $1,330,000 note with a new lender to
refinance the aforementioned debt. The note calls for 300 monthly payments of
$12,091, which include principal and interest at the bank's prime rate (9.50% at
December 31, 2000) plus 1.5%. The note matures on March 1, 2025. At December 31,
2000, the outstanding balance was $1,322,328.

In December 1998, the Chief Executive Officer (the "CEO") of the Company entered
into a $500,000 loan agreement with another lender to finance additional costs
of its new facility. This liability was assigned to the Company and called for
59 monthly interest payments at 12.23% and a balloon payment of $505,000,
including interest, on December 17, 2003. At December 31, 2000 and 1999, the
outstanding balance on this loan was $499,671 and $500,000, respectively. The
notes are personally guaranteed by the Chief Executive Officer of the Company.

                                      F-18


<PAGE>

(a)   BUILDING NOTES, CONT'D

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


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

                                    YEAR ENDED DECEMBER 31,
                                    --------------------------------------------
                                             2001                      $ 13,000
                                             2002                        14,111
                                             2003                       515,305
                                             2004                       475,549
                                             2005                        19,149
                                             Thereafter               1,243,494
                                    --------------------------------------------
                                                                     $2,280,608
                                    ============================================

(b)   RELATED PARTIES

The Company had notes payable to the CEO and a former key employee. At December
31, 2000 and 1999, the balances were $575,992 and $718,002, respectively, with
interest between 4% and 10%. The notes, due in March 1999, were converted to
demand notes. As part of a Separation and Release Agreement with the former key
employee, $70,000 of the principal and accrued interest was paid in monthly
installments through July 2000. The note with the CEO was amended on March 20,
2000 to call for annual payments of not less than $80,000 per year with interest
at 10%.

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

YEAR ENDED DECEMBER 31,
----------------------------------------------------
               2001                        $ 80,000
               2002                          80,000
               2003                          80,000
               2004                          80,000
               2005                          80,000
               Thereafter                   175,992
----------------------------------------------------
                                           $575,992
====================================================

Interest expense on these notes was $54,137 and $67,331 for 2000 and 1999,
respectively.

                                      F-19


<PAGE>

6.    INCOME TAXES

Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes. The
deferred tax asset of $2,166,000 and $1,892,000 as of December 31, 2000 and
1999, respectively, consisted primarily of the income tax benefits from net
operating loss and capital loss carryforwards, amortization of goodwill and
research and development credits. A valuation allowance has been recorded to
fully offset the deferred tax asset as it is more likely than not that the
assets will not be utilized. The valuation allowance increased approximately
$274,000 in 2000 from $942,000 at December 31, 1999 to $2,166,000 at December
31, 2000.

At December 31, 2000, the Company has federal and state tax net operating loss
and capital loss carryforwards of approximately $4,735,000 and $3,864,000,
respectively. The federal and state tax loss carryforwards will expire through
2019, unless previously utilized.

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


                 YEARS ENDED DECEMBER 31,                        2000      1999
                 ---------------------------------------------------------------
                 Statutory U.S. federal rate                      34%       34%
                 State income taxes - net of federal benefit       5%        5%
                 Net operating loss for which no tax
                    benefit is currently available                39%      (39%)
                 ---------------------------------------------------------------
                                                                   -         -
                 ===============================================================

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

                 DECEMBER 31,                              2000         1999
                 ---------------------------------------------------------------
                 Deferred tax assets:
                    Loss carryforwards                 $ 1,699,000  $ 1,425,000
                    Temporary differences                  425,000      425,000
                    Research and development credits        42,000       42,000
                 ---------------------------------------------------------------
                 Gross deferred tax assets               2,166,000    1,892,000

                 Valuation allowance                    (2,166,000)  (1,892,000)
                 ---------------------------------------------------------------
                                                       $         -  $         -
                 ===============================================================

                                      F-20


<PAGE>

7.    EMPLOYEE BENEFIT PLAN

(a)   PROFIT SHARING 401(k) PLAN

During 1997, the Company adopted a 401(k) retirement savings plan for its U.S.
employees which allows each eligible employee to voluntarily make pre-tax salary
contributions up to 15% of their compensation. The Company may elect to make a
matching contribution. The total Company contribution and participant salary
reduction may not exceed 25% of the compensation of eligible participants.
During 2000 and 1999, the Company did not contribute to the Plan.

(b)   INCENTIVE STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS

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

8.    STOCKHOLDERS' EQUITY

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

(b)   COMMON STOCK

On October 22, 1997, PDGI issued 8,245,000 of its $.0001 par value common stock
for 100 percent (1,000,000 shares) of SpaceDev's common stock owned by SpaceDev,
LLC. Upon the acquisition of the SpaceDev stock, SPACEDEV was merged into PDGI
and, on December 17, 1997, the name of the Company was changed to SPACEDEV, INC.
On November 4, 1997, these common shares were exchanged for 82,450 shares of
convertible preferred stock. See Note 8(a). On May 11, 1999, the Company issued
8,245,000 shares of common stock upon the conversion of the preferred shares.

                                      F-21


<PAGE>

(b)   COMMON STOCK, CONT'D

In four different transactions between September 2, 1998 and October 16, 1998,
the Company's CEO purchased 348,000 shares of the Company's common stock at a
per share price of $0.50 pursuant to Section 4(2) of the Securities Act. The
Company recorded compensation expense of $126,000 in the consolidated statement
of operations. The fair value of the shares issued was calculated using the
average closing price surrounding the issuance dates. Cash proceeds totaled
$148,000.

The Company entered into agreements with legal, sales, investor relations and
public relations firms to perform services for the Company. In connection with
these agreements, the Company issued 60,284 and 40,656 shares of its common
stock and recorded expense of approximately $78,000 and $179,000 for 2000 and
1999, respectively. The fair value of the shares issued was calculated using the
average closing price surrounding the issuance dates.

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

During 1999, the Company issued 546,546 shares of its common stock for cash,
priced at an average of $1.03 per share for a total amount of $564,934.

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 December 5, 2000, the Company sold 25,000 shares of its common stock under
the PPM at the minimum value of $1.00 per share.

On March 2, 2001, the PPM offering price was amended to a five-day average of
the bid and ask prices on the date of issuance with a minimum of $0.75 per share
and the re-pricing warrants allow the holder to acquire additional shares at the
same price as the shares acquired.

                                      F-22


<PAGE>

(b)   COMMON STOCK, CONT'D

On June 23, 1999, the Company filed for a registration statement with the State
of Colorado for units consisting of one share of $.0001 par value common stock
and one re-pricing warrant to purchase one share of common stock. The primary
purpose of the offering was to raise $350,000 under Rule 504 of the Securities
Act of 1933 to finance development of a hybrid rocket. That registration
statement was made effective by the State of Colorado on August 26, 1999,
providing for a per unit price of $1.50 per share. Due to fluctuations in the
market price of the Company's common stock, the Company was forced to negotiate
a per unit price based on the five-day trading average, less thirty percent. The
entire offering of $350,000 was sold to a single investor in Colorado at a price
of $0.91 per unit. Following that sale, the Company determined to raise the
aggregate offering price in order to allow it to obtain funding during
preparation of this registration statement. The registration statement was
amended for a total aggregate offering price of $730,000, with a per unit price
based on the negotiated amount paid by the initial investor, and was made
effective by the State of Colorado on October 13, 1999. Following effectiveness
of the post-effective amendment, the Company sold an additional $10,000 in units
under the offering at a price of $0.83 per unit.

The re-pricing warrants were convertible into common stock of the Company if the
market price of the Company's common stock dropped below the price paid per unit
in the offering during the 150 days immediately following issuance. The
conversion formula was to be based on a minimum market price of $1.25 per share.
If the 150-day average closing bid price of the common stock exceeded the Unit
price in the offering, the warrants would automatically expire. Since the units
were issued to investors at a discount, the warrants are not convertible under
the conversion formula, which uses a minimum market price of $1.25, since any
calculation under the formula results in a negative number. As a result, no
further shares will be issued as a result of the issuance of the re-pricing
warrants.

(c)   WARRANTS

On August 14, 2000 and 1999, 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. At December 31, 2000, the
remaining 25,000 unissued warrants were not recorded as the future strike price
of the warrants cannot be estimated.

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

                                      F-23


<PAGE>

(d)   STOCK OPTIONS

On November 21, 1997, the Company entered into a five-year employment agreement
with its CEO. As part of the employment agreement, the Company granted options
to the CEO to purchase up to 2,500,000 shares of the Company's $.0001 par value
restricted common stock.

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

<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
               500,000     Financing and executing a definitive space launch
                           agreement                                                    $2.00
               500,000     Launching of first lunar or deep-space mission               $2.50
               500,000     Successful completion of first lunar or deep-space
                           mission                                                      $3.00
               250,000     Upon the Company's market capitalization reading $250
                           million                                                      $5.00
               500,000     Upon the Company's market capitalization reading $500
                           million                                                     $10.00
               750,000     Upon the Company's market capitalization reading $1
                           billion                                                     $20.00
           ======================================================================================
</TABLE>

All options expire 10 years from date of amendment.

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

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

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

                                      F-24


<PAGE>

(d)   STOCK OPTIONS, CONT'D

All options expire 60 months from the date of issuance.

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

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

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

(d)   STOCK OPTIONS, CONT'D

The following summarizes stock option activity related to all of the option
plans:

                                                                       Weighted
                                                    Options             Average
                                                Outstanding     Exercise Prices
               -----------------------------------------------------------------
               Balance at January 1, 1999         3,200,000               $1.98
                    Granted                         452,222                1.34
                    Exercised                             -                   -
                    Expired                        (400,000)               1.50
               -----------------------------------------------------------------

               Balance at December 31, 1999       3,252,222                1.95
                    Granted                       1,009,331                1.27
                    Exercised                             -                   -
                    Expired                        (550,000)               1.63
               -----------------------------------------------------------------

               Balance at December 31, 2000       3,711,553               $1.81
               =================================================================

                                      F-25


<PAGE>

(d)   STOCK OPTIONS, CONT'D

The weighted average fair value of options granted to employees under the plan
during 2000 and 1999 was $1.23 and $1.34, respectively. At December 31, 2000 and
1999, there were 1,625,147 and 500,000 options exercisable at a weighted average
exercise price of $1.21 and $1.29 per share, respectively. The weighted average
remaining life of outstanding options under the plan at December 31, 2000 was
2.26 years.

<TABLE>
<CAPTION>
                                           Weighted-Average
                                               Remaining                            Weighted-
               Range of     Number of      Contractual Life      Number of           Average
               Exercise      Shares            of Shares           Shares          Exercisable
                Price      Outstanding        Outstanding       Exercisable           Price
            ----------------------------------------------------------------------------------
             <S>             <C>              <C>                   <C>                 <C>
             $0.88-0.99         35,700        5.00 years                    -           $0.94
              1.00-1.99      2,173,631        5.36 years            1,622,925            1.27
              2.00-2.99      1,002,222        2.00 years                2,222            2.25
              3.00-3.50        500,000        2.00 years                    -            3.00
            ----------------------------------------------------------------------------------
             $1.77           3,711,553        2.26 years            1,625,147           $1.77
            ==================================================================================
</TABLE>

As of December 31, 2000, the Company had warrants outstanding that allow the
holders to purchase up to 103,236 shares of common stock at prices between $.66
and $1.44 per share. The warrants may be exercised any time within five years of
issuance.

The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 2000 and 1999 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 2000 and 1999 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,          2000             1999
                     -----------------------------------------------------------
                     Net loss:
                       As reported                 $(1,405,395)     $(4,119,648)
                       Pro forma                   $(2,821,467)     $(4,124,648)
                     Loss per  Share:
                       As reported                      $ (.10)          $ (.39)
                       Pro forma                        $ (.20)          $ (.39)
                     ===========================================================

                                      F-26


<PAGE>

9.    COMMITMENTS AND CONTINGENCIES

      CAPITAL LEASES

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

                DECEMBER 31,                              2000           1999
                ----------------------------------------------------------------
                Computer equipment                   $   207,411    $    68,197
                Less accumulated depreciation            (72,569)       (34,572)
                ----------------------------------------------------------------
                                                     $   134,842    $    33,625
                ================================================================


Future minimum lease payments are as follows:

                YEAR ENDING DECEMBER 31,
                ----------------------------------------------------------------
                          2001                                      $    71,997
                          2002                                           70,281
                          2003                                           24,270
                          2004                                            5,122

                ----------------------------------------------------------------
                Total minimum lease payments                            171,670
                Amount representing interest                            (31,915)
                ----------------------------------------------------------------
                Present value of minimum lease payments             $   139,755
                ================================================================

                Total obligation                                    $   139,755
                Less current portion                                    (52,290)
                ----------------------------------------------------------------
                Long-term portion                                   $    87,465
                ================================================================

10.   CONCENTRATIONS AND CONTINGENCIES

(a)   CREDIT RISK

The Company maintains cash balances at various financial institutions primarily
located in San Diego. Accounts at these institutions are secured by the Federal
Deposit Insurance Corporation up to $100,000. The Company has not experienced
any losses in such accounts. Management believes that the Company is not exposed
to any significant credit risk on cash.

(b)   CUSTOMER

During 2000 and 1999, the Company had a major customer that accounted for sales
of approximately $2,052,000 and $1,130,000 or 53% and 23% of consolidated
revenue, respectively. At December 31, 2000 and 1999, the amount receivable from
this customer was approximately $188,000 and $0, respectively.

                                      F-27


<PAGE>

(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 approximately $5.6 million. This contract represented 53%
of the Company's revenue in 2000. The contract will conclude on December 31,
2003. The payments on the contract are made on a monthly basis according to a
preset payment schedule and resulted in billings in excess of costs incurred and
estimated earnings of approximately $333,000. At December 31, 2000 the total
costs estimated to complete the contract was approximately $6,461,000. As a
result, the Company accrued a provision for an anticipated loss of approximately
$861,000.

(d)   CONTINGENCY

On December 17, 1999, the Company's Board of Directors entered into a Mutual
Release and Rescission of Agreement ("Release Agreement") to rescind the
original acquisition of SIL, effective October 1, 1998. SIL has since filed for
bankruptcy under the laws of England. In September 2000, the Company received a
demand from an English company under the Deed of Counter Indemnity for $300,000
Australian Dollars (approximately $U.S. 163,000) based on SIL's alleged failure
to perform under the contract. The Company is in the process of investigating
the claim made against the performance bond upon which this demand is being
made. In the event the Company is required to indemnify the Company on the
demand, it is the Company's intention to pursue indemnification against SIL to
the extent allowed by the bankruptcy laws of England.

11.   OPERATING SEGMENTS

The Company's operating structure included three operating segments for 2000 and
two segments for 1999.

(a)   SEGMENT PRODUCTS AND SERVICES

The Company's reportable segments are as follows: Space Missions Division (SMD)
and ISS. The Space Missions Division is involved in micro spacecraft and
missions. ISS provides small hybrid propulsion space systems. SIL developed
low-cost satellites and satellite subsystems for use in space. The Company
disposed of SIL on December 17, 1999. See Note 3(c). A new segment, which
involves the development of new commercial revenue generating businesses
developed around the Company's new space technology, is still in the development
stage.

                                      F-28


<PAGE>

(a)   SEGMENT PRODUCTS AND SERVICES, CONT'D

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

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

                Total segment assets                     $ 1,695       $ 2,942       $ 4,637
                Less intersegment assets                       -             -             -
                                                         ------------------------------------
                Net segment assets                       $ 1,695       $ 2,942       $ 4,637
                                                         ====================================


                FOR THE YEAR ENDED DECEMBER 31, 2000
                -----------------------------------------------------------------------------
                (IN THOUSANDS)                             ISS           SMD         Total
                -----------------------------------------------------------------------------
                Geographic Information:
                  Revenue
                -----------------------------------------------------------------------------
                   United States                         $ 1,298       $ 2,595       $ 3,893
                   Europe                                      -             -             -
                                                         ------------------------------------
                                                         $ 1,298       $ 2,595       $ 3,893
                                                         ====================================

                  Long-lived Assets
                -----------------------------------------------------------------------------
                   United States                         $ 1,456       $ 2,597       $ 4,053
                   Europe                                      -             -             -
                                                         ------------------------------------
                                                         $ 1,456       $ 2,597       $ 4,053
                                                         ====================================

                FOR THE YEAR ENDED DECEMBER 31, 2000
                --------------------------------------------------------------------------------------------
                (IN THOUSANDS)                             ISS           SIL           SMD           Total
                --------------------------------------------------------------------------------------------
                Net revenue from external customers      $ 1,008       $ 3,787       $    83       $  4,878
                Intersegment revenues                         71             -            33            104
                Depreciation and amortization expense       (731)       (1,044)          (86)        (1,861)
                Segment loss                             $  (805)      $(2,493)      $  (822)      $ (4,120)
                                                         ===================================================

                Total segment assets                     $ 2,787       $     -       $ 2,317       $  5,104
                Less intersegment assets                    (178)            -          (164)          (342)
                                                         ---------------------------------------------------
                Net segment assets                       $ 2,609       $     -       $ 2,153       $  4,762
                                                         ===================================================
</TABLE>

                                      F-29


<PAGE>

(a)   SEGMENT PRODUCTS AND SERVICES, CONT'D

<TABLE>
<CAPTION>
                FOR THE YEAR ENDED DECEMBER 31, 2000
                --------------------------------------------------------------------------------------------
                (IN THOUSANDS)                             ISS           SIL           SMD           Total
                --------------------------------------------------------------------------------------------
                <S>                                      <C>           <C>           <C>           <C>
                Geographic Information:
                  Revenue
                --------------------------------------------------------------------------------------------
                   United States                         $ 1,008       $     -       $    83       $ 1,091
                   Europe                                      -         3,787             -         3,787
                                                         ---------------------------------------------------
                                                         $ 1,008       $ 3,787       $    83       $ 4,878
                                                         ===================================================

                  Long-lived Assets
                --------------------------------------------------------------------------------------------
                   United States                         $ 2,111       $     -       $ 2,177       $ 4,288
                                                         ---------------------------------------------------
                                                         $ 2,111       $     -       $ 2,177       $ 4,288
                                                         ===================================================
</TABLE>

(b)   METHOD OF DETERMINING SEGMENT PROFIT OR LOSS

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

12.   SETTLEMENT WITH U.S. SECURITIES AND EXCHANGE COMMISSION

In August 1998, the U.S. Securities and Exchange Commission (SEC) alleged that
the Company and its chairman made statements on the Internet regarding revenue
and earnings estimates without a reasonable basis and also misrepresented a
financing agreement it had with a broker-dealer.

During April 1999, the Company and its chairman agreed to settle the SEC's
charges. Neither party paid any fines. Under the settlement, the Company and its
chairman neither admitted nor denied wrongdoing. The Company and its chairman
agreed to be subject to stiffer sanctions for any future violations.

                                      F-30


<PAGE>

13.   SUBSEQUENT EVENTS

In January 2001, SpaceDev Australia Limited was formed for the purpose of
creating a strategic alliance between the Company and Space Projects Australia
Ltd., an Australian business entity formed to created an Australian owned
spaceport. The purpose of the alliance is to expand commercial space projects in
Australia and Asia.

Space Projects Australia Ltd. ("SPA") will primarily act as the facilitator for
space projects developed and designed by SpaceDev Australia and the Company by
providing local and particular knowledge, assets and networks to provide the
required Australian regulatory compliance, launch sites, research and
development facilities, mission and operational services and marketing support
within the Asian and Australian arena.

SpaceDev Australia is authorized to issue two classes of common stock, with
equal voting rights. The Company owns eleven million shares of Class A common
stock, and SPA owns one million shares of Class A common stock. SpaceDev
Australia is planning an offshore offering in Australia for up to 8.89 million
shares of Class B common stock. A Prospectus has been submitted to the
Australian Securities and Investment Commission and the Company is now awaiting
approval of the prospectus to begin selling securities. Because the Class B
common stock will have the same voting rights as the Class A common stock, the
offering represents some dilution of the Company's equity interest in SpaceDev
Australia. SpaceDev Australia will be funded by the Company with 889,000 shares
of its common stock, pursuant to Regulation S of the Securities Act of 1933,
upon the first sale in the offering. Shares issued to SpaceDev Australia by the
Company under Regulation S are expected to be distributed by SpaceDec Australia
to investors in the Australian offering as an immediate dividend to its
shareholders. The Regulation S shares may not be resold or distributed into the
United States or to United States citizens living abroad absent registration
with the U.S. Securities & Exchange Commission or compliance with Rule 144 of
the Securities Act of 1933, including the holding periods set forth in
subsections (d) and (k) of Rule 144. SpaceDev Australia and SpaceProjects
Australia Ltd. will be required to pay dividends equal to 20% of the net
operating profits of SpaceDev Australia before tax.

On February 9, 2001, the Company issued 80,000 options to purchase common stock
at $1.00 per share and acquired all of the outstanding common stock of
ExploreSpace.Com ("ExploreSpace"). ExploreSpace is a website dedicated to the
exploration of space. The Company valued the options using the fair value method
prescribed by SFAS 123. The calculation resulted in fair value of approximately
$67,000. The amount will be capitalized as goodwill and amortized on a
straight-line basis over its estimated useful live of three years.

                                      F-31


<PAGE>

                                   SIGNATURES

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


                                   SPACEDEV, INC.



Date: March 30, 2001               By:  /s/ James W. Benson
     -------------------               -----------------------------------------
                                       James W. Benson, Chief Executive Officer

Date: March 30, 2001               By:  /s/ Charles H. Lloyd
     -------------------               -----------------------------------------
                                       Charles H. Lloyd, Chief Financial Officer

                                      F-32